Climate Cooperation China
On behalf of the International Climate Initiative (IKI)

Enhancing Climate Finance for Accelerating the Low-Carbon Transition

On 13 May 2024, more than 120 participants from the government, financial institutions, companies, academia, and think tanks attended the Subforum on Climate Investment and Finance for Accelerating Urban Transition in Beijing, to share their insights on global trends, international experiences and China’s innovative practices on climate finance. Co-hosted by the GIZ, the World Resources Institute (WRI), and the Climate Investment and Finance Committee (CIFA), the event was focused on urban transition and the financial sector.

 

Photo Credit: CIFA

 

Li Gao, Member of the Environment and Resources Protection Committee of the 14th National People’s Congress and Chairman of CIFA, emphasized the importance of climate investment and finance in his opening remarks, highlighting the Committee’s efforts to promote climate investment through rigorous policy research, standard setting, and the initiation of pilot projects. He introduced the Committee’s proactive approach to supporting international cooperation, notably through the ‘Low Carbon City Accelerator’ initiative, which aims to foster local green development and climate adaptation. Joint capacity-building activities with GIZ have helped local pilots of climate finance to germinate and strengthen local decision-making. Li emphasised the necessity of continuous international dialogue, sharing best practices, establishing transnational standards, and strengthening information disclosure to enhance market transparency and investor confidence.

 

Fang Li, Chief Representative of WRI’s Beijing Office, underscored the crucial role of cities in the low-carbon transition, presenting WRI’s findings that investment in low-carbon infrastructure could reduce emissions by 89 per cent by 2050 in China, generate a net present value return of more than 50 trillion RMB and create 10.2 million jobs. She pointed out the significant investment needed annually and the insufficiency of local financial resources to meet these demands, advocating for the involvement of private sectors and financial institutions. Highlighting the global trend of major commercial banks shifting their support towards low-carbon sectors, Fang called for an effective combination of market mechanisms and responsive government policies to address the imbalance in financing needs for urban low-carbon transitions, such as accelerating the standardisation of sustainable information disclosure.

 

Thorsten Giehler, Chief Representative of GIZ East Asia, embarked on the recent development of regulatory frameworks and policies in EU and Germany on sustainable finance, such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). He outlined Germany’s commitment to promoting international cooperation on climate finance, including initiatives established during the 2023 Sino-German government consultations and the Sino-German High-Level Financial Dialogue, where both sides agreed to increase support for cooperation and the mobilisation of the financial resources needed for climate action. Giehler highlighted GIZ’s involvement in the Sino-German climate cooperation, which aims to support China’s climate goals and the alignment of financial flows with the Paris Agreement through the promotion of the expert dialogue platform on sustainable finance as well as technical advisories and capacity building trainings. He stressed the importance on sharing international best practices, as well as reaching a consensus on the definition of transition finance and improving the interoperability of sustainable finance standards.

 

The economic opportunities of low-carbon urban transitions were further highlighted by Bernhard Mueller of the German National Academy of Science and Engineering. By building more clean, compact and connected cities (3-C strategy) through successful land integration and transport development, China could save up to US$ 1.4 trillion and create millions of jobs. Policymakers need to make complex decisions, though, with high uncertainties and risks, balancing the current costs of action with potential future benefits. He mentioned three examples to illustrate different financing approaches, such as the EU Missions on Climate Neutral & Smart Cities, KfW’s Federal Subsidy for Efficient Buildings (BEG), and the London Climate Finance Facility. Finding the “right” interplay between financial and non-financial approaches is crucial for successful transitions.

 

Amin Mohseni-Cheraghlou, of the Columbia University, highlighted that the urban population is projected to grow from 56% today to 75-80% by 2050, which means that 75% of the infrastructure needed for 2050 has yet to be built. This massive infrastructure investment needs are particularly required in developing countries, where the risk of formation of urban slums are projected to be high (an increase from 13% to 30% by 2050). Non-government funding and public-private partnerships have a crucial role to play in bridging the financing gap and enable a well-planned and sustainable urban development.

 

Tang Dingding, the Honorary Chairman of the Green Trade and Investment Specialised Committee of the Chinese Society for Environmental Sciences and Senior Advisor of the WRI, discussed the progress and challenges in mobilising both public and private capital for climate investment in China, noting significant advancements in pilot green and low-carbon cities. Since 2020, the environment-oriented development (EOD) has carried out three batches of national demonstration pilots and launched 166 national demonstration projects, which are estimated to mobilise hundreds of billions of dollars of social capital.

 

The panel discussion, moderated by Qiu Shiyong from WRI, focused on the essential role of climate investment and finance in sustainable urban development. Wang Jijie from the National Centre for Strategic Research and International Cooperation on Climate Change discussed China’s steady progress in carbon market development and the expansion of industry coverage to promote emission reductions, with civil aviation and other key emission units to be included in the national carbon market. Jiang Jieping from the Sichuan Joint Environmental Exchange shared practical innovations in carbon credits and climate finance in Chengdu, such as the promotion of a carbon credit mechanism for rewarding public low-carbon behaviour, while Xiao Shirui from the Guangdong Finance Association highlighted Guangdong Province’s launch of a municipal carbon credit mechanism based on voluntary emission reductions and carbon-neutral orientation. Lawrance Lu, Executive Director of Civic Exchange, described how buildings account for 90% of the city’s total electricity consumption. According to a joint study with the WRI, decarbonising this sector in the Greater Bay Area by 2060 will create an investment gap of US$150-300 billion, requiring the establishment of a better cross-regional coordination mechanism.

 

The subforum, furthermore, focused on the policies needed for financing green low-carbon and climate resilient transformation, financial product innovation and market practices, as well as climate and environmental risk management and information disclosure from the perspective of financial markets. This thematic discussion was moderated by Qi Lan, Co Team Lead of the Sector Team of Climate and Project Director on Sustainable Finance at GIZ East Asia.

 

The thematic discussion started with a keynote by Ms. Wang Haihong from HSBC China, who emphasised the key role of finance in supporting sustainable economic transformations and introduced HSBC’s net-zero strategies and innovative solutions, including financing sustainable infrastructure; expanding investments in new economy companies, especially with climate-friendly technologies; implementing sustainable supply chain decarbonisation projects and the establishment of natural capital as an asset class, exploring new solutions through the joint venture Natural Capital Management. Ms Wang emphasised that HSBC’s transformation is a collection of customer transformation successes, built on HSBC’s partnership with various stakeholders.

 

Dr. Janto Hess, Project Director of the IKI project “Sino-German Cooperation on Climate Change – Climate Partnership”, officially launched the Sino-German Joint Studies on Transition Finance. The release of three reports, conducted by the Institutes of Science and Development, Chinese Academy of Sciences (CASISD) and the Frankfurt School of Finance and Management on behalf of the GIZ, is the result of fruitful scientific cooperation between the two author groups. The findings hold multiple critical implications for public and private market actors, as the joint research contributes to the development of a common definition of transition finance under the G20 framework. It provides policy recommendations that will pave the way for the development of a stronger transition finance market and accelerate the urgent transition to a low-carbon and sustainable economy in alignment with the goals enshrined in the Paris Agreement. As pointed out by Dr. Hess, in the context of Germany and the EU, the definition of transition finance is aligned with the climate targets of the European Union and the Paris Agreement, the OECD Guidance on Transition Finance and other relevant frameworks, defined as the financing and funding of all sectors, specifically high-emitting and hard-to-abate industries, to enable them to gradually shift their activities aligned with a net zero pathway by 2045, while incorporating social and environmental safeguards. In contrast to this understanding of transition finance, the Chinese experts defined transition finance to solely focusing on the target of emission reduction. Most German banks are members of the Net Zero Banking Alliance (NZBA), and some are also members of the Glasgow Financial Alliance for Net Zero (GFANZ) and already gather first experiences on transition finance. Some of Germany’s hard-to-abate entities have issued sustainability-linked bonds, such as Heidelberg Materials AG, who issued its first sustainability-linked bond in December 2022 with a face value of €750 million, and RWE AG, who issued two green bonds worth of €2bn in total in 2022.

 

Photo Credit: CIFA

 

During the panel discussion on the transformation of the financial sector, He Simiao from AXA Climate explained the advantages of weather index-based insurance products. An approach relatively new to the Chinese insurance market. On claim settlement of extreme weather events or catastrophes, index-based insurances can allow a quicker payout with lower transaction costs, when compared to traditional insurance models. If the weather indicators reach a certain threshold, the insurance policy can be triggered very quickly. During a recent urban catastrophe in Guangdong, the insurance settled claims very quickly and enabled the local government departments in the timely implementation of disaster relief and post-disaster reconstruction. Other new insurance policies, introduced by AXA Climate, can be triggered by early warning signals from government departments. This allows for funds to be allocated before an extreme weather event to prevent and mitigate disasters, rather than waiting for compensation until after the event. This innovative approach has greatly benefitted city disaster relief efforts.

 

Photo Credit: CIFA

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