Path to a green China: The role of capital markets in decarbonising the future

Over the past four decades, climate change has resulted in a significant increase in the frequency and intensity of extreme weather events. Climate and environment-related risks have become one of the most troubling long-term concerns globally.

From the endorsement of the United Nations Framework Convention on Climate Change in 1992 to the signing of the Paris Agreement in 2016, the international community has gradually reached a consensus on addressing climate change by reducing carbon emissions. Carbon neutrality has become an inevitable choice to tackle this challenge.

In September 2020, Chinese President Xi Jinping pledged at the General Debate of the 75th Session of the UN General Assembly that China would have carbon dioxide emissions peak before 2030 and achieve carbon neutrality before 2060. Experts worldwide have hailed this move as realistic and important, saying that China’s pledge will lead joint actions on global warming and encourage the rest of the world to progress on climate action.

The role of capital markets

To help achieve carbon neutrality, capital markets can fully tap on their resources by providing financing channels, price discovery, resource allocation, and risk management. The Guiding Opinions on Building a Green Financial System issued under the guidance of the People’s Bank of China (PBOC) marks the beginning of China’s construction of a green financial system. Since then, relevant departments have issued supporting measures to continuously improve the green-finance governing rules.

This year, the PBOC announced that it would establish a mandatory information disclosure system step-by-step to cover various financial institutions and financing entities, with uniform disclosure standards. The China Securities Regulatory Commission (CSRC) has also unveiled new initiatives, for example incorporating a chapter on environmental and social responsibility in its newly revised corporate disclosure rules, and encouraging companies to voluntarily disclose their carbon emissions reduction measures during the reporting period.

At present, China has established a comprehensive green-finance policy framework and is actively developing “Five Pillars” to promote green finance: green finance standards, environmental information disclosure, policy incentive mechanism, product innovation, and international collaboration.

The ‘Five Pillars’ of carbon neutrality

By connecting policies with markets, as well as linking issuers with investors, the Shanghai Stock Exchange (SSE) has made relentless efforts to attain carbon neutrality for capital markets.

In 2017, the SSE established a steering group and a working group for advancing green finance and sustainable development. In April 2018, the SSE released the SSE Vision and Action Plan for Supporting Green Development and Promoting Green Finance (2018-2020). In recent years, the SSE has implemented this plan in five ways: optimising equity financing services, accelerating the development of the green bond market, enriching green investible products, enhancing global cooperation in green finance, as well as strengthening promotion and research on green finance. The SSE has now achieved the preliminary goals set by the Action Plan.

For the stock market, the SSE has been supporting green enterprises to raise funds in the capital market. In 2020, among the newly-listed companies on the SSE main board, four are in the new-energy, energy conservation, and environmental protection sectors. Meanwhile, for the SSE STAR Market, there were 20 IPOs in these sectors.

As for the information disclosure system, as early as 2008 the SSE issued its own Guidelines on Listed Companies’ Environmental Information Disclosure. In 2019, the SSE released the Rules for Listing Shares on the SSE STAR Market, including a special chapter on social responsibility, requesting mandatory disclosure of social responsibility conducts of STAR Market companies. Currently, the SSE, under the guidance of the CSRC, is propelling the research in and formulation of ESG and carbon emission-related information disclosure rules of listed companies.

For the bond market, the SSE launched a pilot programme for green corporate bonds in 2016. This February, the exchange launched its first batch of carbon-neutral green bonds, raising US$1.1 billion. In addition, Mainland China’s first carbon-neutral ABS in financial leasing was also successfully listed on the SSE in April 2021. Recently, the exchange revised the Guidelines No. 2 of Shanghai Stock Exchange for Application of Rules for Issuance and Listing Review of Corporate Bonds - Specific Types and added relevant rules for new types of bonds, such as carbon-neutral green bonds and blue bonds.

Meanwhile, the SSE has kept expanding its range of green investible products, while diversifying the offering for low-carbon investment. The SSE is working with Shanghai Environment and Energy Exchange and China Securities Index Co. Ltd. to compile a carbon-neutral investment index and develop ETFs tracking this index.

Furthering international cooperation 

The SSE values international cooperation in green finance and has been playing an increasingly important role in regional and global initiatives. Last year, the exchange joined the UN SSE Climate Disclosure Advisory Group and shared our experience in consummating an international guidance on climate disclosure.

In addition, the SSE has given full play to the advantages of its platform and strengthened ESG-related research and promotion. Since 2018, the SSE has embedded green-finance panels at the Shanghai Stock Exchange Global Investors Conference for three consecutive years. Since last year, the SSE has rolled out ESG investment live streaming together with Lujiazui Financial City, and organised a series of well-received green finance-related training sessions for listed companies.

We also shared our green finance practices through platforms such as World Economic Forum and NGOs like Shan Shui Conservation Center. By doing so, the Exchange has improved stakeholders’ understanding of green finance and managed to create a good ecosystem for green finance.

It is worth mentioning that the SSE is also leading real-world practices by building a green office. Exactly 1,383.62 tons of standard coal (equivalent value) were used in the first three quarters of 2020 at SSE’s headquarters, which is 2.88 percent lower than the same period in 2019. The SSE has published its social responsibility report for four consecutive years, blazing a trail for more listed companies to fulfill their social responsibilities.

A new journey 

Carbon neutrality creates distinct business opportunities for exchanges, and at the same time imposing higher requirements for their fulfillment of social responsibilities. At the SSE, we will facilitate carbon-neutrality goals by developing a green finance market through enriching green financial products, nurturing green investors, broadening direct financing channels for green industries, and attracting long-term foreign investment.

We would also like to call on our global counterparts to work together, in partnership with those at the forefront of the green sectors, to pursue international collaboration in environmental governance and climate change. With determination and effort, we are hopeful that we can build a harmonious green finance ecosystem, a vibrant, clean and beautiful world, as well as a community with a shared future for mankind.

– The Shanghai Stock Exchange is Vice-Chair of the WFE’s Sustainability Working Group.