Opinion - A Climate-Friendly Financial System
By Ma Jun and Caio Koch Weser

Release time:2018-12-18

BEIJING/FRANKFURT – The climate conference now underway in Katowice, Poland, has been billed as the most consequential since the 2015 summit that produced the Paris climate agreement. Amid unprecedented public concern over the threat posed by climate change – fueled by an alarming recent report by the Intergovernmental Panel on Climate Change (IPCC), not to mention devastating natural disasters around the world – negotiators will seek to establish a set of rules for meeting the Paris commitments. But, as is so often the case, success will depend on finance.


The world’s advanced economies have made major financial commitments in previous climate negotiations. Yet it is far from certain that they will fulfill their promises, beginning with the provision of $100 billion annually to developing countries by 2020. According to the United Nations Framework Convention on Climate Change’s Standing Committee on Finance (SCF), public finance from developed to developing countries to support climate-change mitigation and adaptation amounted to $57 billion in 2016. When taking account of private finance mobilized by public support, flows reached over $70 billion in 2016.


However, the Committee’s estimate of the total climate finance flows remain a small fraction of the $2.4 trillion of investment in clean energy needed each year until 2035 to hold the global temperature rise to 1.5°C, as calculated by the IPCC.


Whether rich countries honour climate finance commitments made in previous negotiations, and the degree to which developing countries can accept flexibility in how finance flows are measured, will be key to advancing the climate talks at this critical time. But, above all, climate risk and consideration of long-term sustainability will need to be embedded in the world’s financial system: banks, asset owners and managers, insurance companies, and the capital markets that facilitate these players’ transactions.


The good news is that the world is already moving in this direction, thanks partly to the Task Force on Climate-related Financial Disclosures, formed in 2015 by the Financial Stability Board and the G20 Sustainable Finance Study Group, which significantly helped to encourage financial institutions and companies to understand, assess and disclose the extent of the climate risks they face.


These frameworks and tools are gaining further traction and inspiring actions: the China-United Kingdom Green Finance Taskforce, for example, has established a group of UK and Chinese financial institutions to pilot TCFD reporting. That task force has also developed a set of Green Investment Principles to promote low-carbon investments in the Belt & Road region by global investors.


Then there is Climate Action 100+, an investor-led initiative that seeks to motivate companies to help achieve the Paris agreement’s goals by improving corporate governance on climate change, curbing emissions, and strengthening climate-related financial disclosures. So far, 310 investors with more than $32 trillion in assets under management have signed on to the initiative.


While market-based initiatives are important drivers of innovation, governments and regulators also have a crucial role to play in activating green finance and ensuring that climate risks are measured and reported accurately. Here, steps taken by the European Union and China to steer finance toward low-carbon assets stand out.


The EU’s Action Plan for a greener and cleaner economy has spurred an ambitious agenda to advance the transition to a sustainable financial system. Draft regulations are designed to encourage financial actors to assess and disclose sustainability risk, while moving toward the establishment of common standards to promote the financial instruments – such as green bonds – that can help direct funding to environment-friendly projects and companies. EU finance ministers have also just agreed to begin requiring banks to disclose environmental, social, and governance (ESG) risks within three years.


As for China, in 2016 the State Council announced a set of comprehensive guidelines for green finance, and the central bank and some local governments have introduced monetary and fiscal incentives for green loans and green bonds. Moreover, the Asset Management Association of the China Securities Regulatory Commission recently released green investment guidelines for the asset-management industry, calling for ESG considerations to be integrated into institutional investors’ decision-making. The CSRC has also announced a plan to require all listed companies to disclose environmental information by 2020.


At the international level, there is the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Created at the end of last year, the NGFS brings together financial regulators and central banks from 24 countries – including France, China, and Germany – that recognize the threat to financial stability posed by climate change, and the need to assess and manage that risk, in part through prudential supervision. A central element of such risk management is for banks and investors to shift their portfolios away from high-emitting companies and projects, toward low-carbon assets.


As the IPCC’s recent report makes plain, avoiding the worst effects of climate change will require action on an unprecedented scale – starting immediately. Policymakers in national capitals must ensure that both public and private finance will flow in line with the climate agenda, and that the right conditions are put in place to make the global financial sector the facilitator of, rather than a barrier to, the low-carbon future.


Ma Jun, Chairman of Green Finance Committee of China Society for Finance and Banking, Co-Chair of the G20 Sustainable Finance Study Group, and Member of the Monetary Policy Committee of the People’s Bank of China. Caio Koch Weser, Chairman of the Board of the European Climate Foundation, was Vice Chairman of Deutsche Bank Group and German Deputy Minister of Finance.