The next evolution in green finance

James Poon July 21, 2023 08:18

To avoid the worst impacts of climate change, it is estimated that the world needs at least USD4.3 trillion in annual finance flows by 2030. The past decade has seen a growing recognition and adoption of sustainable finance in redirecting capital towards low-carbon activities. Solutions such as green bonds and sustainability-linked loans (SLLs) has introduced new mechanisms and pathways that facilitate the transformation of entire industries, and incentivized both public and private businesses to embark on a journey of decarbonization while driving positive environmental and social impact.

China is ahead of the curve

Following the Paris Agreement and UN climate talks such as COP27, countries worldwide have pledged to limit global warming to less than 2 degrees Celsius above pre-industrial levels and outlined their carbon reduction targets. In 2020, China announced its “dual carbon” target to reach peak CO2 emissions before 2030 and achieve carbon neutrality before 2060.

As the world’s largest energy consumer and carbon emitter, China’s pace of emissions reductions will be significant in determining whether the world makes progress in controlling global temperatures. Reaching these ambitious targets will not only be contingent on technological innovation, but also on international cooperation.

China had been developing its green finance ecosystem even before it announced its “dual carbon” targets, implementing detailed policies and regulations to facilitate green development. Low-carbon development and green transition have also become top priorities for advancing domestic social and economic policies, which, combined with the maturing green finance ecosystem, have become indispensable in China’s response to fighting climate change and building a more sustainable future for all.

The country’s top-down market steering approach has made China the world’s largest green bond market. Despite the general slowdown in 2022 globally, China and Hong Kong have maintained growth momentum in sustainable finance issuance and reached US$173 billion last year, a 34% year-on-year increase. The vast scale and size of the Chinese economy is creating a steady supply of green finance projects that will attract a wide pool of domestic and international capital, especially as China continues to adopt globally accepted norms and standards.

Financial innovation and collaboration key to progress

COP27 called on the financial industry to mobilize finance for climate action in a way that is local, scalable, collaborative, trusted, and consistent. Most important of all, it emphasized turning commitments into action and tangible progress. For centuries, the banking industry has played an instrumental role in bridging the finance gap, and now there is an opportunity for the industry to step up and promote green finance to accelerate the net-zero transition. Banks can clearly see the implications that decarbonization and net-zero targets have for each industry, and have the means to provide tailored solutions that facilitate industries’ green transition.

This involves partnering and supporting businesses across industries to begin their shift into green finance and complete their first sustainable finance transaction. Currently in China, green credit and green bonds are the leading, go-to green finance solutions, but other innovative instruments are available that can open up access to green finance.

For instance, SLLs can play a crucial role in incentivizing China’s corporate sector to adopt sustainable practices and demonstrate their commitment to the government’s “dual carbon” targets by setting relevant KPIs. More recently, market leaders like Ant Group have been pursuing further innovative solutions such as sustainability-linked derivatives that incentivize reaching greenhouse gas emission targets by offering interest rate swaps.

Accelerating adoption of green finance

The Intergovernmental Panel on Climate Change (IPCC) has already made it clear that climate change presents a ‘code red for humanity’ and that urgent actions are needed from all parts of the global economy to drastically reduce emissions. It has become critically important that governments, businesses, and investors substantively accelerate the adoption of green and sustainable finance in order to drive purposeful progress in the transition to carbon neutrality.

Going beyond traditional sources of financing to explore innovative new methods will be key to delivering on the monumental global agenda of achieving carbon neutrality and keeping global temperatures within targeted limits.

For example, green finance has been critical in helping China achieve and consolidate its leading position in electric vehicles (EVs). In 2022, EVs accounted for one in every four cars sold in China, with the number of zero-emission cars expected to surpass conventional internal combustion engine cars by 2030. By enabling access to new sources of funding, green finance has been instrumental in materializing the potential of the EV industry, and has transformed the sector to become an essential part of the global green transition.

Other industries that have traditionally been major pillars of the Chinese economy, including real estate, commodities, and logistics, are also seeing enormous demand for green and sustainable finance. A significant uptake in green finance activities in these sectors will be needed to achieve a net-zero transition. Taking a holistic, supportive approach toward these industries to ensure their financing needs are met in the transition process will be key to achieving balanced economic growth and development amid the race to meet national and global climate targets.

Climate change will not wait. What happens in China can go a long way towards shaping the outcome of global efforts to reduce emissions in time to prevent the worst effects of climate change. China’s latest efforts to align sustainable bond principles with international best practices demonstrate that the days of voicing commitment are over: now the need is for action and impact.

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James Poon

Country Manager, China and Hong Kong, ING