Hi you're listening to copy time a podcast series on markets and economies from devious group research. I'm tomorrow. Big Chief economist. Welcome to our 61st episode. Today. We're going to go big on climate change and china. And to do that we have a very distinguished guest with us from Beijing Dr martin, President of the Institute of Finance and Sustainability, which is an institution based in Beijing. He is also the chairman of China Green Finance Committee.
Special advisor to the Governor of People's Bank of China. Co chair of G 20 Sustainable Finance Working Group and co chair of the steering committee of Green Investment Principles for the Belt and Road. Uh june was also formerly chief economist of PBOC and
member of PBOC monetary Policy committee. I personally had the pleasure of overlapping with him twice in my professional career, both in the I. M. F. And as well as when you both were economists at Deutsche Bank dr martin, Welcome to Coffee Time.
Thank you very much for inviting me to join your forecast.
Really glad to have you with us june um I will begin the discussion at the global level and maybe then we will then narrow it down to china. So last month, on august 9th uh the iPcc intergovernmental panel on climate Change, they released their first report. It was the first part of their six assessment report, so called the er six share with us, your key takeaways from it.
The er six report by I. P. C. C. Essentially said that global temperature has risen 1.1 degree since the industrialization Against 1.5° target set by the Paris agreement? We're left with only 0.4°. This message reinforces urgency for the world to take actions and to mobilize finance to implement the paris agreement. I totally agree with the uh U. N. Secretary general who said that the report is a code red for humanity.
The extreme weather events that we observe recently including floods in china and europe and the welfare in Greece. They're basically telling us that the catastrophic impact of climate change is already a fact rather than a projection. Therefore we need immediate and more ambitious actions. Specifically, we need more countries to explicitly commit to carbon neutrality goals Whether they are 2050 or 2060 and we need concrete plans and roadmaps for implementing these pledges.
Otherwise it will run the risk of doing too little and too late, which will lead us to the narrower option of disorderly transition in the longer term. But asia, I'm pretty glad that in the matter of just one year we have seen major economies like china, Japan Korea and Indonesia having announced a carbon neutrality goes, some smaller economies such as Kazakhstan recently also announced carbon neutrality goes, I think many others will follow.
But after setting these net zero targets, we really need to agree on policy actions and quality on these actions. So what are these actions for example, we need to remove fossil fuel subsidies. I need to introduce uh emission trading systems or carbon taxation. And we need to define, what are the green activities and brown activities that uh, sustainable finance should either support or should avoid.
And also we need to invest massively in technology, especially in areas such as hydrogen storage, c C U. S. Energy efficiency and so on so forth. And all major companies and the fine institutions in addition to the government's, they need to have plans and need to have actions
june. How do you convince technology optimists that, you know, why do we have to go through all these painful transitional measures if we just wait a little longer and technology will come that will suck out all the carbon from the atmosphere. And we don't have to make all these adjustments.
Of course there are lots of uncertainties around your pathway towards carbon neutrality. Um, I think what you're suggesting is probably taking chance. Um, just in case there's some breakthrough in technology happens and the world will be saved, but we cannot take chance. We need to use all possible means, including the existing technologies such as what we see in the solar, uh, you know, wind, um, and other energy efficiency sectors as well as the possible breakthrough in the future.
So we? Re going to invest in both existing low carbon technology and apply them to all possible fields as well as investing massively in new technology that will help us and probably will be exceeding our target in the future in terms of the time that will meet the the carbon you try to pick up.
All right, So that I think that's the ground for our pivot toward china. So as you pointed out earlier that it was, I think September 2020 when China announced its carbon neutrality, gold. um maybe you can give us a snapshot of china's policy to confront climate change and then maybe later we can talk about the magnitude of efforts that would be needed. But maybe first we just talk about the policy.
Yeah, as you said that china announced its coming neutrality go in september last year. And since then, lots of regions and sectors and companies began to develop their roadmaps for implementation. I myself with leading the team uh to help chongqing municipality, which is one of the provincial level city
to draft this roadmap. And uh we're going to publish this chunking roadmap in just a few days, I've seen companies such as a major power producers announcing targets like by 2030 you will achieve 75% renewable. And the major steel company like a baosteel announcing the target of 2050 carbon neutrality, which is 10 years ahead
of the national target. So these are all quite encouraging and I expect some regions, especially those in coastal areas announcing carbon neutrality goes, that's 10 years or five years ahead of the national targets. That's the actions that's been taken already. But at the national level, uh the N. D. R. C. Which is the old planning agency now, it's called National reform.
Uh And Development Commission is working on what we call one plus N roadmap meaning uh in all major sectors including the energy which is center and the building sector, the manufacturing sector, uh and transportation sector, they all need a specific role maps to implement it the carbon neutrality pledge. As for policies, a couple of things are in place
and many more are being discussed and planned. For example, we have a national emission trading system already which was up and running just last month and some experts are talking about the possibility of imposing carbon taxation On smaller companies which are not covered by the 80s and the energy level or to policy building related policies are all being designed. I think the sector policies will drive a lot of demand change um in the specific sectors.
And finally green finance, which is the field. I mean working on for many years, we're trying to raise as much as a few 100 trillion RMB in the coming three decades to support the carbon neutrality go by lowering the funding costs for green and possibly increasing funding costs for Brown.
You
mentioned about magnitudes in fact, Yeah, I have a couple of estimates uh from different studies, one of which is an earlier study back end of last year saying that china will need to invest in 130 trillion R&;B for green and low carbon sector because of carbon neutrality.
But as I said, they were publishing our new estimates soon and my new estimated were likely to be closer to 500 trillion because the definition of these low carbon green investments are quite different in different studies, but our with a broader sort of our coverage will be much higher than earlier estimates.
These are exceptionally large numbers june, we are basically talking about five times China's current GDP.
Uh, yeah, but we're talking about next three or four decades. Um, you're talking about the one annual GDP number,
right. But we're still talking about, you know, substantial percentage of GDP in mid single digit, perhaps toward green initiatives on an animal basis.
Indeed, based on the smaller number 130 something trillion, that's about 2.5% annual GDP For the coming three decades Based on larger numbers closer to 10% of GDP every year. That's needed for green and low carbon investments.
I think that is going to be a very influential sort of set of analysis for the rest of the world to understand that if you seriously want to go and embrace the transition, how much costs it will entail and how to think in terms of, you know, financing and finding revenues for that.
So, yeah, that's, that's a good system. So, you mentioned the emission trading system june, so maybe walk us through how that is working in china and how dissimilar or similar it is to the european emission trading system.
China started its experiment on emission trading system back as early as in 2012, So we had seven regional um, imaging trading systems, but now China is launching its national system that's based in shanghai and as I said, it was the trading started in july this month this year. Um and now the national system is covering Um a total emission of 4.5 billion tons of co two per year, which makes it the largest, the main trading market in the world.
But still the current trading is only covering the thermal power sector for the shanghai market And these are 2300 companies. But in the coming few years the government is planning to expand the coverage to many more sectors including steel, cement, aluminum,
petrochemical paper, airlines and so on. So by then it's going to be even bigger than the current size in terms of coverage of a carbon um it's similar to the european E. T. S in the sense that it is also a cap and trade system, but of course the carbon pricing china is now still lower At the 50 something RBB put on. But a lot of experts, including myself are expecting to go up in the coming years and decades.
Um the current national trading system is not yet involving financial investors, which will draw back and there was no derivatives such as, you know, forwards and futures and options, but all these are recommendations we're making uh, for the regulator to change in the future. I think, uh, these functions will be added in the, not very distant future.
Um, there's another element of the chinese carbon market, which is called CCR, there's china certified emission reduction, which provides a offsetting mechanism that's similar to a CBM or we can call the chinese version of C D M, the emitters uh, covered by the national market or the compliance market can by CCR as a carbon offset and international airlines can also by CCR using the cosy agreement. Um, but the CCR is not yet open to financial
investors and I think that's possible in the future. When we moved to, you know, refining these policies.
So john I recently had a discussion with Professor David Carbon David victor at University of California SAn Diego and he has written quite a bit of work on emission trading system. And he sort of walked us through how in the case of europe, it initially did not work very well because the expectation was market based solutions would be saving the day, but then they basically need a lot of top down intervention coming at the european union level and then companies sort
of fell in line. So would you say that the emission trading system that china is doing is also going to be sort of the latter part of what the Europeans have done, which is more of a top down signal and the companies will have to sort of follow
uh currently the main market in china or what I call the national market is a top down driven or top down design the market, but we still have options of, you know, developing alternatives. For example, Mark Carney has set up this task force on voluntary carbon market and my colleagues are involved in uh studying there standards and I personally believe that the china should also consider developing a voluntary carbon market using the international uh TsV CM standards.
And we also have discussions with Guangdong and Hong kong um to uh uh sort of looking to the option of developing a unified regional market which is unifying the Guangdong carbon market with the potential treating magnetism Hong kong and adding to the unified market a carbon connecting mechanism which will allow for investors to enter the chinese carbon market. So all these are discussions that's going on too, uh sort of supplement the top down approach for carbon emission trading in china
probably keeps you very, very busy june. Let's talk about green finance, You have been the pioneer in developing the Green finance policy framework in china during 2014 17 when you were PBS system, economist, how does green financial system work and how would china mobilize? I mean you mentioned this extremely large numbers earlier that how would the financing for all that we mobilized
in the past few years. China developed a framework of green financial system which I think can be So describe with four pillars. One is a taxonomy which means that we need to have a few documents to define what other green activities that the green loans, green bonds, green foster support and so far we have three taxonomy is in china, one for green landing, one for green bonds and one for green projects
and second pillars disclosure. We want to make sure that the issuers will disclose enough information including environmental crime information to the investors so that the green money will target especially for green projects. The third thing is about incentives for some green projects. They have environmental benefits. For example you can reduce carbon, reduce pollution but the beneficiaries are not paying them, that's why their returns are not high enough to attract private capital.
So for these projects we need incentives to enhance the return um under that pillar in china we introduce the instruments such as the PBOC re landing facility, that's a central bank offering cheap financing to the project through commercial banks and also local banks are local governments offering interest subsidies and guarantees to reduce either funding costs or risks for these projects.
And the final pillar is what we call the sweet top products because different kind of green activities will require different types of financing and financial services.
So we need to have loans and bonds and private equity and the insurance products and so on, all serving for the green economy and within that space um China has developed the largest green lending market already uh in the world and we now have a second largest green bond market, but in terms of DsG products were still lagging behind O. E. C. D. Country in terms of proportion of after management products, you know labeled as S. E. S. G. Um but that's not enough in the past four or
five years. Uh this framework was serving not um sort of mostly for carbon neutrality. That's why I recently a lot of uh discussions are concentrated on how to further improve the green financial system here in china to achieve carbon neutrality and a couple of actions are now being taken. One is to modify the taxonomy to ensure that the green projects uh not only addressing pollution, biodiversity issue but also clearly addressing the carbon issue.
And secondly enhancing the disclosure requirements um to make sure that the companies and the issues and fine institutions will disclose carbon related information and un incentives. I think the Central bank will put out a bigger um you know relearning facility and other related instruments to support
um green projects. And on the product side a lot of experiments on carbon uh related financial products, for example, the interest of a longer bond could be linked to the carbon intensity of the project. If the company reduced the carbon intensity more aggressively than the company will enjoy lower funding costs.
I mean june I mean of course on paper, that's exactly the way things should be.
Um but what we have seen in practice around the world in recent years is that as governments become very enthusiastic supporter of green financing, you see a lot of greenwashing uh so how are you going to sort of deal with the issue of people try to just do some box ticking exercise and hope to get preferential treatment because they're just doing the box checking but they're not being serious enough for substantive enough,
there's a couple of safeguards against going washing. One is taxonomy. That's why I keep emphasizing the importance of that in all conversations and green finance, you need to define what is green and what is not green officially. Rather than allowing the individual issuers to define by themselves. That's why in china we started with top down taxonomy. Um for example, the landing related taxonomy was developed by the banking regulator. The first version of the china. Green bond taxonomy
was published by Green Finance Committee that I chair. And now the second version is directly by the central bank itself. So this is the first sort of a line of defense, making sure the definition of green is clear and the second line of defense is verification for the banks we have regulators um are saying to them that they were going to audit
the greenness of your projects. Of course they're not auditing every single project, but it's a threat that you may be audited for certain, you know, long transactions that claim to be green but not actually green. So the long documentation and the evidence of supporting their environmental benefits need to be there to prepare for auditing
And also for green bonds. A large number, I think more than 60, of the green bonds have the verification services from the party um, accepted those which are pure green, you know, like renewable energy and the subway. You can See them as green, you know, by your eye, but most of other projects require 3rd party verification.
Of course the market itself is a mechanism because investors and investment banking and this will begin to see what is truly agreement with another green and the market, we're reacted by, you know, staying away with non green companies or non green products even though they claim to be green.
Yeah, I'm looking forward to, you know, spreads beginning to reflect the market's trust or lack thereof on so called green products and yeah, you're right, that would be a very useful source of information beyond just policing the attempts at greenwashing. So john I just want to ask you a supplemental question which is,
you are part of multilateral initiatives. But you're also looking at the the china initiatives best practice would be that we have worldwide uniform taxonomy, worldwide uniform reading system definition of E. S. P. And so on. Are we there?
Uh No that's a very tricky issue. Back in 2016 when china was the president of G 20 I had the pleasure to co chair the G 20 green Finance study group in that year we begin to discuss the need for introducing taxonomy, need to enhance disclosure um and we need to have you know, green institutional um investor products such as the S. D. And so on. But at that time is we're talking about the need for all these standards because there's a lack of standards
And uh now the discussion is totally different. In a recent discussion with VSO International Standard Organization, I was told that there are 200 tax on them is already uh huh. So where are they coming from? Some are designed by the government for example, china at the government level have three sets of taxonomy, europe has. The official taxonomy is called us a simple finance taxonomy and some are by industrial associations like the comma.
Some are developed by Ngos like C. B. I. And many many more are produced by the company themselves. For example, 84 Pink Coal Deutsche Bank uh not ISIS Bmp. They all have their taxonomy Just imagine if every single bank has a taxonomy then we probably have 10,000 taxonomy in the world. It's going to create a total confusion. A lot of transaction costs and the potential for greenwashing.
That's why I strongly feel right now that we need to move towards consistency, comparability and eventual convergence of taxonomy in the world. The same thing happened to the E. S. G. Rating methodology back five years ago, there are very very few rating companies working on that now. I think a few dozen um companies providing different rating methodology. So the correlation of MsG ratings are very low. Uh if one company says this is a good one, you know high SD score and the other
reading companies that is very low. So who do you believe? Right. Unlike the credit rating agencies they provide, you know, results which are very very correlated. So we need to consolidate these methodologies and improving their consistency and transparency And that's the effort we're making in this year's G-20 sustainable finance working group which was reestablished by the italian presidency. And once again, I have a pleasure to coach here.
This working group now together with us colleagues and we're looking into you know, ideas and options on how to improve comparability interoperability and eventually uh consistency of these standards and methodologies for simple finance
June, could you expand on that a little more? And since, you know, we are talking about the G-20 Sustainable Finance Working Group that, you know, the coordination among major economies and how will likely develop economy developing economies, we're not quite there yet. How they would coordinate with the bigger countries like china and the US and cross border green capital flows, I think is an integral part of all this. How would that get facilitated?
Uh Certainly there's lots of issues require international coordination, that's why the G 20 system of Finance working group are focusing on these topic that requires highest level of coordination, for example, uh Taxonomy yesterday, rating issues we mentioned already and reporting standards and sensibility is also very important because there's so many agencies now putting out different frameworks and standards for similar reporting. Some are focusing on climbing,
some on climate environment. Some are saying we need to do also biodiversity related reporting. Some are saying we need to do this on a voluntary basis. Some saying we need to do this on a compulsory basis and ah and some uh you know, producing specific templates and others are saying, you know, let's leave it to the um the companies for them to decide what to do.
So, all these issues I think require coordination and Uh this year we have a G-20 summit finance role map um coming out, I think we're going to see that in october Um this year, when the G-20 comes to a conclusion and within the road map will highlight the need
for coordination. These are specific areas and also I need to further um take actions to improve um uh risk management, risk reporting and on establishing a framework of transition finance and also on the need to look into how finance can protect biodiversity
uh from the broader multilateral. Just to focus on ASIA for for a moment. Um What are the opportunities for regional cooperation in Saudi Asia right now?
Um I think in Asia there's lots of opportunity because demand for system of finance is huge. We have in a huge countries like china and India and Indonesia in terms of population um and also carbon emissions or carbon intensity high are in these developing countries. So in the future the demand for sustainable finance, I think it will be massive. Um We can call it on many many different areas.
For example standards can Asean countries think about developing a regional taxonomy Instead of you know, 10 or 11 smaller technology me that's applied to individual countries with limited liquidity. And also we need to collaborate on developing green technologies and investing in these sectors. Just give you example, domestic is doing great in investing green tech including in china and china has a great production um capacity. We can produce a lot of a lot
of things. We have a much lower cost than many other countries. So by combining the uh the investment technology, production facilities, we probably can produce, you know, low cost equipment in many areas such as renewable equipment batteries and the E. V. S for the rest of the world of course for Asia
and also within the green finance market. Um there are a couple of fairly developed um markets in areas such as you know Hong kong Singapore being open uh and with a lot of expertise I think they need to serve the rest of the Asia especially emerging markets better by providing financing at affordable cost.
And in this regard back a few years ago, the china Green Finance Committee, which I cheer and city of London, we set up a uh set of principles called Green Investment Principles for the belt and road largely to mobilize financing and helping emerging markets um to finance their green infrastructure. And in fact the DBS is one of the members of signatories of the Green Western principles.
So annually we're holding conference um and also asking a working group to develop ideas on how to you know enhance transparency measuring environmental impact and also innovate on financial products um to help these emerging markets
very, very encouraging june I'd like to develop the last part of the podcast going back to china last year on this podcast we had paul Hebert who had financial stability of the european central bank and he told me that most of his time is not spent on looking at, you know, banks value at risk from financial shock but looking at their risk in the portfolio from climate shock. So give us a sense of the climate risk and financial risk intersection in the context of china.
Indeed, greenhouse system of finance has two major aspects which are well recognized. One is mobilization, we need to mobilize more funding for green investments and secondly, it's about risk management, namely managing risks arising from the environmental climate exposure um for fine institutions Just give you some ideas. Um many banks uh in the world are telling us that they have 10 or 20% of the assets which are called high carbon assets, our assets that's exposed to climate risks.
And uh in some regions, I think in the very um sort of carbon intensive uh countries or regions, I think they're fine institutions may have higher exposure to these high carbon assets and these assets face a lot of risks in china, we have done a study Showing that the potential default rate of simple power companies can go up from the current 3% to 22% within 10 years because of energy transition, because energy transition means that the demand is going to
go down for these companies and the cost will go up as they will have to pay high prices. Um you know, to uh to actually pay more to buy the carbon quota or if they want to continue producing at the current scale with carbon intensity and uh with the worsening of the financial performance, the funding costs will also go up because the rating companies will actually downgrade them uh and therefore forcing them to except the high funding costs or even, you know, out of the financial market.
So all these are province which are facing the high carbon companies which are the high carbon exposure for the banks and financial institutions. So in china, we are now asking the financial institutions began to looking to the measurement and reporting of these risks. For example, some banks that began to uh use a definition of brown uh taxonomy and began to measure, you know, how much assets we have in this brown space.
And I think more than a dozen chinese banks began to do environmental and climate risk analysis in the form of stress testing and they are now stress testing against different industries such as a coal fired power generation steel cement. All these are now being worked on. And the central bank just issued a guideline last month to the chinese bank that they will be required to report on the climate and environmental information on a mandatory basis going forward.
So again, this was staying with china beyond this one example that you gave about one bank. What's your sense of china's financial sectors preparedness with respect to climate change.
Um Now, in terms of mobilization, I think the chinese bank are doing quite well. We have now 13 trillion RMB uh words of green loans already, which is the largest number in the world, of course, still growing very rapidly in the first half of this year. The green loans are growing at the pace of roughly 15% year on year, much faster than the overall loan growth. But in terms of risk control, I think it's still in the very early stage.
As I said, um about a dozen bank began to conduct environmental climate risk analysis, But we have 4000 banks in China and some banks are beginning to report the climate information to the regulators. It's only on experimental basis now and it will take some time, I think, to cover the anti banking sector as a manager, I think. Not yet, really. Uh so engaged in
climate risk measurement and management yet. So it will be um, you know, a long way to go towards a sort of full of framework for climate risk management within the chinese financial system.
So lots on the agenda, lots of work to do. And clearly you're keeping very busy, I suppose my final question to you is that, you know, how hopeful are you because you see the global bureaucracy at work in various multilateral discussions and deliberation that you sit in and I'm sure you've had moments of frustration, like you were talking about having multiple layers of taxonomy that are often conflicting and confusing.
So has even if you've had a long career in private sector now, public sector and now in the global multilateral space, uh are you optimistic that that will make tangible progress?
I would say, I'm cautiously optimistic. Um as I said, a couple of things are promising uh for example, a lot of large economies are committing to a carbon neutrality and I'm sure many others will follow, partly because of peer pressure.
And I'm glad that G-20 re established the system of finance working group this year after a pause of two years, which is a good sign, partly because us is coming back to paris agreement, and US China is now co chairing uh this uh working group and making it more feasible to achieve a consensus Within the G 20 space. But still, you know, different countries have very different priorities.
Um and sometimes, you know, on issues like whether we should be uh utilizing carbon taxation, establishing um you know, carbon markets, removing fossil fuel subsidies. Still lots of lots of debate uh in the international community, it's not easy because At G-20 level and many other international forum, the consensus based decision making process needs to be followed. And as long as one major member is objecting to a potential consensus, it's very hard to move.
That's why we need to have a lot of skills. Two sort of a facilitated the formation of consensus sometimes by twisting the language so that we can all come to the same page. So, uh you know, our actually matters in a sense that we make more efforts, make smarter efforts. Things can move faster.
So from economic analysis to climate diplomacy. Do you know you've made quite the transition yourself?
Thank you to move for the invitation. It's great to have the conversation with you
june. Thank you for your time. I mean, I cannot think of anything as more consequential than this issue. So again, we really, really appreciate your time and insight. I'd also like to thank our listeners for being part of this conversation. Uh, Kobe time was produced by martin, Tuckey, daisy Sherman and violently provided additional assistance. It is for information only and does not represent any trade recommendations.
All 61 episodes of Kobe time are available on Youtube and all major podcast platforms including apple, google and Spotify. As far as our devious research publications, webinars and live streams are concerned. You can find them all by googling DBS Research Library. Have a great day.