The Next Regulatory Moves to Watch in China | PBoC on Green Finance

Updated: Sep 26, 2021

PBoC on Green Finance

At the recent Roundtable of China Development Forum, Yi Gang, Governance of the PBoC (The Central Bank of the People's Republic of China, Central Bank in China), has given his remarks on China’s monetary policy and green finance.

While most central banks are still fighting the economic impact of the pandemic, China has started its 14th Five-Year Plan in constructing green economy and join the global fight on climate change. As climate risk can bring about all the financial instability the central banks could not afford to ignore. Climate risk, of treated poorly, could be shaking the stability if the entire financial system. It may also affect the scope and transmission of monetary policy. New standards and evaluation tools are needed for measuring variants such as growth and productivity, the measure of efficiency in monetary policy won’t be the same in the pursuit of sustainable growth.

By end-2020, outstanding green loans in China were about 12 trillion RMB, or 2 trillion USD, ranking the first in the world. Outstanding green bonds in China registered about 800 billion RMB, or about 120 billion USD, ranking the second largest in the world. Such rapid progress in green finance is giving strong support to China’s green transition.

To reach the ’30 · 60’ carbon neutral, PBoC has prioritised the following two tasks:

  • Apply public policies as incentives to encourage market forces to fill the massive green investment gap for green transition, and,

  • Evaluate and address the potential impacts of climate change on financial stability and monetary policy. Heighten credit risk, market risk and liquidity risk could be brought by frequent climate change events and depressed value in carbon-intensive assets during green transition.

For example, under the guidance of the People's Bank of China, the National Association of Financial Market Institutional Investors (NAFMII) launched the Sustainable Development Linked Bond (SLB, Sustainability-Linked Bond for short) on April 28, 2021. This product refers to the debt financing tool that links the bond terms to the issuer's sustainable development goals, stimulates the issuer to formulate and achieve the sustainable development goals through the bond structure design, and meets the financing needs of enterprises that committed to achieving the sustainable development goals.

In the overall framework of the “30·60” goals, the initial focus is placed on the carbon-intensive industry's emission reduction needs. On April 29, 2021, China Huaneng, Guodian Electric Power, Datang International, Shaanxi Coal Group and other eight sustainable development-linked bonds were disclosed and issued on May 6~7, 2021, reflecting the issuer's actions and attitudes taken towards sustainable development and carbon reduction paths. Sustainability-linked bonds is introduced to help support the transformation of the carbon intensive industries, said NAFMII.

Key measures including:

1. Improve green finance taxonomy

  • Building blocks for identifying green economic activities and channelling funds to green projects.

  • Improving the existing taxonomies of green bonds (2015) and green credit (2018).

  • Revising the Green Bond Endorsed Project Catalogue by removing fossil fuel projects

  • To announce a 'Common Ground Taxonomy' this year (2021) in G20.

2. Strengthen information disclosure

  • The use of funds raised from green financial bonds in the interbank market is now required to be disclosed on a quarterly basis.

  • Financial institutions are also required to report the use and allocation of green loans.

  • Developing a mandatory disclosure system for financial institutions and firms to follow uniform disclosure standards is on the PBoC's agenda.

3. Incorporate climate change into the policy framework

  • Developing inclusion of climate change factors in the stress test of financial institutions.

  • Exploring the role of monetary policy in encouraging financial institutions to support carbon emission reduction.

  • Further increase the share of green bonds, limit investment in carbon-intensive assets, and incorporate climate risk factors into the risk management framework in foreign exchange reserve investment.

4. Proactively deal with the climate change risk

  • The first batch of carbon-neutral bonds has recently been issued in China’s interbank market.

  • Measure of the carbon emission and climate risks of projects and quarterly green credit assessment has been asked from pilot financial institutions.

  • More financial institutions are expecting to be covered in such assessment.

5. Deepen international cooperation

  • Promoting sensible roadmap for sustainable finance, information disclosure and the green taxonomy with G20.

  • Deepen cooperation under the Network for Greening the Financial System (NGFS), the International Platform on Sustainable Finance (IPSF) and other multilateral frameworks.

  • Continue to assist the developing countries in capacity building to support their green transition and response to climate change.

All dimensions of corporate reporting need to be interconnected under an integrated approach. Sustainability reporting and financial reporting are currently not formally connected, leaving potential gaps, overlaps and a lack of coherence. If sustainability reporting and financial reporting are to be placed on an equal footing under an identical timing requirement, connectivity becomes essential. The ripple effect of policy changes poses a serious challenge for businesses around the world, GC Insights is here to help. Read more on the latest consultation paper published by the China Securities Regulatory Commission (CSRC) on the proposed revision to China’s Guidelines for disclosure and format of corporate information on publicly issued securities, including increasing attention to improve transparency and disclosures on corporate governance and ESG matters and promote supervision on major changes among China’s listed companies.

More measures will be introduced gradually. GC Insights keeps tracking the sustainable development world and has been obtaining and growing the knowledge for sustainable growth, ESG compliance, and assurance. The team is ready to help you navigate through these regulatory changes and build upon the changes to a sustainable lead. Follow us for more to expect for the next sustainable regulatory moves in China and the global markets that are yet to come.

(written by Yitong Yuan)

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