by SynTao Green Finance and China SIF

On 12 January 2024, SynTao Green Finance and China Sustainable Investment Forum (China SIF) jointly released "Top 10 Trends of Responsible Investment in China 2024".
 

1.Regulators Support Green and Inclusive Finance

The Chinese Central Financial Work conference held at the end of 2023 pointed out that finance should provide high-quality services for economic and social development. It proposed improvement in five major areas, i.e., fintech, green finance, inclusive finance, pension finance and digital finance. These will become the key priorities of financial work for the foreseeable future. Green finance and inclusive finance are both important components of ESG. In addition to that, fintech, pension and digital finance are inextricably linked to ESG issues such as data security, community development and long-term capital. Therefore, the five major areas will drive forward the rapid development of ESG in China. In terms of asset classes, green credit remains the largest ESG asset with an average annual growth rate of more than 30% for three consecutive years since 2021. It is expected to maintain its growth momentum in 2024.
 
The integration of green finance and inclusive finance will increase. At the policy level, the central government proposed in 2022 to promote the integration of inclusive finance and green finance; The State Council, in its Implementation Opinions on Promoting the High-Quality of Inclusive Finance in 2023, explicitly called for inclusive finance to play a role in supporting green and low-carbon development. At the practical level, many banks are already designing green finance-related products for micro and small enterprises and individual consumers. Market institutions are recommended to focus on integration and innovation through a combination of both green and inclusive aspects in 2024.

2.Local Green Finance Policies Are Proliferating

Local green finance initiatives are one of the experiences of China’s green finance development. Since the launch of green finance pilot zones in 2017, the number of pilot zones has expanded from eight in five provinces to ten in seven provinces. Pilot zones such as Huzhou City of Zhejiang Province have innovated and accumulated many achievements. As a next step, it is worth paying attention to how these results will be circulated and whether the pilot zones will continue to expand or upgrade. In addition, regions that are not yet included in the pilot also have noteworthy features like the environmental disclosure requirements and green finance branches in Shenzhen, which already have been thoroughly implemented.
 
Local green finance is also increasingly connected to climate targets. Many regions have adopted green finance as an important means of achieving the carbon reduction goal, as evidenced by the names of their policies. For example, the Action Plan for Promoting Green Finance Development and Serving the Carbon Peak and Carbon Neutrality Strategy during the 14th Five-Year Plan Period of the Shanghai Banking and Insurance Industry, and the Circular of the Beijing Banking and Insurance Supervisory Bureau, Tianjin Banking and Insurance Supervisory Bureau, and Hebei Banking and Insurance Supervisory Bureau on Collaborating to Promote Green Finance and Assisting the High-quality Development of Beijing-Tianjin-Hebei Region. By 2024, it is expected that this trend will continue. In addition, the climate finance pilot was officially launched in 2022 by the Ministry of Ecology and Environment (MEE), and some early results will come out in 2024.

3.ESG Regulations Are Strengthened

While the green finance and ESG markets are developing rapidly, regulators are also strengthening regulation. This is reflected in several markets, including the credit market, bond market, and asset management industry, through a variety of initiatives, including statistical monitoring, information disclosure and performance evaluation. In 2023, the China Green Bond Standards Committee organized several meetings and issued the Guidelines for Post-Issuance Information Disclosure of Green Bonds among others, which had a positive impact on the promotion of healthy development of the green bond market. China’s National Financial Regulatory Administration (NFRA) has proposed to gradually form financial policy arrangements that align with climate targets, incorporate transition finance into the daily regulatory evaluations, and improve the green financial regulatory indicator system, which may become the key focus of green financial regulation in 2024.
 
In overseas markets, the trend of ESG regulation is clear. For example, Europe has introduced the European Green Bond Standard and the Corporate Sustainability Reporting Directive, and is promoting sustainability due diligence; Canada has introduced the Responsible Investment Identification Framework; Japan has incorporated anti-greenwashing requirements into the Comprehensive Supervisory Guidelines for the Operation of Financial Instruments Business Operators. Notably, ESG rating services and data products have become a new regulatory priority recently. Both Singapore and the European Union have issued regulatory documents. Hong Kong is planning to introduce related measures, deserving the attention of the domestic market regulators in the Chinese mainland market.

4.Transition Finance Becomes a New Growth Potential

Transition finance plays a crucial role in securing financing for traditional high-carbon industries, enabling them to undergo a low-carbon transition. It is a valuable complement to conventional green finance and its market potential is expected to surpass the conventional green finance market. The People’s Bank of China (PBoC) has prioritized transition finance in the past two years. Transition finance standards for iron and steel, coal power, building materials and agriculture are under development. Several regions, including Shanghai, Huzhou, Chongqing, Hebei and Tianjin, have introduced transition finance policies or standards.
 
To support transition finance effectively requires accompanying policy tools and financial products. The carbon emission reduction facility, which is a refinancing program by PBoC, has disbursed loans of billions of yuan since late 2021. The PBoC has announced an extension of this facility until the end of 2024. With the forthcoming release of transition finance standards, it is expected that there will be more innovative policy tools and products in areas such as loans, equities, bonds, insurances, and other financial domains. Moreover, for financial institutions, achieving an orderly transition at the asset level requires carbon accounting, climate disclosure and transition risk management.

5.Insurance Sector Takes the Lead

Long-term asset owners play a crucial role in driving ESG market growth. The ESG Survey Report for Asset Owners (2023) indicates a gradual increase in ESG awareness among domestic market asset owners, with over half of the surveyed institutions consistently considering asset manager's knowledge and capability in engagement. In recent years, the National Social Security Fund Council has included ESG factors when selecting asset managements.
 
Among various asset owners, the insurance industry has emerged prominently as a key player in recent years. The Insurance Asset Management Association of China (IAMAC) has issued an engagement initiative and introduced draft engagement guidelines for insurance asset management. Institutions such as China Life, CPIC and Taikang participated in the China Climate Engagement Initiative (CCEI) in 2023. Regulatory drive has been a significant factor: in 2022, NFRA released the Green Finance Guidelines for Banking and Insurance Sectors and later the Green Insurance Statistics System. In 2023, the Insurance Association of China issued the Green Insurance Category and ESG Disclosure Guide for Insurances, signaling clear policy trends. It is anticipated that in 2024, more insurance groups will advance ESG at group level that covers both liability and investment businesses.

6.Green Debt Market Becomes Diverse

In 2023, while the global green bond market faced challenges, China’s green bond market remained stable. Financial institutions continued to dominate the issuance of green financial bonds, with central and local state-owned enterprises as major contributors. This structural trend is expected to persist in 2024. At the end of 2023, a joint announcement by the China Securities Regulatory Commission (CSRC) and the State-owned Assets Supervision and Administration Commission (SASAC) supported the issuance of green bonds by central enterprises, which will create impacts in 2024.
 
In terms of categories, the variety of green bonds has expanded significantly, including standard green bonds (including blue bonds and carbon-neutral bonds), carbon yield green bonds, green project revenue bonds, and green asset-backed securities. Low-carbon transition bonds and sustainability-linked bonds have also gained traction. Beyond conventional bond markets, labelled green loans, sustainability-linked loans and Real Estate Investment Trusts (REITs) products backed by green assets have emerged, contributing to the diversification of the green debt market. However, enhancing credibility and avoiding greenwashing remains a constant consideration for issuers.

7.ISSB Standards Change Disclosure Landscape

In 2024, new standards by the International Sustainability Standards Board (ISSB), i.e., IFRS S1 (General Disclosures) and IFRS S2 (Climate Disclosures) become effective. At the same time, ISSB takes over TCFD. This marks a transformative shift in the global landscape of ESG disclosure standards, with ISSB, the Global Reporting Initiative (GRI), and the EU Corporate Sustainability Reporting Directive (CSRD) as three major players. No matter which standard, climate disclosure takes the central role, with more companies measuring carbon emissions, some employing climate scenario analysis to assess climate resilience, and specific sectors, like finance, delving into Scope 3 emissions.
 
In the Chinese mainland market, various government departments, such as PBoC, CSRC, SASAC, MEE and the Ministry of Finance, are actively promoting ESG or environmental information disclosure within their respective areas. How the Ministry of Finance will apply ISSB standards is particularly noteworthy. Moreover, CSRC is drafting an ESG reporting guide for listed companies. If this guide is successfully released, then ESG reports by listed companies will become more and more popular, which will potentially create peer pressure for non-listed companies.

8.TNFD Highlights Importance of Nature Disclosure

In 2024, there will be two COP events: Colombia to host COP16 on biodiversity in October, and Azerbaijan to host COP29 on climate in November. Also, Brazil takes the G20 presidency in 2024. Given the importance of the Amazon rainforest, the G20 Sustainable Finance Working Group is likely to take biodiversity as one focus area.
 
Many predict that biodiversity will become a new focus after climate change in the ESG landscape. In this context, the Taskforce on Nature-related Financial Disclosures (TNFD) is an important movement. Established in 2021, after 4 trial versions, TNFD officially released its final framework in September 2023. Similar to TCFD, TNFD also follows the four-pillar framework: governance, strategy, risk and impact management, metrics and targets. It is quite likely that TNFD will learn from TCFD experiences to create impacts among financial regulators. Therefore, early learning about TNFD is recommended for businesses and financial institutions.

9.Critical Minerals Attract More Attention

COP28, convened in the UAE, underscored the global consensus on transitioning away from fossil fuels, heightening the urgency of alternative energy. Many countries have agreed on two primary options for alternative energy. Firstly, a commitment to tripling installed renewable energy capacity by 2030, is embraced by over 100 countries. Secondly, the focus on nuclear power, with more than 20 countries committing to tripling global nuclear power by 2050. This presents a significant opportunity for Chinese companies in the wind and solar power industry, as the global market for renewable energy is expected to expand rapidly.
 
New energy-related products have become a new growth for China's exports. This category includes electric vehicles, lithium batteries, and photovoltaic products, which are intricately linked to crucial minerals such as lithium, cobalt, and gallium. As global demand and China's exports surge, attention to critical mineral issues is expected to increase substantially. From an ESG perspective, the extraction and processing of critical minerals involve environmental, labour, and community concerns, making it prone to disputes. Chinese companies need to pay more attention to these issues and improve risk management.

10.Generative AI Sparks ESG Concerns

ChatGPT has emerged as a groundbreaking force, bringing generative AI technology into the mainstream spotlight. This powerful technology has demonstrated its effectiveness across various industries, enhancing efficiency in data processing, text writing, creative design, and more. It is conceivable that generative AI can also find applications in ESG markets, such as ESG report writing and rating analysis, despite these explorations being in their early stages. The potential value and impact of such applications cannot be underestimated.
 
On the other hand, companies developing and applying generative AI technology must pay close attention to potential ESG risks it may trigger. Risk factors encompass technology ethics, copyright protection, data security and privacy, among others. Companies should prevent the uncontrolled application of generative AI technology. Additionally, due to its high demand in computability, generative AI technology may result in significant water consumption, energy consumption, and carbon emissions. From a macro perspective, generative AI technology may alter societal job demands, leading to unemployment in some sectors. All stakeholders, including companies applying generative AI technology, should proactively manage such potential impacts. This could be achieved through initiatives such as skill training, enabling employees liberated from repetitive tasks to undertake more critical and creative work.