International Seminar Series on Transition Finance: International Experience and China Practice Update

On July 19, the Paulson Institute and the Institute of Finance and Sustainability held a closed-door virtual seminar titled “International Seminar Series on Transition Finance: International Experience and China Practice Update,” supported by the Green Finance Committee. Dr. Ma Jun, Chairman of Green Finance Committee of China Society for Finance and Banking, President of the Institute of Finance and Sustainability, and Co-Chair of the G20 Sustainable Finance Working Group, and Deborah Lehr, Vice Chairman and Executive Director of the Paulson Institute, delivered opening remarks for the seminar. Gracie Sun, Senior Advisor and Managing Director of Green Finance Center of the Paulson Institute, was the moderator.

The seminar invited representatives from regulators, domestic and international financial institutions, and transition finance pilot regions as well as subject matter experts to shed light on the latest developments on local practices and international experiences in transition finance. Prominent members that were present included Zhang Chunlei, Deputy Director of Financial Innovation Promotion Department of National Association of Financial Market Institutional Investors; Huang Dingwei, Deputy Director of the Financial Affairs Office of Huzhou Municipal  Government; Xu Shaohua, Vice President of the People’s Bank of China Quzhou Central Sub-branch; Yuan Wei, ESG Officer, Project Lead for China ESRM Project of International Finance Corporation; Leslie Maasdorp, Vice President and Chief Financial Officer of the New Development Bank; Yin Hong, Vice President of the Modern Finance Research Institute, ICBC; Kara Mangone, Global Head of Climate Strategy, Goldman Sachs; Gan Luying, Head of Sustainability Bonds, Debt Capital Markets Asia-Pacific, HSBC; Wu Zhu, Chief Investment Officer of China-US Green Fund; and Zhang Liyang, Managing Director of TPG Capital.

In his opening remarks, Dr. Ma Jun pointed out that one of the key tasks for the G20 Sustainable Finance Working Group this year is to launch a transition finance framework in the second half of 2022. With a preliminary consensus, the framework included five key elements: clarifying the criteria for identifying transition activities, specifying disclosure requirements, promoting innovation in transition finance products, providing incentives to support transition, and ensuring just transition. The framework’s global adoption will help more high-emitting sectors and companies transition towards a green and low-carbon future.

Deborah Lehr stressed that transition finance will be a key tool to our transition towards a low-carbon economy without compromising economic growth and threatening energy security. However, as transition finance is still a relatively nascent concept and its market share is small, it is crucial to set a transition finance framework and concrete standards. China as a testing ground for transition finance will spearhead the country’s efforts in achieving its carbon neutrality target.

From the perspective of Chinese industries, experts presented China’s first cases of sustainability-linked bonds and transition bonds, shared local transition roadmaps and taxonomies as well as the creation and application of online carbon account systems. Zhang Chunlei said that by April 2021, the National Association of Financial Market Institutional Investors had already issued China’s first seven sustainability-linked bonds totaling 7.3B RMB. In June 2022, China’s issued its first five transition bonds totaling 2.29B. These are significant achievements in transition finance products where two types of bonds have been tested in real life for fund usage, information disclosure, linked targets, third-party certification, and more. From the perspective of local practice, Huang Dingwei said that the transition roadmap and taxonomy explored by Huzhou identified a low-carbon, technology-enabled transition path for 57 sub-sectors, which accurately matches them with financial institutions that will fund transition activities. In addition, Huzhou has created a digital transition finance system for automated, highly efficient, and low-cost carbon accounting, and the system now has 30,000 corporate carbon accounts, covering roughly 70 percent of corporate borrowers of financial institutions in Huzhou. Xu Shaohua talked about Quzhou’s “Carbon Account Finance 5e System” which includes Carbon Account eBook, Carbon Credit eReport, Carbon Policy eRelease, Carbon Finance eSupermarket and Carbon Benefit eAssessment, covering thousands of local companies above a certain revenue threshold. Meanwhile, personal carbon accounts cover over 90 percent of local residents.

From the perspective of international multilateral development financial institutions, Yuan Wei shared that the International Finance Corporation of the World Bank Group screens all  investments for climate risk and align new investments with the Paris Agreement. IFC is introducing international experience to China’s ongoing transition finance pilot. Yuan Wei noted that many Chinese companies are yet to develop medium-to-long-term transition plans, such plans can create larger asset and project pools for international investors and local banks to finance their transition. Noting that multilateral development financial institutions around the world are shifting from the traditional model of infrastructure investment to climate investment, Leslie Maasdorp emphasized the importance of just transition and shared relevant cases of the New Development Bank’s project in South Africa.

On Chinese financial institutions, Yin Hong shared ICBC’s efforts in transition finance, including incorporating energy saving, carbon emission, and other related metrics of ten high-emitting sectors, such as thermal power, coal, and steel, into the bank’s internal policies and standards, stress-testing the transition risks of these high-emitting sectors, and preparing for risks that might arise from the transition process.

On international financial institutions, participating experts shared their views on the best international practices and cases from the perspectives of banks and equity funds. Kara Mangone said that Goldman Sachs has deployed $300B across investing, financing and advisory in sustainability to date and is committed to providing a total of $750B by 2030. Goldman Sachs is working with stakeholders in China and Asia to establish a Green Finance Working Group comprised of senior executives from companies in the US, EU, and China, and it has also launched a Climate Innovation and Development Fund to promote the global and regional low-carbon climate transition.

On sustainability-linked bonds, Gan Luying shared how HSBC helped Malaysian oil and gas company Yinson issue sustainability-linked sukuk, detailing how renewable energy power generation and carbon intensity were set as Key Performance Indicators (KPIs) and Sustainability Performance Targets for the bond and its characteristics. In addition, Yinson’s medium-to-long-term emission reduction and climate goals roadmap is deemed reliable by international investors, as it reflects both mature technologies that are commercially available and future carbon reduction technologies to be developed.

In terms of ESG investments, Wu Zhu shared how the China-US Green Fund has screened portfolio companies through ESG assessments, developed ESG assessment databases, and formed its own ESG assessment strategy and methodology. At the same time, they have continued to optimize relevant metrics used as the criteria for subsequent funding rounds of green projects, striving to gain maximum green benefits at minimum economic costs. Zhang Liyang introduced TPG’s social impact investments around the globe, the establishment of the TPG Rise Fund and the Climate Fund with the participation of PI Chairman Henry Paulson, and the positive social impact and carbon reduction outcome yielded from their investments.

Concluding the seminar, Dr. Ma Jun pointed out that the upcoming G20 Transition Finance Framework is expected to be endorsed at the highest level of the global financial governance mechanism and become an important basis for all countries, including the G20 countries, to develop regulatory policies on transition finance. He discussed the pros and cons of the two approaches (taxonomy approach and principles approach) for defining transition finance standards and how a progressive approach should be used for companies to phase in a credible and clear medium-to-long-term transition path. He emphasized that transition finance is still a relatively new topic thus experience sharing, collaboration, and exchanges between countries will play a significant role in the development of transition finance around the world.