Sustainable finance: key theme of US-Chinese cooperation

The United States and China are the world’s two largest economies, each with great influence, especially over investment and the financial system. As the latest IPCC report suggests, the world is on track to reach and exceed 1.5 degrees of warming over the next two decades, if urgent action is not taken. The US and Chinese governments must demand that the financial sector take more action beyond the commitment to net zero. Financial sector institutions need to establish scientific goals, sound information and clear plans to ensure that their actions will have an impact on the economy, and their respective governments need to translate these initiatives into coordinated financial regulation. As the G20 summit approaches (October 30-31, 2021), one of the key topics will be sustainable finance and the risks to the financial system due to climate change. This highlights the recently re-established Sustainable Finance Task Force (SFWG), co-chaired by the United States and China.[i]. The task force will be “central to coordinating international efforts to mobilize sustainable finance, which is crucial to achieving a green and sustainable global recovery.”

At the Green Swan conference[ii]- co-sponsored by the Bank for International Settlements (BIS), the Banque de France, the International Monetary Fund and the Network for the Greening of the Financial System – Federal Reserve Chairman Jerome Powell and Governor of the People’s Bank of China ( PBOC) Yi Gang have explicitly stated that sustainable finance is a main area where the two countries will collaborate.

During the G20 SFWG private sector roundtable, Luigi Federico Signorini, Senior Vice Governor of the Bank of Italy, said the initial focus will be on standardized taxonomy, good data and climate disclosures.

He said: “Greenwashing is a danger; good data, an agreed taxonomy and adequate disclosure of companies are needed. Global consistency is important, as the fragmentation of standards across jurisdictions is confusing for investors and costly for businesses. many countries and regions. It is therefore important to strive for an early global understanding, before national choices take hold.

Based on these focal points, we offer an update on the position of the US and China in these areas, along with suggestions on where they could collaborate and support the SFWG (and beyond). .

Green taxonomies

EU taxonomy is a system used to clearly delineate the types of financial activities that can be classified as sustainable. The system is intended to lay the groundwork for new sustainable finance products, help financial institutions shift to a more sustainable business model, as well as enable investors with sustainable mandates to easily find investments that match their strategy. .

In recent years, China has updated its green bond taxonomies and currently states that it is around 80% similar to the EU’s green bond taxonomy. Besides,

The People’s Bank of China (PBOC) has released new standards such as the financial institution’s green finance assessment plan, which expands the scope of green loan assessment to more financial instruments, especially obligations, and environmental equity financing instrument standards, which clarify the requirements, valuation, risk control and other details for environmental equity financing instruments.

In the USA,. the current White House administration declared climate risk as a systematic risk to the financial system in its recent Executive Order 14030 report. US regulators are aware of the risks posed by climate change and are seeking to address them. Recently, Michael Hsu, the Acting Comptroller of the Office of the Comptroller of the Currency (OCC), presented a two-pronged approach to identifying, measuring and managing climate risk. He says, “First, we need to engage with others and learn from others. The OCC recently joined the Network for Greening the Financial System (NGFS), a group of central banks and supervisors around the world who share best practices. Second, we must support the development and adoption of effective climate change risk management practices in banks. ”

Climate risk disclosures and good data

Financial institutions face many different types of risks due to climate change. Both regulators and financial institutions need to understand the impact that the climate can have on their traditional categories of risk: credit risk, market risk, liquidity risk and operational risk. Without a thorough understanding of the effects of climate on an institution’s financial statements, regulators and investors do not have a good understanding of the stability of individual companies and the entire financial system, nor an appropriate plan to respond. to potential system shocks.

The PBOC should use the tools at its disposal to ensure that financial institutions and investors are well prepared for climate-related risks. As an important first step, China has taken a strong stance on the climate and emissions disclosures becoming mandatory in the very near future.

Delving further into understanding the risks of climate change, the PBOC has conducted stress tests to assess climate risks for consistently important banks and is looking to roll out broader tests across the 4,000+ banks this year to understand how the system financial response would respond to potential shocks. . In addition, the PBOC has published the Guidebook for Environmental Disclosures for Financial Institutions. This guide is a firm attempt by the central bank to standardize environmental disclosures for financial institutions and to help direct capital towards green / low carbon projects more accurately by quantifying environmental risks in terms financial.

In addition, the China Securities and Regulatory Commission has issued updated guidelines on the content and format of annual and semi-annual reports for listed companies, including the addition of a dedicated chapter on ESG, disclosure of all environmental infringement enforcement files and the encouragement of carbon emissions disclosure. emission reduction efforts and their impact. U.S. regulators have yet to begin stress testing, although several executives have discussed it as a likely future step, with no specific timeline at this time. They are much further along on the mandatory disclosure requirement, with the Securities and Exchange Commission (SEC) going ahead and developing a rule at this time.

Although existing rules and guidance require companies to disclose climate risks, this is considered voluntary. A new rule proposal is expected by December or January. To kick off the process, the SEC issued a Request for Information (RFI) earlier this year on climate reporting, to which the NRDC provided detailed comments, urging this decision as essential to understanding climate risk in investments and our economy. Since this RFI, SEC chairman Gensler has publicly committed to demanding climate information for public companies. As Gensler and other regulators have pointed out, mandatory disclosure is a key first step in understanding the enormous risks climate change poses to our investments, economy and financial system by providing consistent, reliable and comparable data. .

As the two countries progress on climate risk disclosure, ensuring that frameworks and reporting are aligned so that investors can compare investments and geographies will make the systems stronger and lighter.

Different disclosure standards and ESG requirements can lead to inconsistent and sparse environmental data. The veracity and richness of the underlying data must exist to ensure successful execution of the establishment of appropriate standard taxonomies and climate disclosure mandates.

As stated by the US Treasury, “Quality data and comparable disclosure frameworks are essential for addressing climate-related financial risks and mobilizing sustainable finance. We note the importance of working to face these risks. We look forward to discussing, at our October meeting, the SFWG synthesis report and a multi-year G20 sustainable finance roadmap, initially focused on climate.[iii]

At the G20 summit, we expect the United States and China to discuss and work together on 1) creating a global standard for various frameworks and taxonomies to address climate risks, 2) creating a global methodology for measuring these risks, and 3) applying these methodologies by coordinating mandatory climate disclosures for public and private financial sector institutions.

[i] https://www.g20.org/g20-sustainable-finance-working-group.html “G20 Sustainable Finance Working Group”

[ii] https://www.bis.org/events/green_swan_2021/overview.htm

[iii] https://home.treasury.gov/news/press-releases/jy0269