To further efforts in tackling climate change, the international community needs to form broad consensus around key issues on green finance.
This is according to Yi, who was speaking at a high-level seminar on ‘Green Finance and Climate Policy’, co-hosted by the PBoC and the International Monetary Fund.
His views reflect a growing need to implement steps to achieve various commitments to a low-carbon future.
China, for example, has announced a goal of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060 – the 30/60 goal. “This requires a comprehensive economic transition, and green finance can be an accelerator in this process,” said Yi.
Fuelled by previous initiatives and policy priorities, by the end of 2020, green loans and green bonds in China totalled $1.8 trillion and $125 billion, respectively, ranking as the world's largest and second largest.
Yet the 30/60 goal requires a higher bar for the financial sector, said Yi. This is needed to overcome challenges such as increasing public education on emission reduction, creating more price discovery, improving climate information disclosure and paying greater attention to fossil fuel-related transition risks.
Three key steps
According to Yi, progress is needed in three areas:
1. Mobilising public and private funds to support the green economy in line with market principles.
“We need to encourage more private capital participation. To do this, we need to lay the groundwork on two fronts,” he explained.
First is information disclosure, with the PBoC planning to set up a mandatory disclosure system with uniform standards, and promote greater information sharing between financial institutions and companies.
The second is about green finance taxonomy. “The PBoC is about to finish revising the green bond catalogue by removing fossil fuel projects. We are also working with international counterparts to harmonise taxonomies,” added Yi.
2. Evaluating the potential impact of climate change on financial stability.
According to Yi, it will take 70 years for the EU, 45 years for the US, and about 30 years for China, to move from carbon peak to net zero. As a result, the PBoC is looking at the possibility of including climate factors in financial stress tests and gradually incorporating climate risks into the macro-prudential policy framework.
“The PBoC is reviewing green loan and green bond performance of financial institutions on a quarterly basis. Financial institutions are encouraged to evaluate and manage their environmental and climate risks,” said Yi.
3. Letting the carbon market play its role of price discovery.
“China's national emissions trading system will be up and running by the end of this June,” announced Yi.
Regulators are soliciting opinions on its operational rules, which propose fewer emission quotas that are freely allocated to polluters previously. Financial regulators should also be involved in the supervision of the carbon market, he added.
“The carbon market should be a financial market in nature and allow carbon financial derivatives trading. This will make sure that all risks are fully priced in so that the carbon price plays a better role of serving either as an incentive or a constraint. “
Global effort
In Yi’s view, success will also depend on international coordination. This includes central banks, which he said could contribute to the net zero goal in many ways – such as developing a strong policy system, a diversified market system and enhancing international coordination.
“Central banks have a role to play in providing policy incentives,” he explained. “The PBoC plans to launch a support toolkit to provide low-cost funds for carbon emission reduction. The PBoC will also support green finance through a host of measures ranging from commercial credit ratings, deposit insurance rates to collaterals for open market operations.”
