Caixin ESG Biweekly: China’s Growing Support for Green Finance and Pollution Controls
China’s central bank is crafting policies to support finance for green development. The State Council plans to give green finance greater weight in how financial institutions are evaluated. To learn more about the challenges facing green finance in China, read Caixin’s latest cover story here.
China-EU High Level Environment and Climate Dialogue
The First China-EU High Level Environment and Climate Dialogue was held by video link on Feb. 1 between Chinese Vice Premier Han Zheng and First Vice President of the European Commission Frans Timmermans. Han expressed that both sides should act upon the consensus reached at the China-Germany-EU leaders’ September 2020 video meeting and take full advantage of high level dialogue, deepening pragmatic China-EU cooperation on environment and climate and making green cooperation a new focus and driver of the comprehensive strategic partnership between China and the EU.
The Regulation on Management of Pollution Discharge Permits (排污许可管理条例) will come into effect on March 1, 2021. The regulation stipulates that parties involved in the discharge of pollutants should follow the permit system, and any discharge activities not conforming to permits are to be banned. At the routine policy briefing of the State Council on Feb. 5, Liu Zhiquan, director of the Department of Environmental Impact Assessment and Emission Management at the Ministry of Ecology and Environment, elaborated on the significance of the legislation: its integration of various decentralized systems into a single environmental protection system will realize full-process management for stationary pollution sources. According to 2020 data, there are 2.36 million registered units engaged in pollutant discharge, accounting for 86.5% of all stationary pollution sources.
Ministry of Ecology and Environment (MEE)
The Ministry of Ecology and Environment (MEE) formulated the Guiding Opinions on Enhancing the Management of a Positive List for Ecological Environment Supervision and Law Enforcement and Promoting Differentiated Law Enforcement and Supervision (Exposure Draft) (关于加强生态环境监督执法正面清单管理推动差异化执法监管的指导意见（征求意见稿) for public comment. A positive list will be formulated based on local industrial structures, environmental capacities, environmental quality targets and the capabilities of supervision and law enforcement. Enterprises’ levels of equipment, emissions standards compliance, monitoring system networking, environmental risk management, environmental information disclosure, environmental credit evaluation and other factors will to be taken into account. Such comprehensive considerations provide a strict control for the number of enterprises on the positive list.
Ministry of Ecology and Environment
China’s Interim Rules for Carbon Emissions Trading Management (碳排放权交易管理办法(试行)) came into effect on Feb. 1, marking the start of spot transactions within the quotas of the national carbon market. The rules specify that the MEE shall organize a registration system and trading system for domestic carbon emissions, including agencies for registration and trade, in accordance with national regulations. The national carbon emission registration agency will be responsible for the centrally unified carbon emissions trade.
Ministry of Ecology and Environment
The MEE held its regular press conference on Jan. 28. In 2021, MEE will firmly implement the new development philosophy, systematically design the ecological environment protection system for the 14th Five-year Plan period, draft and implement an action plan for meeting peak carbon emissions by 2030, continue to act on pollution control, continuously strengthen ecological protection and recovery, ensure nuclear and radiation safety, advance supervision and law enforcement for ecological environment protection in accordance with the law, effectively prevent and resolve ecological and environmental risks, guarantee basic infrastructure support and further modernize environmental governance systems and capacities.
Ministry of Science and Technology (MOST)
The Implementation Plan of Special Action for Green Development of National High-Tech Zones (国家高新区绿色发展专项行动实施方案) released by MOST on Feb. 2 stipulates cultivating several influential demonstration parks for green development and leading green technology companies to take the lead in realizing a variety of green goals — including the U.N. 2030 Agenda for Sustainable Development, near-zero industrial wastewater discharge, peak carbon emissions, the modernization of parks’ green development governance, and carbon neutrality in certain high-tech zones. By 2025, the comprehensive energy consumption per unit of industrial added value for national high-tech zones is to drop below 0.4 tons of standard coal per 10,000 yuan ($1,541); carbon dioxide emissions per unit of industrial added value will be cut by over 4% annually; and some high-tech zones are to realize peak carbon emissions.
People’s Bank of China (PBOC)
Director of the Research Bureau of the People’s Bank of China (PBOC) Wang Xin indicated that the PBOC has completed initial steps to improve top-level design for green finance. Moving forward, the PBOC will focus on supporting green development through three financial functions: resource allocation, risk management and market pricing. Specifically, the PBOC will research and introduce a series of policies and measures to promote green and low-carbon development; it will systematically conduct financial planning in accordance with the 14th Five-Year Plan’s objectives of green and low-carbon development and climate change response; it will make timely adjustments to improve green finance performance evaluation system for financial institutions; it will continuously expand application scenarios for evaluation results; and it will publish the latest unified version of the “Green Bonds Endorsed Project Catalogue.”
China Securities Regulatory Commission (CSRC)
On Feb. 5, the CSRC solicited public comments on the “Guidelines for Investor Relations Management of Listed Companies (Exposure Draft)” (上市公司投资者关系管理指引（征求意见稿)). The exposure draft features three major revisions improving upon the “Working Guidelines for the Relationship Between Listed Companies and Investors” issued in 2005: a clarified definition of investor relation management, more content and methods of investor relation management, and stronger constraints on listed companies. Regarding the communication between listed companies and investors, the exposure draft adds information on companies’ environment, social and corporate governance (ESG). It also provides new channels of communication, including websites, new media and investor education bases.
Guangdong-Hong Kong-Macao Greater Bay Area (GBA)
The People’s Bank of China (PBOC) Guangzhou Branch recently held a meeting on environmental information disclosure by financial institutions. Thirteen corporate banking establishments in eight GBA cities (Guangzhou, Zhuhai, Huizhou, Zhongshan, Dongguan, Foshan, Jiangmen and Zhaoqing) were designated as pilot institutions for environmental information disclosure (EID) work, marking the formal launch the pilot EID projects at GBA financial institutions. EID content mainly consists of environment-related annual surveys, governance structures, policy and systems, objective analysis of banks’ environmental risks and opportunities, environmental risk management and processes, operations’ environmental impact, and so forth.
On Jan. 27, the Government of the Hong Kong Special Administrative Region announced the successful offering of the second round of green bonds, worth $2.5 billion (16.2 billion yuan) in total. The offering comprises tranches of $1 billion five-year, $1 billion 10-year, and $500 million 30-year green bonds. The green bonds are expected to be settled on Feb. 2 and listed on the Hong Kong Exchange and the London Stock Exchange. These include the first 30-year green bond issued by an Asian government, according to the Hong Kong Monetary Authority (HKMA). The Green Bonds have been assigned credit ratings of AA+ by S&P Global Ratings and AA- by Fitch.
Five Provinces: Shaanxi, Sichuan, Jiangxi, Jilin and Zhejiang
The “Research Report on Information Disclosure of Corporate Greenhouse Gas Emissions” was recently released by the Institute of Public and Environmental Affairs (IPE), the National Center for Climate Change Strategy and International Cooperation (NCSC), China University of Political Science and Law, and other institutions. According to the report, five provinces — Shaanxi, Sichuan, Jiangxi, Jilin and Zhejiang — have officially issued documents regarding corporate greenhouse gas emissions disclosure management, while more than 20 provinces and municipalities have seen examples in corporate greenhouse gas emissions disclosure management. Corporate disclosure is still significantly lagging behind governmental disclosure.
Six enterprises: CSG, CTG, HPI, SPIC, SPAG and Yalong Hydro
The first batch of carbon-neutral bonds was successfully issued on Feb. 9, according to the National Association of Financial Market Institutional Investors. These bonds were registered by six enterprises: China Southern Power Grid (CSG), China Three Gorges Corp. (CTG), Huaneng Power International Inc. (HPI), State Power Investment Corp. Ltd. (SPIC), Sichuan Province Airport Group Co. Ltd. (SPAG) and Yalong River Hydropower Development Co. Ltd. (Yalong Hydro). The total issuance amount came to 6.4 billion yuan. This first batch of bonds consists of medium to long-term debt financing instruments (all having terms of two years or longer). Their investments will be applied to various fields characterized by low carbon and energy conservation, including wind power (four bonds), hydropower (four bonds), photovoltaics (two bonds) and green building design (one bond). The principal underwriters are: Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Industrial Bank, Agricultural Bank of China and China Citic Bank.
China Industrial International Trust
On Jan. 29, China Industrial International Trust Ltd. (CIIT) launched the “No. 1 CIIT Assembled Funds Trust Plan for Lifeng A016 Carbon Emission Rights,” which is the first green trust plan for carbon emission rights in Fujian province. Transferring revenue rights in the form of carbon emission rights, the “Plan’s” trust fund innovatively uses Fujian’s carbon trading market price as a standard of value for the underlying trust property. Financial support was offered to Sansteel Minguang Co. Ltd. Fujian. It aims to bolster the emission trading market in Fujian and improve its financial products.
Asset Management Association of China (AMAC)
On Feb. 18, the Asset Management Association of China (AMAC) released the Fund Manager Eco-Investing Self-Assessment Report 2020 (基金管理人绿色投资自评估报告（2020)). In general, public fund management companies have been exploring green investment systems and successful in applying research results to green evaluation tools and databases. They have been able to adopt various means, including exercising their rights as shareholders at general shareholders’ meetings, to promote the environmental performance of invested enterprises. All 54 green investment products of the sampled public fund management institutions follow specific strategies: they focus on themes such as new energy, environmental protection and environmental governance; they build investment portfolios through top-down and/or bottom-up approaches; or they track specific indexes.
ESG Investment: A Mechanism for Correcting “Market Failure”
Haitong International Securities Group Ltd.’s (Haitong International) Chief Economist Sun Mingchun argued that ESG investment is a spontaneous market mechanism correcting “market failure” incurred over the past half century. When it comes to surmounting increasingly dire challenges (climate change, environmental pollution and the wealth gap) and mitigating the potential harms of rapid technological change (safety hazards and ethical or social conflicts), ESG adopts the premise of minimal government intervention, encouraging enterprises to step forward and take on more social responsibility. ESG investment strives to “internalize externalities” — in other words, to put a price tag on the impact enterprises have on the outside world as they act in pursuit of maximum profit. Essentially, it is redefining the very boundaries between enterprises and the market.
Nearly 80% of Asia-Pacific Investors Have Increased ESG Investment
MSCI Inc.’s (MSCI) “2021 Global Institutional Investor Survey” shows that institutional investors have integrated ESG factors into investment decisions at a faster rate during the Covid-19 pandemic. The survey targeted 200 asset management institutions with approximately $18 trillion total assets under management, including 70 institutions in the Asia-Pacific region. Its findings indicate that 79% of investors in the Asia-Pacific region (and 77% of investors worldwide) have increased ESG investment either “moderately” or “significantly.” Among the largest institutional investors (managing assets in excess of $200 billion), the proportion is even greater — as high as 90%. In addition, 57% of investors in the Asia-Pacific region expect to incorporate ESG factors into their investment analyses and decision-making processes either “mostly” or “completely” by the end of 2021.
China’s green finance market to grow to $15.4 trillion by 2060
China’s green finance market is expected to grow to 100 trillion yuan by 2060, according to an Aarecent report by Liu Linan, head of macro strategy for Greater China at Deutsche Bank. The data show that there are more than 130 green investment funds in China, altogether managing 69 billion yuan, more than double that of 2013. In addition, China has established a green industrial fund through 22 local governments with a scale surpassing 46 billion yuan. Beyond green credits, China’s onshore and offshore green bond offerings rose from 240 billion yuan in 2016 to 386 billion yuan in 2019, making China the world’s largest issuer of green bonds.
Growing turnover in China’s pilot carbon market
On Jan. 27, the International Institute of Green Finance (IIGF) of Central University of Finance and Economics (CUFE) released the China Carbon Market Report 2020. Its analysis estimated that global carbon emissions in 2020 reached 34 billion tons. This is about 2.4 billion fewer ton than were released in 2019, due to the impact of Covid-19 and other factors, and marks the largest drop in absolute value on record. This only underscores the importance of the current opportunity. Global efforts in response to climate change are in a critical period. The report provided a summary and analysis of China’s carbon market development in 2020 as well as relevant suggestions. It concluded that China’s pilot carbon markets performed well in 2020. Although the volume of quota transactions declined, turnover still increased due to a general rise in carbon prices.
China’s new demands focus on ESG benchmarks and strategies
The ESG Investment Development Report 2020 released by China Securities Index Co. Ltd. on Feb. 1 indicates that, as of late 2020, sustainable investments in the American market have become a crucial component of the asset management industry. Among these investments are 82 ESG exchange-traded funds (ETFs) showing a strong momentum of growth with a year-on-year increase of 236% in total size. Compared with the global market, the scale of China’s ESG investment is quite small. However, since targets for peak carbon emissions and carbon neutrality have been moved forward, relevant institutions have been paying more and more attention to ESG investment, gradually enriching the ESG index system. Among the investment products, stock index products focus on green industries, while new demands are mainly reflected in ESG benchmarks and strategies.
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Caixin Insight, the research arm of Caixin Global, is a strategic advisory helping clients assess policy risk and macroeconomics in China.
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