Wang Wen, Executive Dean of Chongyang Institute for Financial Research, Chinese University of China and Secretary-General of the Green Finance Committee of China Society for Finance and Banking, and Liu Jintao, Associate Research Fellow of Chongyang Institute for Financial Research, Chinese University of China
Transition finance covers the service blind spots of green finance and is the main engine of green development after the carbon peak is achieved. China has become an important driving force for the global green economy, and will play an increasingly dynamic role in transition finance business in the future, fully meet the low-carbon transition funding needs of a large number of traditional high-emission industries, continue to inject vitality into China's green finance reform, innovation and upgrading, and promote China's green finance and transition finance to "go global".
Climate change has become one of the most serious challenges facing the world today, and the Intergovernmental Panel on Climate Change (IPCC) emphasized in its Sixth Assessment Report released in 2021 that limiting global temperature rise to no more than 1.5 degrees Celsius requires a rapid and far-reaching transformation in energy, industry, buildings, transportation and urban systems.
In the 20s of the 21st century, after countries successively issued the "carbon neutrality" goal, the global concern has shifted from whether to carry out green upgrading at the beginning to how to carry out the transformation at the fastest speed, that is, the focus has gradually shifted from the increment of sustainable development to the stock, and transition finance will play an important supporting role in the global carbon neutrality process.
Since 2016, the scale of green investment and financing funds in the mainland has increased rapidly, reaching 5.3 trillion yuan in 2023, but there are still a considerable number of industries of brown or light green industries, and to achieve the goal of carbon neutrality, we have to attach great importance to the transformation of those traditional high-emission industries, or as long as they are not dark green industries, there is a need to continue to transform.
Therefore, the importance of transition finance in the goal of carbon peak and carbon neutrality in the mainland is increasing day by day, and clarifying the unique advantages of transition finance and the innovative value in green finance will help to promote the carbon neutrality timetable and roadmap more efficiently and on time. Under the top-level guidance of China's ecological civilization construction, it is an important foundation to explore the new momentum of carbon neutrality by combining the concept and development process of transition finance, the domestic and foreign policy environment and market background, and the reform and innovation status of green finance.
Transition Finance: International Context and China's Current Situation
The concept of transition finance has been formed and deepened in China
Since the Industrial Revolution, with the rapid development of science and technology and industry, the excessive exploitation of nature by human beings has caused excessive greenhouse gas emissions, resulting in frequent extreme weather in recent years, which seriously threatens the future development of mankind. Building a sustainable and resilient economy and realizing the harmonious coexistence of human economic and social development and nature have become the development goals and consensus of all countries, and the concept of "transition finance" came into being in the context of such needs.
The core concept of "transformation" is that the behavior of a particular economic activity or agent changes over time, and it emphasizes the process rather than the outcome. Therefore, the transition does not mean that current activities have to be green or low-carbon, but rather a process of "greening" high-carbon economic activities that transition to green over time.
There is no unified international and domestic standard for the concept of "transition finance". In the EU Sustainable Finance Taxonomy issued by the European Commission's Technical Expert Group, the White Paper on "Financial Support for Trustworthy Low-Carbon Transition Activities" issued by the Climate Bonds Initiative, the Handbook on Climate Transition Finance published by the International Capital Market Association, and the Basic Guidelines for Climate Transition Finance jointly issued by the Financial Services Agency of Japan and the Ministry of the Environment, "transition" or "transition finance" are all defined and classified in different ways. However, most of them clearly emphasize that transition finance is aimed at traditional high-carbon brown industries with high potential for emission reduction. The concept of transition finance is defined in three points: first, the support objects of transition finance not only cover projects or activities with low-carbon and carbon-reduction effects, but also include entities that have established clear carbon reduction goals and implementation paths; Second, transition finance promotes the transition from high-carbon to low-carbon and even decarbonization, which is closely related to the long-term emission reduction paths of various industries. Third, the target of transition finance support needs to have a clear emission reduction effect, which is consistent with the Paris Agreement or national carbon neutrality goals.
In September 2020, China put forward the "dual carbon" goal of striving to peak carbon emissions before 2030 and achieve carbon neutrality before 2060. To achieve the "dual carbon" goal, on the one hand, it is necessary to vigorously develop green industries, and on the other hand, it is necessary to carry out green transformation of the existing brown industries, which requires large capital investment.
The mainland's original green finance only focused on the financing needs of green enterprises. At present, the definition criteria of green finance (including green credit, green bonds and other instruments) are still dominated by various green catalogues, and many projects that can reduce pollution and carbon emissions to a certain extent but do not meet the requirements of pure green have not yet been included, and more are "pure green" or "dark green" projects. Many financial institutions simply establish a strategy of refusing financing for steel and coal power projects, which is not conducive to the low-carbon transformation process of the whole society, because the development of green increment does not change the non-green stock part of the industrial structure, which is necessary in the transition to carbon neutrality.
Limited by the scope of project support for green finance, the funds raised by green finance in mainland China are mainly invested in the deep green industry, and there is a lack of support for traditional carbon-intensive industries. Transition finance can be used as an extension of green finance, paying more attention to the financing needs of high-carbon industries, and better meeting China's current development requirements under the "dual carbon" goal. Transition finance can also promote the rational allocation of transition costs and inject capital and liquidity into transition markets.
Policy innovation in the development of transition finance in mainland China
As early as 2020, some regions in mainland China began to carry out "transition finance" activities on a pilot basis, such as Huzhou City, a pilot zone for green finance reform and innovation. In its Guide to Financing Climate Transition released in November 2020, the Hong Kong Green Finance Association (HKGFA) identified transition finance support for technologies and activities that can produce lower carbon outcomes, and proposed a credible transition plan that is aligned with the goals of the Paris Agreement.
In recent years, some financial institutions in mainland China have also successively issued guidance documents on transition finance. For example, Bank of China and China Construction Bank issued the Transition Bond Management Statement and the Transition Bond Framework respectively in early 2021. The Hong Kong Green Finance Association (HKGFA) released the Climate Transition Finance Guide in November 2020.
On the basis of green bonds, China has also innovated and developed a variety of transition financial instruments, including sustainability-linked bonds (SLBs), sustainability bonds, and transition bonds.
Linkages, differences and innovations between transition finance and green finance
There is a difference between the purpose and business content of transition finance and green finance. In the Sustainable Finance Framework developed by the United Nations Environment Programme (UNEP), the two companies work together to mitigate climate change and serve to meet the emission reduction targets set out in the Paris Agreement. However, from a conceptual point of view, there is also a clear difference between transition finance and green finance, with the scope of support for green finance including clean energy, green transportation, green buildings, etc., and the business scope mainly focusing on low-carbon and green incremental projects. Unlike green finance, which has a broad scope of support, transition finance focuses on the transformation of existing industries of carbon-intensive enterprises and "two high" projects, and emphasizes the low-carbon transformation of existing support objects.
Transition finance covers the service blind spots of green finance
Due to the main emphasis on enhancing environmental benefits, green finance often ignores the sustainable development of traditional enterprises or projects, and in the current context of carbon neutrality, traditional enterprises or projects have high transformation needs, and transition finance plays an important role at this time, so the business coverage of transition finance provides a supplement to green finance. In general, transition finance must now focus on cement, steel, energy and other related industries.
From a practical point of view, transition finance provides a guarantee for the green "soft landing" of the "two high" enterprises, so as to avoid the sports "carbon reduction" that only focuses on results and ignores the process. For example, in the Catalogue of Green Bond-Backed Projects released in 2021, the clean use of coal was excluded from the original version, and the clean use of coal is an important means for high-emission and high-energy-consuming enterprises to achieve a complete green transition, and relevant enterprises can achieve low-cost and high-efficiency transformation and upgrading through transition financial instruments.
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Article source丨Tsinghua Financial Review, Issue 126, May 2024
This article is edited by Zhou Mingyi
Editor-in-charge丨Ding Kaiyan, Lan Yinfan
Preliminary trial丨Xu Lanying
Final Review丨Zhang Wei
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