|Another turbulent and complex year is coming to end driven by economic recovery (discussions), more COVID19 and more Zoom conferences. |
Before we round up and share what we believe were key developments in green finance and sustainable development in 2021, we want to take this opportunity and first say:
Thank you for your support!
We established the Green Finance & Development Center as part of the Fanhai International School of Finance (FISF) at Fudan University in Shanghai, China in August this year. Our mission continues from the previous work we did at the Green BRI Center: We want to accelerate green finance and support the sustainable economic transition through evidence-based advisory and policy for financial institutions, policy makers and international institutions.
Since our establishment, the GFDC has worked with more than 30 partners in over 10 countries. We want to thank all of you who have made this journey possible.
|Our content for the 2021 review…it was not an easy choice from many more options:|
1. The end of coal? Not yet, but we are moving forward with commitments for overseas coal from China and the G7
2. More development finance? At least some more initiatives announced from BRI to Global Gateway and B3W – but with some risks
3. Is biodiversity finance moving mainstream – from TNFD establishment to CDB COP15 in China
4. Commitments to climate finance and net-zero at COP26 – yet decreasing action from development finance institutions
5. Improved green finance taxonomies and environmental disclosure (ESG) in the EU, in China and for the BRI – and a little bit of harmonization
6. BRI countries +2, BRI investments -25%
7. The Green Finance & Development Center in review
Finally, we want to wish you all happy holidays and a healthy and successful new year 2022. We are hopeful that next year we will be able to re-convene internationally. We are looking forward to working with you on building a green and sustainable future.
and the whole team from the Green Finance & Development Center
1. The end of coal? Not yet, but we are moving with commitments for overseas coal from China and the G7
|On September 21, China’s President Xi announced at the United Nations General Assembly to not build new overseas coal-fired power plants and support the low-carbon energy development in emerging economies. Three months earlier in June 2021, the G7 nations at their meeting in Cornwall, UK agreed to end funding of new coal generation in developing countries and offer up to US$2.8 billion to stop using the fuel. |
These announcements come amid struggles of actually building and operating coal-fired power plants in overseas markets. In our study published in June, we found that about half of China’s overseas coal-fired power plant projects announced since 2013 were running into delays or even cancellations. We also found that already in 2020 no new announcements were made for new overseas Chinese sponsored coal-fired power plants, while we also found that 2021 saw no investments into coal-related projects.
At the same time, however, China has agreed to continue support for “clean coal” domestically, partly to deal with domestic electricity shortages (which were themselves not caused by a shortage of coal generation capacity, but by high prices of coal). To support further coal upgrading, the Chinese Central Bank PBOC has announced a new financing tool of US$31 billion part of which to upgrade coal fired power plants, while the Banking Regulator CBIRC ordered banks to provide more lending to operators of coal power plant – even when these loans might be high risk.
Finally, China and India made sure that the use of coal would be phased down (rather than “phased out”) in the final COP26 outcome.
|Challenges for energy finance in 2022:|
Two issues stand out for the coming year(s):
1. What to do with the existing (often loss-making) coal-fired power plants, and
2. How to finance and define “low-carbon energy” alternatives?
To address these topics, we will work to understand pathways to finance early retirement of coal-fired power plants. We will also continue our research in evaluating real costs of real green energy versus “transition” fuels, such as natural gas and evaluate the just transition mechanism available to move away from fossil fuels to green energy.
2. Global competition for (green) development finance accelerating – from B3W to BRI and Global Gateway
| The year 2021 saw the launch of several new global development initiatives, most importantly the G7’s Build Back Better World (B3W) under US-leadership in June 2021 and the European Union’s Global Gateway in December 2021 (others include the UK’s Clean Green Initiative).|
This is a good and challenging development.
On the positive side, the world needs to mobilize US$ 15 trillion to close the global infrastructure gap by 2040, according to the Global Infrastructure Hub (GI Hub). So far, the world is falling far short:
– the Chinese BRI has mobilized about US$800 billion between 2013 and 2021
– the Global Gateway promises another US$300 billion between 2021 and 2027
– the B3W has made no announcements on funding
Also on the positive side, all of these initiatives promise to focus on green infrastructure development:
– 29 countries launched the Green Belt and Road Partnership in June 2021;
– the B3W’s overall goal global infrastructure development for green growth;
– the Global Gateway promises to mobilize finance for green and clean, secure infrastructures.
On the challenging side is that these initiatives are not designed to work together. China’s BRI is by definition a Chinese initiative, while the Western-led initiatives (B3W and Global Gateway) explicitly state the goal of working with like-minded democratic countries and to promote democratic values. This is an only slightly veiled opposition to China’s increasing footprint through the BRI.
Accordingly, these new initiatives are not necessarily set up to collaborate with Chinese partners, but to provide an alternative to them. This – in the worst case – leads not to smart investments for sustainable development, but possibly to politically motivated “strategic” investments from either side.
Yet, much remains to be seen on how these new initiatives actually deliver. So many questions-marks for 2022.
|Challenges for development finance in 2022:|
Three issues stand out for the coming year(s):
1. How will these new initiatives by the EU and the G7 actually deliver?
2. How can international cooperation for financing be improved to support much needed green development rather than political ambitions?
3. What is the role of multilateralism in this increasingly divided world?
To address these topics, we will provide advisory and capacity in collaboration with Chinese and international partners, e.g., to apply the new project finance mechanism handbook and ESG standards to accelerate collaboration for Chinese and international project finance.
We will also work with multilateral financial institutions to improve green project delivery mechanisms, particularly through public private partnerships (PPP).
3. Biodiversity finance moving mainstream – from TNFD establishment to CDB COP15 in China and COP26 in Glasgow
| Biodiversity finance has taken a much more prominent role in 2021 for politics, financial institutions and central banks. This is an urgently needed upgrade of green finance to not only look at climate, but to address the accelerating loss of biodiversity and the increasing financial risks associated with it.|
Some of the main biodiversity finance-related developments in 2021 include:
– in May, the G7 nations agreed to the global ‘30×30’ initiative to conserve or protect at least 30 per cent of their respective countries’ land and at least 30 per cent of their (or ideally the world’s) ocean by 2030;
– Launch of the Task Force for Nature-related Financial Disclosure (TNFD): in June 2021, after more than a year of preparation work, the TNFD officially launched. With its task force of 35 members and the two co-chairs Elizabeth Maruma Mrema (Executive Secretary of the UN Convention on Biological Diversity) and David Craig (former CEO of data provider Refinitiv), it aims to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks. GFDC Director Christoph Nedopil supported the establishment of the TNFD as a member of the interim working group IWG;
– the Marseille Manifesto was published in September 2021 that summarizes important commitments of global leaders in politics, business and communities, such as the commitment by over 30 subnational governments, cities, partner organisations and IUCN to expand universal access to high-quality green spaces and to enhance urban biodiversity in 100 cities, representing around 100 million citizens by 2025;
– the first phase of the CDB COP 15 in Kunming China ended in October with the Kunming declaration (an agreement of the participants to negotiate an effective post-2020 biodiversity framework) and China’s announcement for the US$ 233 million Kunming biodiversity fund. Due to the COVID-19 pandemic, the global biodiversity community is hoping for more negotiations and commitments in early 2022;
– the global network of central bank and banking regulators NGFS together with the research network INSPIRE issued the interim report on ‘Biodiversity and Financial Stability’. The report finds that there is growing evidence that biodiversity loss could have significant economic and financial implications, as the decline of ecosystem services poses physical risks for the economic actors that depend upon them. This report is a milestone as it builds the ground of financial regulators to provide more guidance and regulation for the financial sector on addressing biodiversity risks#,
– in November at COP26 in Glasgow, UK, 141 global leaders, including from China, agreed to the Declaration on Forests and Land Use that, amongst others, states to facilitate alignment of financial flows to reverse forest loss and degradation.
Yet, biodiversity loss at this time is still accelerating, while tools for financial institutions to measure and report risks are still under development. 2022 will need to see much faster action.
|Challenges for biodiversity finance in 2022:|
Three issues stand out for the coming year(s) for financial institutions to incorporate biodiversity risks and opportunities in their portfolio and investment decisions:
1. What are concrete steps of regulators to protect biodiversity and require financial institutions to re-evaluate current investments (i.e., what are transition risks to observe)?
2. Can global initiatives from regulators (e.g. NGFS), markets (e.g. TNFD, IRIS+, Science-based Targets Initiative) create broader awareness in the financial sector and provide relevant tools to measure and report biodiversity risks?
3. What environmental and social risk management (ESRM) frameworks of financial institutions will include biodiversity considerations?
To address these topics, it will be important to get the different stakeholders in biodiversity, local communities, financial institutions, financial regulators and policy makers together rather than having them work in silos (e.g. the TNFD task force has no biodiversity specialists, but only financial institutions).
We will continue our work with Chinese and international financial institutions, regulators and civil society organizations to evaluate biodiversity risks and disclosure standards (e.g., biodiversity stress testing for financial institutions) and support the development of environmental and social policies for financial institutions to incorporate biodiversity risks and opportunities. We will also continue our work with biodiversity specialists to understand real opportunities and risks of biodiversity, that impact financial decision-making.
4. Commitments to climate finance and net-zero at COP26 – yet insufficient development finance
| Global commitments to reduce carbon and greenhouse gas emissions have accelerated in 2021 – and with it financial institutions are committing to align financial flows. |
Particularly noteworthy commitments wereCOP26 Glasgow Climate Pact confirmed global commitment to limit global warming to less than 1.5 degrees Celsius. It also, for the first time, included a statement on coal (however not to “phase-out”, but to “phase-down” the use of coal). COP26 also delivered other important climate milestones, particularly on reducing methane, a powerful climate gas responsible for up to 25% of global warming. China-US Glasgow Declaration was a surprise side-negotiation between China and the US during COP26. Similarly to the Glasgow Climate Pact, it addressed the topic of methane and promised cooperation between China and the US on this topic.Glasgow Financial Alliance for Net Zero (GFANZ) was launched as a forum for leading financial institutions to accelerate the transition to a net-zero global economy. It attracted over 450 financial firms across 45 countries responsible for assets of over $130 trillion. GFANZ firms’ net-zero commitments must use science-based guidelines to reach net-zero emissions by 2050, cover all emission scopes, include 2030 interim target settings and commit to transparent reporting and accounting in line with Race to Zero criteria. Despite this progress and recognition of climate change as a global threat, global financial flows are still insufficiently aligned with a net-zero goal.the promise of US$100 billion per year of development finance for climate adaptation and mitigation has not been kept;global fossil fuel investments by private financial institutions: 381 banks have lent US$315 billion to the coal industry in 2019 and 2020, a Urgewald and Reclaim Finance found in February. Commercial banks have also helped the sector raise over US$800 billion through bond issues and share sales;the multilateral development banks (MDBs) have actually downsized their climate investments (due to COVID-19 related recovery measures and re-financing activities)
|Challenges for climate finance in 2022:|
Four issues stand out for the coming year(s) for climate finance:
1. How to phase out non-green or “dirty” assets in the existing financial portfolios?
2. How to finance the transition of the real economy, particularly of those currently high-emitting industries and sectors? Can a “transition taxonomy” to support financing the transition of dirty to non-dirty activities help?
3. How to accelerate climate finance flows into emerging markets to support mitigation and particularly adaptation?
4. How to reduce government support for polluting sectors and industries in terms of subsidies, state-owned enterprises and tax exemptions?
The Green Finance & Development Center will work with its partners to support the acceleration of climate finance, particularly in emerging economies. At this time, we understand that transition finance is crucial, but we do not believe that a transition finance taxonomy should be developed. Rather, global financial institutions and regulators should agree on a dirty finance taxonomy, in addition to green finance taxonomies to ensure phase-out of harmful projects.
5. Improved green finance taxonomies and environmental disclosure (ESG) in the EU, in China and for the BRI – and a little bit of harmonization
|Some important improvements were made for more common frameworks on defining economic activities that are “green” and thus can be supported through green finance – particularly through green finance taxonomies:|
– in May 2021, the China’s Central Bank PBOC together with China’s Securities & Regulatory Commission (CSRC) and the National Development & Reform Commission (NDRC) published the updated “Green Bonds Endorsed Projects Catalogue” to govern China’s green bonds market. Compared to the previous version, it does not include “clean coal” any more, while it still supports upgrades of existing coal-fired power plants;
– in December 2021, the European Union (EU) passed the first two chapters of the sustainable taxonomy, the EU’s ambitious labelling system for green investment. It will describe the sustainable criteria for renewable energy, car manufacturing, shipping, forestry and bioenergy and more, and include a “technology-neutral” benchmark at 100 grams of CO2 per kilowatt-hour for any investments in energy production. So far, the decision on including or not including nuclear and gas as a source of energy has been postponed.
– Russia announced a new green finance taxonomy. The Russian taxonomy covers waste management, energy, construction, industry, transport, water supply, biodiversity, and agriculture. The taxonomy adopted a 100g CO2e/kWh threshold for electricity generation, which is a cornerstone also of the EU Taxonomy. According to Climate Bonds Initiative (CBI): “The adoption of this threshold for gas-fired power signals to international investors that the Russian Taxonomy is aligned with global definitions of green investment, and independent of fossil fuel interests.”
– China and the EU unveiled their Common Ground Taxonomy – Climate Change Mitigation in November 2021. It provides an analysis on approaches of the EU taxonomy and China taxonomy, and the methodology for comparing and identifying commonalities and differences between some features of the two taxonomies.
– The EU’s Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021. Its scope captures financial market participants and financial advisers operating in the EU. Importantly, it includes disclosure obligations on adverse impacts on sustainability matters at entity and financial products levels.
Application and disclosure of environmental, social and governance (ESG) standards within financial institutions and asset managers has increased significantly in 2021. Bloomberg reports that ESG Assets under Management (AUM) will increase to US$50 trillion by 2025 (up from US$35 in 2020). However, concerns are rising on ‘Greenwashing’, where investors promise or report false or misleading information. Regulators are increasingly scrutinizing misleading or false claims by asset managers, such as Deutsche Bank’s asset management company DWS‘s investigation by the American SEC.
– The Chinese Ministry of Ecology and Environment (MEE) has finished a consultation phase on disclosure of ESG-related metrics for corporations, while the Chinese Central Bank has completed a first phase of a pilot to implement climate accounting in financial institutions.
|Challenges for ESG and green taxonomies in 2022:|
Two issues stand out for the coming year(s) on standards for taxonomies and disclosure:
1. How to improve ESG disclosure in order to keep the momentum in the green finance market and avoid misleading or wrong “green” claims by financial institutions and corporations?
2. How to harmonize green finance taxonomies more broadly to allow more seamless capital flows?
Both are very challenging topics, also as national differences are often hard to overcome (as we also found in an academic paper published earlier this year on the Nature of Green Finance Standards – available here). It is promising to see the EU, China and the G20 engaging in common standards on taxonomy and disclosure and the Green Finance & Development Center will work with Chinese and international regulators, as well as capital market to improve ESG application.
6. BRI – getting greener, growing in size, slowing in investments
| The Belt and Road Initiative (BRI) has been further enshrined in China’s overseas engagement strategy. President Xi emphasized the role of the BRI at multiple occasions, such as the Bo’Ao Forum in April 2021, where he particularly stressed the role of the Belt and Road Initiative Green Development Coalition and the Green Investment PrinciplesForum on China-Africa Cooperation (FOCAC) in November 2021, where he emphasized the China’s support for the countries of the BRI The BRI is also getting greener. In June 2021, the Ministry of Commerce (MOFCOM) and the Ministry of Ecology and Environment (MEE) issued the Guidlines for Greening Overseas Investment and Cooperation [对外投资合作绿色发展工作指引], that for the first time encouraged the application of international environmental standards for Chinese developers in countries with weak environmental protection laws. |
In October 2021, the implementation guide for the “Traffic Light System” for BRI projects was launched by the BRIGC after introductory remarks by Minister of Environment Huang Runqiu. Furthermore, more research on improving biodiversity, and greening trade and the transport sector were published at that meeting (we reported in our previous newsletter).
In terms of BRI financing, 2021 saw a further decline to US$19.3 billion in the first half (compared to US$27.5 billion in the first half of 2020). While investments in solar and wind fell strongly, we noticed not new coal-related financing and investment in 2021 (in line with President Xi’s announcement – see first point).
Finally, two more countries signed a Memorandum of Understanding (MoU) with China to join the Belt and Road Initiative, bringing the tally to 135-142:
1. 🇪🇷 Eritrea – a low-income country in northeast Africa on the Red Sea coast. With a GNI per capita of about 650 USD and a population of 3.21 million. It holds a strategic position at the Red Sea and the Suez Canal, as well as to the waters in the Persian Golf.
2. 🇬🇼 Guinea Bissau – a low-income country on Africa’s West coast. The country has a GNI per capita of about 800 USD and a population of about 2 million. Its economy is mostly based on exporting agricultural products, such as fish, cashew nuts and gold. Guinea Bissau is a member of the African Continental Free Trade Agreement (AfCFTA) that removed border tariffs between man African nations. It is an important partner on the Atlantic coast for China.
>> Check out our BRI country list maps and tables here.
|Challenges for the green BRI in 2022:|
Three issues stand out for the coming year(s) on standards for greening the BRI (apart, of course, from dealing with COVID-19):
1. How to support countries in the BRI to reduce sovereign debt burden while supporting a green transition?
2. How to work with BRI countries to increase capacity on green finance and green project development?
3. How to support BRI stakeholders in China and BRI countries to improve standards and guidances for green finance?
The Green Finance & Development Center is working with Chinese and international partners to understand the application of debt-for-nature swaps, as well as debt-for-climate or debt-for-SDG swaps as a tool to reduce sovereign debt burden and accelerate green recovery. The GFDC is further supporting Chinese partners, such as the BRIGC, to further provide research and policy studies on greening finance policies and practices, for example in disclosure and coal-related strategies.
7. Green Finance & Development Center in 2021
|Since our establishment in August, we have been honored to publish and contribute to numerous policy studies, interviews, media reports and knowledge products.|
|BRIGC: “Green Development Guidance for BRI Projects – Implementation Guide” backed by the Ministry of Ecology and EnvironmentCCICED: “Special Policy Study on Green Finance“|
|Global Research Alliance for Sustainable Finance and Investment (GRASFI) as conference executive chair, moderator of two panels and presenting papersModerator of OECD/Asian Development Bank on SOE Governance, moderating a global sessionsKeynote speaker at International Financial Technology Forum in Suzhou, China…|
|Thank you again for reading and we look forward to hearing your feedback, thoughts and again wish you a happy end of the year 2021 and a successful and healthy 2022.|