The Institute of Finance and Sustainability (IFS) is set to release new sectoral benchmarks to help financial institutions assess the credibility of companies’ decarbonisation plans when securing transition finance.
The initiative is being led by IFS president and former People’s Bank of China (PBOC) chief economist Ma Jun, who hopes the voluntary benchmarks will help standardise how financial institutions assess companies’ transition plans, laying the groundwork for China’s transition finance market to grow.
Last November, the Beijing-based institute published its first set of benchmarks covering the electricity, steel, cement, chemicals, non-ferrous metals and glass sectors.
The IFS spent nearly two years developing the initial benchmarks because there was little consensus among Chinese banks on what constituted a science-based and ambitious transition plan, Ma said.
The benchmarks are voluntary reference pathways rather than regulatory requirements, but Ma said he expects them to bring greater consistency to the banks’ assessment of transition plans.
“I was in a meeting setting targets and the views on the percentage of carbon intensity reduction for steel companies within five years ranged from 2% to 20%. Some said 2% was good, some said it needed to be at least 20%,” Ma told Green Central Banking. “If you were a bank, what would you say? It’s very hard. That’s why it requires a benchmark.”
The benchmarks align with China’s stated aim of achieving carbon neutrality by 2060, its updated nationally determined contribution and the goals of the Paris Agreement. Under the IFS framework the recommended benchmark for the steel sector is an 18% reduction in carbon over the next five years.
The IFS plans to publish benchmark pathways for six additional sectors in the next few months.
“These 12 sectors will cover over 90% of total emissions in China. So by then, we will have a more or less complete list of benchmark pathways,” Ma added.
Beyond transition taxonomies
In China, all major provinces and cities have put out their own transition taxonomies, including Zhejiang, Hebei, Shanghai and Chongqing.
“China probably has the largest number of transition taxonomies in the world,” said Ma, who estimates there are at least 20 separate guidance documents across the country.
The Chinese central bank has also drafted its own transition finance framework for four carbon-intensive sectors – coal power, steel, building materials and agriculture – with plans to expand the standards to seven other industries.
But Ma said that despite China’s active efforts to develop transition finance, the market will take longer to mature than green finance.
“Different regions and sectors use different technical pathways, and have very different initial starting points and levels of capacities. So it takes longer to get to a complete ecosystem for transition finance, compared to green finance,” said Ma, who was instrumental in setting up China’s green finance market during his stint at the People’s Bank of China from 2014 to 2017.
“Green was relatively easy,” he said. “Within just one year of publishing the green bond catalogue, we became the world’s largest issuer.”
“It just needed a taxonomy, then you could visually see where most of the projects belong. The cost of recognising, labelling and verifying is also very low for green projects and the greenwashing risk is easier to control. That’s why it could grow very fast.”
“But for transition, there are a lot of difficulties,” said Ma. “Just defining transition activities takes multiple years, because there are so many sectors and pathways. Then, after the pathway is put out, people will ask for the quantitative thresholds for each pathway. All this will take time, because technically, these issues have not been fully resolved yet.”
More capacity building is needed to help companies prepare their transition plans, especially among smaller businesses.
“For small- and medium-sized companies, it is a daunting task. It’s like asking a primary school student to do a thesis,” said Ma.
One way IFS hopes to support widespread adoption is by developing transition plan templates, such as one being piloted in Huzhou, which banks can ask their clients to complete.
Too early for a ‘common ground taxonomy’
As transition taxonomies proliferate in Asia, some experts have warned that a weak consensus across these emerging frameworks could expose investors to cross-border financing risks.
One key effort to align green finance taxonomies has been through the Common Ground Taxonomy, which China, the EU and, most recently, Singapore, have all adopted.
Ma, who co-chairs the working group behind the international effort, said that it is “a bit too early” to coordinate a similar harmonised approach for transition taxonomies.
“Partly because it’s too new, not many countries have formal transition taxonomies yet. All of them are in the experimentation stage,” said Ma. “Everybody has to have their own stuff first in order to coordinate.”
