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Opportunities & challenges: bankings under carbon neutrality(I)



Yin Hongvice president of Modern Finance Research Institute of ICBC and Deputy Secretary General of Green Finance Committee of China Society for Finance and Banking, is committed to studying green finance, including stress testing of environmental risks on credit risks of commercial banks, ESG rating and green index etc. Yin also severs as the Chinese leader of the pilot program of environmental disclosure of financial institutions in China and UK, as well as the co-chairman of the first work panel of the Belt and Road "Green Investment Principle" (GIP).

At the general debate of the UN General Assembly in September 22, 2020, President Xi Jinping announced China's ambition to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060, which are also included in the recent Government Work Report, the 14th Five-Year Plan and the draft outline of the Long-Range Objectives Through the Year 2035. Since finance is the core of modern economy, what opportunities and challenges will banks and other financial institutions face under the goal of carbon neutrality? How far is China's current green financial system away from the target of carbon neutrality, and how to improve? Dr. Yin Hong, vice president of Modern Finance Research Institute of ICBC, was interviewed for above issues, saying that carbon neutrality puts forward higher requirements for banks’ low-carbon and sustainable operation.


Q|China Sustainability Tribune

A|Yin Hong


Q: What does the carbon neutrality target mean for the development of banking business?


A: Under the goal of carbon neutrality, the state and relevant ministries will take a series of measures to promote the low-carbon transformation of the economic structure. Measures may include the following referring to international experiences: first, reducing high carbon emissions, such as reducing carbon emissions from fossil energy, industry, transportation and buildings; second, developing low-carbon industries, such as clean energy, green buildings, green transportation and industrial energy conservation and emission reduction; third, conducting carbon neutrality and carbon storage, such as tree planting, carbon capture and storage; fourth, formulating fiscal and tax policies, such as carbon tax, carbon trading, and green finance, etc. In the trend of low-carbon transformation of the economic structure, the banking industry will embrace huge market opportunities.


First, low carbon transformation will create a lot of demands for investment. According to the research of the Institute of Climate Change and Sustainable Development of Tsinghua University, carbon neutrality will bring China investment opportunities worth RMB 138 trillion in the next 30 years. Clean energy, green transportation, green buildings, energy conservation and environmental protection and other low-carbon industries will develop rapidly. And the green and low-carbon technology will undergo faster innovation, which will facilitate the green upgrading of the industry. For example, the cost of photovoltaics has decreased by 80% - 90% in the past decade, leading to a significant rise of the investment value of the industry. Finally, the carbon capture and storage will also undergo rapid development to achieve commercial sustainability in the end.


Second, ESG investment market will see a rapid development. Since the outbreak of COVID-19 pandemic, ESG has been recognized and concerned by more global investors. By the end of 2020, the responsible investment in the United States was close to RMB 17.1 trillion, with a year-on-year growth of 42%, and sustainable investment accounted for 33% of the total asset management. In the third quarter, the quarterly growth rate of sustainable fund in Asia was as high as 75%, with a sharp increase of 160% in Japan. By the end of 2020, the total scale of sustainable investment fund in China has exceeded RMB 117.2 billion, 124 funds in total, an increase of 58% and 12% respectively from the end of 2019.


Investors' attention to the ESG performance of listed banks has increased significantly, mainly in the following aspects: firstly, the amount of relevant research, exchange and consultation on ESG has doubled compared with that of previous years; secondly, the focus of investors' attention is whether to publicly put forward carbon reduction targets or make relevant commitments, release separate environmental information disclosure report, and disclose data of assets carbon emission, etc.


Third, carbon financial products will continue to innovate. From the perspective of EU carbon market, carbon financial products include carbon futures, carbon funds, carbon asset pledge financing, carbon asset repurchase financing, carbon quota custody and green structured deposits, among which carbon futures accounted for 90% of the market turnover and 95% of the volume, while other carbon financial products are much smaller in proportion.


There are some trends for innovation that China's banking industry may take into account: in terms of asset business, we may explore loans pledged by carbon emission rights, international carbon factoring financing, carbon income backed notes, etc. as well as issuing low-carbon themed credit card and providing new energy vehicle loan and green housing credit for individual customers. In terms of liability business, we may issue investment bonds and debit cards themed by carbon neutrality, as well as carbon project income bonds. When it comes to intermediary business, we should develop green financial products that are linked with carbon dioxide, and carry out innovation of new investment banking products such as financial consultants in carbon trading; meanwhile, we can give full play to the traditional advantages of banks in energy consuming industries and project financing, so as to expand the consulting business of environmental information and environmental risk management.


Q: Apart from the opportunities just mentioned, what challenges and risks will the banking industry face under the goal of carbon neutrality? How should banks strengthen risk assessment and management?


A: Under the goal of carbon neutrality, the banking industry also faces many challenges: firstly, for banks with a large proportion of high carbon financial assets, they will face higher transformation risks. In the process of low-carbon transformation, high-carbon enterprises may bear higher costs, narrower profits and even losses due to technological transformation, energy conservation and emission reduction, which may lead to credit risk; the demand for high-carbon enterprises' products may decline, which may lower their business income and finally trigger credit risk. For example, after Apple announced its "carbon neutrality" goal, all the high-carbon power and components throughout its supply chain need to be replaced by low-carbon ones.


Second, the regulatory authorities will put forward higher requirements for the low-carbon transformation of the banking industry. The regulatory authorities will innovate incentive and restrictive policies to promote the low-carbon transformation of financial institutions, such as encouraging financial institutions to invest more assets in low-carbon areas; evaluating the ability, efforts and contributions of financial institutions to cope with climate change and including carbon emission reduction performance into MPA (Macro Prudential Assessment); promoting mandatory disclosure of related environment and climate information of listed financial institutions; and guiding financial institutions to carry out carbon footprint measurement and environmental risk analysis and management, etc.


Third, banks need to consider their own carbon neutrality goals and measures. Some financial institutions have announced their carbon neutrality goals. And this requires them to measure their own carbon footprint and take effective measures to reduce and neutralize carbon emissions, which is a complex project.


In order to strengthen the risk assessment and management, on the one hand, the banking industry should, in light of the progress and policy implementation of the state’s carbon neutrality goal, predict the impact of future industrial restructuring on high-carbon industries, timely adjust and tighten the credit policy for high-carbon industries to prevent any risk during low-carbon transformation; on the other hand, banks need to pass the environmental and climate risk scenario analysis and stress test, and select particularly high-carbon industries for quantitative risk analysis, while incorporating environmental and climate factors into the customer rating system. For example, ICBC has carried out forward-looking environmental risk stress test and ESG research.


This article is translated from China Sustainability Tribune.

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