Opinion: U.K., China Have Chance of Reaching the Paris Climate Goals
David Schwimmer is CEO of London Stock Exchange Group.
President Xi Jinping’s recent comments to the UN that “the human race cannot ignore the warnings of nature over and over again” demonstrate both that international action must be taken to meet the challenges of climate change and that China has an important leadership role in these efforts.
China’s role in the global sustainable transition across each of the environmental, social and governance (ESG) elements is critical. The rate of reform and growth in China in this area has been remarkable. The facts speak for themselves: China is now the second largest global issuer of green bonds and this year China is aligning even more closely with international green bond standards, which is a significant development.
The U.K. and China have worked closely on sustainable finance for several years and must continue to do so if we have a chance of reaching the Paris Climate Goals. It is an auspicious moment to work together on this agenda. Both countries have the opportunity to take leading roles now to drive progress — given that this year China holds the presidency of COP15, the fifteenth meeting of the conference of parties to the UN Convention on Biological Diversity, and the UK holds the presidency of the 26th UN Climate Change Conference of the Parties (COP26) next year.
The sustainable investment market is advancing radically — climate risk and sustainability considerations are integral to how global asset owners such as pension funds select asset managers and benchmarks. 2020 has seen sustainable investment funds attract record levels and global assets under management stand at over $1 trillion today. Issuers have responded to Covid-19 by successfully selling bonds designed to help fight the pandemic which indicates that Covid-19 could drive sustainable investing even further.
This is an area where market participants are competing. Reforms to China’s equity capital markets, specifically revisions to the listing rules and the introduction of new and enhanced disclosure rules, will both help investors to make better decisions and improve the efficiency of China’s capital markets, making them more attractive to innovative companies, including those with green credentials, as well as foreign and domestic investors.
“The UK and China have worked closely on sustainable finance for several years and must continue to do so if we have a chance of reaching the Paris Climate Goals. It is an auspicious moment to work together on this agenda.”
Investors are asking for more granular information to help them assess how to allocate capital. London Stock Exchange Group (LSEG) is broadening its ESG and climate related analysis to cover China and other Asian markets. Investors use our ESG data and analysis when making decisions about allocating capital to the Chinese market. We have enhanced the level of climate reporting data that we provide on China A, B and H shares and now cover over 1800 securities in the market.
LSEG’s index business, FTSE Russell, has a long-term working relationship with the investment community and with Chinese regulatory authorities. This has helped to enable A share inclusion into our global indexes, which has resulted in significant new inflows into China.
In September, we announced that China would join our World Government Bond Index, which will be subject to confirmation in March 2021. This signals an important landmark for the internationalization of China’s domestic financial markets and is likely to increase foreign investor participation in the Chinese bond market. If confirmed, China would also join FTSE Russell’s Climate World Government Bond Index which measures countries’ exposure to the physical impact of climate change; the economic impact of transitioning to a low-carbon economy; and the resiliency of national institutions to climate risk exposure. This has the advantage of showing investors who want to invest in ESG how China’s exposure to climate change risks compares to other countries. Inclusion in this index would establish a benchmark that, over time, would enable China to demonstrate to investors the progress that it is making to reduce climate risks.
LSEG is proud of the partnerships it has developed over many years in China. In September, London Stock Exchange welcomed China Yangtze Power as an issuer to the London market, raising capital through Shanghai-London Stock Connect. It is particularly notable that Yangtze Power is the first Chinese listed company to be awarded London Stock Exchange’s Green Economy Mark. The Green Economy Mark is awarded to companies and investment funds that derive 50% or more of their total annual revenues from products and services that contribute to the global green economy. This mark of recognition helps to raise companies’ sustainability credentials with investors. We were proud to be able to award this Mark to Yangtze Power and hope other Chinese companies may follow suit.
Companies are also driving the sustainability agenda in China, such as those that manufacture solar electricity panels and wind turbines for global markets, and are generating much more renewable energy too: China is now the world’s largest producer of renewable power from wind as well as solar photovoltaics, accounting for almost 30% of global wind and global solar production. London is a gateway for international ESG investors to allocate capital to China, so we hope to see many more Chinese companies with green credentials listing in London given global investor demand.
Responding to the challenge of climate change requires global collaboration to support market driven ESG investing. Global regulators are taking necessary steps to drive sustainable investment through disclosure and reporting requirements for listed companies, and it is critical that regulations are globally consistent.
It is for that reason we are very pleased that Shanghai Stock Exchange and Shenzhen Stock Exchange have joined the United Nations Sustainable Stock Exchange Initiative working group that will develop ESG reporting guidance aligned with the Financial Stability Board’s Task Force on Climate Financial Disclosures (TCFD). This initiative will support and encourage stock exchanges to develop best practice reporting guidance for issuers and ensure globally consistent disclosures in line with the TCFD.
Over the next year, China and the U.K. must advance the sustainable transition together through their respective presidencies of COP15 and COP26. I look forward to continuing to work with our partners in China on these important issues.
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