Speaker 1: Hi you're listening to copy time a podcast series on
Speaker 1: markets and economies from devious group research. I'm tomorrow. Big
Speaker 1: Chief economist. Welcome to our 61st episode.
Speaker 1: Today. We're going to go big on climate change and china.
Speaker 1: And to do that we have a very distinguished guest
Speaker 1: with us from Beijing Dr martin, President of the Institute
Speaker 1: of Finance and Sustainability, which is an institution based in Beijing.
Speaker 1: He is also the chairman of China Green Finance Committee.
Speaker 1: Special advisor to the Governor of People's Bank of China.
Speaker 1: Co chair of G 20 Sustainable Finance Working Group and
Speaker 1: co chair of the steering committee of Green Investment Principles
Speaker 1: for the Belt and Road.
Speaker 1: Uh june was also formerly chief economist of PBOC and
Speaker 1: member of PBOC monetary Policy committee. I personally had the
Speaker 1: pleasure of overlapping with him twice in my professional career,
Speaker 1: both in the I. M. F. And as well as
Speaker 1: when you both were economists at Deutsche Bank
Speaker 1: dr martin, Welcome to Coffee Time.
Speaker 2: Thank you very much for inviting me to join your forecast.
Speaker 1: Really glad to have you with us june um I
Speaker 1: will begin the discussion at the global level and maybe
Speaker 1: then we will then narrow it down to china.
Speaker 1: So last month, on august 9th uh the iPcc intergovernmental
Speaker 1: panel on climate Change, they released their first report. It
Speaker 1: was the first part of their six assessment report, so
Speaker 1: called the er six
Speaker 1: share with us, your key takeaways from it.
Speaker 2: The er six report by I. P. C. C. Essentially
Speaker 2: said that global temperature has risen 1.1 degree since the
Speaker 2: industrialization
Speaker 2: Against 1.5° target set by the Paris agreement? We're left
Speaker 2: with only 0.4°.
Speaker 2: This message reinforces urgency for the world to take actions
Speaker 2: and to mobilize finance
Speaker 2: to implement the paris agreement. I totally agree with the
Speaker 2: uh U. N. Secretary general who said that the report
Speaker 2: is a code red for humanity.
Speaker 2: The extreme weather events that we observe recently including floods
Speaker 2: in china and europe
Speaker 2: and the welfare in Greece.
Speaker 2: They're basically telling us that the catastrophic impact of climate
Speaker 2: change is already a fact rather than a projection.
Speaker 2: Therefore we need immediate and more ambitious actions. Specifically,
Speaker 2: we need more countries to explicitly commit to carbon neutrality
Speaker 2: goals
Speaker 2: Whether they are 2050 or 2060
Speaker 2: and we need concrete plans and roadmaps for implementing these pledges.
Speaker 2: Otherwise it will run the risk of doing too little
Speaker 2: and too late,
Speaker 2: which will lead us to the narrower option of disorderly
Speaker 2: transition in the longer term.
Speaker 2: But asia, I'm pretty glad that in the matter of
Speaker 2: just one year we have seen major economies like china,
Speaker 2: Japan Korea and Indonesia
Speaker 2: having announced a carbon neutrality goes,
Speaker 2: some smaller economies such as Kazakhstan recently also announced carbon
Speaker 2: neutrality goes, I think many others will follow.
Speaker 2: But after setting these net zero targets, we really need
Speaker 2: to agree on policy actions and quality on these actions.
Speaker 2: So what are these actions for example, we need to
Speaker 2: remove fossil fuel subsidies.
Speaker 2: I need to introduce uh emission trading systems or carbon taxation.
Speaker 2: And we need to define, what are the green activities
Speaker 2: and brown activities
Speaker 2: that uh, sustainable finance should either support or should avoid.
Speaker 2: And also we need to invest massively in technology, especially
Speaker 2: in areas such as hydrogen storage, c C U. S.
Speaker 2: Energy efficiency and so on so forth.
Speaker 2: And all major companies and the fine institutions in addition
Speaker 2: to the government's, they need to have plans
Speaker 2: and need to have actions
Speaker 1: june. How do you convince technology optimists that, you know,
Speaker 1: why do we have to go through all these painful
Speaker 1: transitional measures
Speaker 1: if we just wait a little longer and technology will
Speaker 1: come that will suck out all the carbon from the atmosphere.
Speaker 1: And we don't have to make all these adjustments.
Speaker 2: Of course there are lots of uncertainties around your pathway
Speaker 2: towards carbon neutrality.
Speaker 2: Um, I think what you're suggesting is probably taking chance.
Speaker 2: Um, just in case there's some breakthrough in technology
Speaker 2: happens and the world will be saved, but we cannot
Speaker 2: take chance. We need to
Speaker 2: use all possible means, including the existing technologies such as
Speaker 2: what we see in the solar, uh, you know, wind, um,
Speaker 2: and other energy efficiency sectors as well as the possible
Speaker 2: breakthrough in the future.
Speaker 2: So we? Re going to invest in both existing low
Speaker 2: carbon technology and apply them to all possible fields as
Speaker 2: well as investing massively in new technology
Speaker 2: that will help us and probably will be exceeding our
Speaker 2: target
Speaker 2: in the future in terms of the time that will
Speaker 2: meet the
Speaker 2: the carbon you try to pick up.
Speaker 1: All right, So that I think that's the ground for
Speaker 1: our pivot toward china.
Speaker 1: So as you pointed out earlier that it was, I
Speaker 1: think September 2020 when China announced its carbon neutrality, gold.
Speaker 1: um maybe you can give us a snapshot of china's
Speaker 1: policy to confront climate change and then maybe later we
Speaker 1: can talk about the magnitude of efforts that would be needed.
Speaker 1: But maybe first we just talk about the policy.
Speaker 2: Yeah, as you said that china announced its coming neutrality
Speaker 2: go in september last year.
Speaker 2: And since then, lots of regions and sectors and companies
Speaker 2: began to develop their roadmaps for implementation.
Speaker 2: I myself with leading the team uh to help chongqing municipality,
Speaker 2: which is one of the provincial level city
Speaker 2: to draft this roadmap. And uh we're going to publish
Speaker 2: this chunking roadmap in just a few days,
Speaker 2: I've seen companies such as a major power producers announcing
Speaker 2: targets like by 2030 you will achieve 75% renewable.
Speaker 2: And the major steel company like a baosteel announcing the
Speaker 2: target of 2050 carbon neutrality, which is 10 years ahead
Speaker 2: of the national target. So these are all quite encouraging
Speaker 2: and I expect some regions, especially those in coastal areas
Speaker 2: announcing carbon neutrality goes, that's 10 years or five years
Speaker 2: ahead of the
Speaker 2: national targets.
Speaker 2: That's the actions that's been taken already.
Speaker 2: But at the national level, uh the N. D. R. C.
Speaker 2: Which is the old planning agency now, it's called National reform.
Speaker 2: Uh And Development Commission is working on what we call
Speaker 2: one plus N roadmap meaning
Speaker 2: uh in all major sectors including the energy which is
Speaker 2: center and the building sector, the manufacturing sector,
Speaker 2: uh and transportation sector, they all need a specific role
Speaker 2: maps to implement it
Speaker 2: the carbon neutrality pledge.
Speaker 2: As for policies, a couple of things are in place
Speaker 2: and many more are being discussed and planned. For example,
Speaker 2: we have a national emission trading system already which was
Speaker 2: up and running just last month
Speaker 2: and some experts are talking about the possibility of imposing
Speaker 2: carbon taxation
Speaker 2: On smaller companies which are not covered by the 80s
Speaker 2: and the energy level or to policy building related policies
Speaker 2: are all being designed. I think the sector policies will
Speaker 2: drive a lot of demand change um in the specific sectors.
Speaker 2: And finally green finance, which is the field. I mean
Speaker 2: working on for many years, we're trying to
Speaker 2: raise as much as a few 100 trillion RMB in
Speaker 2: the coming three decades to support the carbon neutrality go
Speaker 2: by lowering the funding costs for green and possibly increasing
Speaker 2: funding costs for Brown.
Speaker 1: You
Speaker 2: mentioned about magnitudes in fact, Yeah, I have a couple
Speaker 2: of estimates uh from different studies,
Speaker 2: one of which is an earlier study back end of
Speaker 2: last year saying that china will need to invest in
Speaker 2: 130 trillion R&B
Speaker 2: for green and low carbon sector because of carbon neutrality.
Speaker 2: But as I said, they were publishing our new estimates
Speaker 2: soon and my new estimated were likely to be closer
Speaker 2: to 500 trillion
Speaker 2: because the
Speaker 2: definition of these low carbon green investments are quite different
Speaker 2: in different studies, but our with a broader sort of
Speaker 2: our coverage will be much higher than earlier estimates.
Speaker 1: These are exceptionally large numbers june, we are basically talking
Speaker 1: about
Speaker 1: five times China's current GDP.
Speaker 2: Uh, yeah, but we're talking about next three or four decades. Um,
Speaker 2: you're talking about the one annual GDP number,
Speaker 1: right. But we're still talking about, you know, substantial percentage
Speaker 1: of GDP in mid single digit, perhaps toward green initiatives
Speaker 1: on an animal basis.
Speaker 2: Indeed, based on the smaller number 130 something trillion, that's
Speaker 2: about 2.5% annual GDP
Speaker 2: For the coming three decades
Speaker 2: Based on larger numbers closer to 10% of GDP every year.
Speaker 2: That's needed for green and low carbon investments.
Speaker 1: I think that is going to be a very influential
Speaker 1: sort of set of analysis for the rest of the
Speaker 1: world to understand that if you seriously want to go
Speaker 1: and embrace the transition, how much costs it will entail
Speaker 1: and how to think in terms of, you know, financing
Speaker 1: and finding revenues for that.
Speaker 1: So, yeah, that's, that's a good system. So, you mentioned
Speaker 1: the emission trading system june,
Speaker 1: so maybe walk us through how that is working in
Speaker 1: china and how dissimilar or similar it is to the
Speaker 1: european emission trading system.
Speaker 2: China started its experiment on emission trading system back as
Speaker 2: early as in 2012,
Speaker 2: So we had seven regional
Speaker 2: um, imaging trading systems, but now China is launching its
Speaker 2: national
Speaker 2: system that's based in shanghai
Speaker 2: and as I said, it was the trading started in
Speaker 2: july this month this year.
Speaker 2: Um and now the national system is covering
Speaker 2: Um a total emission of 4.5 billion tons of co
Speaker 2: two per year, which makes it the largest,
Speaker 2: the main trading market in the world.
Speaker 2: But still the current trading is only covering the thermal
Speaker 2: power sector for the shanghai market
Speaker 2: And these are 2300 companies. But in the coming few
Speaker 2: years the government is planning to expand
Speaker 2: the coverage to many more sectors including steel, cement, aluminum,
Speaker 2: petrochemical paper, airlines and so on. So by then it's
Speaker 2: going to be even bigger than the current size in
Speaker 2: terms of coverage of a carbon
Speaker 2: um it's similar to the european E. T. S in
Speaker 2: the sense that it is also a cap and trade system,
Speaker 2: but of course the carbon pricing china is now still
Speaker 2: lower
Speaker 2: At the 50 something RBB put on. But a lot
Speaker 2: of experts, including myself are expecting to go up in
Speaker 2: the coming years and decades.
Speaker 2: Um the current national trading system is not yet involving
Speaker 2: financial investors, which will draw back
Speaker 2: and there was no derivatives such as, you know, forwards
Speaker 2: and futures and options,
Speaker 2: but all these are recommendations we're making uh, for the
Speaker 2: regulator to change in the future. I think,
Speaker 2: uh, these functions will be added in the, not very
Speaker 2: distant future.
Speaker 2: Um, there's another element of the chinese carbon market, which
Speaker 2: is called CCR, there's china certified emission reduction, which provides
Speaker 2: a offsetting mechanism
Speaker 2: that's similar to a CBM or we can call the
Speaker 2: chinese version of C D M,
Speaker 2: the emitters uh, covered by the national market or the
Speaker 2: compliance market can by CCR as a carbon offset
Speaker 2: and international airlines can also by CCR
Speaker 2: using the cosy agreement.
Speaker 2: Um, but the CCR is not yet open to financial
Speaker 2: investors and I think that's possible in the future. When
Speaker 2: we moved to,
Speaker 2: you know, refining these policies.
Speaker 1: So john I recently had a discussion with Professor David
Speaker 1: Carbon David victor at University of California SAn Diego
Speaker 1: and he has written quite a bit of work on
Speaker 1: emission trading system. And he sort of walked us through
Speaker 1: how in the case of europe,
Speaker 1: it initially did not work very well because the expectation
Speaker 1: was market based solutions would be saving the day, but
Speaker 1: then they basically need a lot of top down intervention
Speaker 1: coming at the european union level and then companies sort
Speaker 1: of fell in line. So would you say that the
Speaker 1: emission trading system that china is doing is also going
Speaker 1: to be sort of the latter part of what the
Speaker 1: Europeans have done, which is
Speaker 1: more of a top down signal and the companies will
Speaker 1: have to sort of follow
Speaker 2: uh currently the main market in china or what I
Speaker 2: call the national market is a top down driven
Speaker 2: or top down design the market, but
Speaker 2: we still have options of, you know, developing alternatives. For example,
Speaker 2: Mark Carney has set up this task force on voluntary
Speaker 2: carbon market
Speaker 2: and my colleagues are involved in uh studying there
Speaker 2: standards and I personally believe that the china should also
Speaker 2: consider
Speaker 2: developing a voluntary carbon market using the international
Speaker 2: uh TsV CM standards.
Speaker 2: And we also have discussions with Guangdong and Hong kong
Speaker 2: um to uh
Speaker 2: uh sort of looking to the option of developing a
Speaker 2: unified
Speaker 2: regional market which is unifying the Guangdong carbon market with
Speaker 2: the potential
Speaker 2: treating magnetism Hong kong and
Speaker 2: adding
Speaker 2: to the unified market a carbon connecting mechanism which will
Speaker 2: allow for investors to enter the chinese carbon market.
Speaker 2: So all these are discussions that's going on too,
Speaker 2: uh sort of supplement the top down approach for carbon
Speaker 2: emission trading in china
Speaker 1: probably keeps you very, very busy june. Let's talk about
Speaker 1: green finance, You have been the pioneer in developing the
Speaker 1: Green finance policy framework in china during 2014 17 when
Speaker 1: you were PBS system, economist,
Speaker 1: how does green financial system work and how would china mobilize?
Speaker 1: I mean you mentioned this extremely large numbers earlier that
Speaker 1: how would the financing for all that we mobilized
Speaker 2: in the past few years. China developed a framework of
Speaker 2: green financial system which I think can be
Speaker 2: So describe with four pillars. One is a taxonomy
Speaker 2: which means that we need to have a few documents
Speaker 2: to define what other green activities
Speaker 2: that the green loans, green bonds, green foster support
Speaker 2: and so far we have three taxonomy is in china,
Speaker 2: one for green landing, one for green bonds and one
Speaker 2: for green projects
Speaker 2: and second pillars disclosure. We want to make sure that
Speaker 2: the issuers will disclose enough information including environmental crime information
Speaker 2: to the investors
Speaker 2: so that the green money will target especially for green projects.
Speaker 2: The third thing is about incentives for some green projects.
Speaker 2: They have environmental benefits.
Speaker 2: For example you can reduce carbon, reduce pollution
Speaker 2: but the beneficiaries are not paying them,
Speaker 2: that's why their returns are not high enough to attract
Speaker 2: private capital.
Speaker 2: So for these projects we need incentives to enhance the
Speaker 2: return
Speaker 2: um under that pillar in china we introduce the instruments
Speaker 2: such as the PBOC re landing facility,
Speaker 2: that's a central bank offering cheap financing to the project
Speaker 2: through commercial banks
Speaker 2: and also local banks are local governments offering interest subsidies
Speaker 2: and guarantees to reduce either funding costs or risks for
Speaker 2: these projects.
Speaker 2: And the final pillar is what we call the sweet
Speaker 2: top products
Speaker 2: because different kind of green
Speaker 2: activities will require different types of financing and financial services.
Speaker 2: So we need to have loans and bonds and private
Speaker 2: equity
Speaker 2: and the insurance products and so on, all serving for
Speaker 2: the green economy
Speaker 2: and within that space um China has developed the largest
Speaker 2: green lending market already
Speaker 2: uh in the world and we now have a second
Speaker 2: largest green bond market,
Speaker 2: but in terms of DsG products were still lagging behind O. E. C. D.
Speaker 2: Country in terms of proportion
Speaker 2: of after management products, you know labeled as S. E. S. G.
Speaker 2: Um but that's not enough in the past four or
Speaker 2: five years. Uh this framework was serving not um sort
Speaker 2: of mostly for carbon neutrality. That's why I recently
Speaker 2: a lot of uh discussions are concentrated on how to
Speaker 2: further improve
Speaker 2: the green financial system here in china
Speaker 2: to achieve carbon neutrality
Speaker 2: and a couple of actions are now being taken. One
Speaker 2: is to modify the taxonomy to ensure that the green
Speaker 2: projects
Speaker 2: uh not only addressing pollution, biodiversity issue but also clearly
Speaker 2: addressing
Speaker 2: the carbon issue.
Speaker 2: And secondly enhancing the disclosure requirements um to make sure
Speaker 2: that the companies and the issues and fine institutions will
Speaker 2: disclose carbon related information
Speaker 2: and un incentives. I think the Central bank will put
Speaker 2: out a bigger
Speaker 2: um you know relearning facility and other related instruments to
Speaker 2: support
Speaker 2: um green projects. And on the product side a lot
Speaker 2: of experiments on carbon uh related financial products, for example,
Speaker 2: the interest of a longer bond could be linked
Speaker 2: to the carbon intensity of the project.
Speaker 2: If the company reduced the carbon intensity more aggressively than
Speaker 2: the company will enjoy lower funding costs.
Speaker 1: I mean june I mean of course on paper, that's
Speaker 1: exactly the way things should be.
Speaker 1: Um but what we have seen in practice around the
Speaker 1: world in recent years is that as governments become very
Speaker 1: enthusiastic supporter of green financing, you see a lot of
Speaker 1: greenwashing uh so how are you going to sort of
Speaker 1: deal with the issue of people try to just do
Speaker 1: some box ticking exercise and hope to get preferential treatment
Speaker 1: because they're just doing the box checking but they're not
Speaker 1: being serious enough for substantive enough,
Speaker 2: there's a couple of safeguards against going washing. One is taxonomy.
Speaker 2: That's why I keep emphasizing the importance of that in
Speaker 2: all conversations and green finance,
Speaker 2: you need to define what is green and what is
Speaker 2: not green officially. Rather than allowing the individual issuers to
Speaker 2: define by themselves. That's why in china we started with
Speaker 2: top down
Speaker 2: taxonomy. Um for example,
Speaker 2: the landing related taxonomy was developed by the banking regulator.
Speaker 2: The first version of the china. Green bond taxonomy
Speaker 2: was published by Green Finance Committee that I chair. And
Speaker 2: now the second version is directly by the central bank itself.
Speaker 2: So this is the first sort of a line of defense,
Speaker 2: making sure the definition of green is clear
Speaker 2: and the second line of defense is verification
Speaker 2: for the banks we have regulators
Speaker 2: um are saying to them that they were going to
Speaker 2: audit
Speaker 2: the greenness of your projects. Of course they're not auditing
Speaker 2: every single project, but it's a threat that you may
Speaker 2: be audited for certain, you know, long transactions that claim
Speaker 2: to be green but not actually green. So the long
Speaker 2: documentation
Speaker 2: and the evidence of supporting their environmental benefits need to
Speaker 2: be there
Speaker 2: to prepare for auditing
Speaker 2: And also for green bonds. A large number, I think
Speaker 2: more than 60, of the green bonds have
Speaker 2: the verification services from the party
Speaker 2: um, accepted those which are pure green, you know, like
Speaker 2: renewable energy and the subway. You can
Speaker 2: See them as green, you know, by your eye, but
Speaker 2: most of other projects require 3rd party verification.
Speaker 2: Of course the market itself is a mechanism because
Speaker 2: investors
Speaker 2: and investment banking and this will begin to see what
Speaker 2: is truly agreement with another green
Speaker 2: and the market, we're reacted by, you know, staying away
Speaker 2: with non green companies or non green products even though
Speaker 2: they claim to be green.
Speaker 1: Yeah, I'm looking forward to, you know, spreads beginning to
Speaker 1: reflect the market's trust or lack thereof on so called
Speaker 1: green products and yeah, you're right, that would be a
Speaker 1: very useful source of information beyond just policing the attempts
Speaker 1: at greenwashing. So john I just want to ask you
Speaker 1: a supplemental question which is,
Speaker 1: you are part of multilateral initiatives. But you're also looking
Speaker 1: at
Speaker 1: the the china initiatives best practice would be that we
Speaker 1: have worldwide uniform taxonomy, worldwide uniform reading system definition of E. S. P.
Speaker 1: And so on.
Speaker 1: Are we there?
Speaker 2: Uh No that's a very tricky issue. Back
Speaker 2: in 2016 when china was the president of G 20
Speaker 2: I had the pleasure to co chair the G 20
Speaker 2: green Finance study group in that year we begin to
Speaker 2: discuss
Speaker 2: the need for introducing taxonomy,
Speaker 2: need to enhance disclosure
Speaker 2: um and we need to have you know, green institutional
Speaker 2: um investor products such as the S. D. And so on.
Speaker 2: But at that time is we're talking about the need
Speaker 2: for all these standards because there's a lack of standards
Speaker 2: And uh now the discussion is totally different. In a
Speaker 2: recent discussion with VSO International Standard Organization, I was told
Speaker 2: that there are 200 tax on them is already
Speaker 2: uh huh.
Speaker 2: So where are they coming from? Some are designed by
Speaker 2: the government for example, china at the government level have
Speaker 2: three sets of taxonomy,
Speaker 2: europe has. The official taxonomy is called us a simple
Speaker 2: finance taxonomy
Speaker 2: and some are by industrial associations like the comma.
Speaker 2: Some are developed by Ngos like C. B. I.
Speaker 2: And many many more are produced by the company themselves.
Speaker 2: For example, 84 Pink Coal Deutsche Bank
Speaker 2: uh not ISIS Bmp. They all have their taxonomy
Speaker 2: Just imagine if every single bank has a taxonomy then
Speaker 2: we probably have 10,000 taxonomy in the world.
Speaker 2: It's going to create a total confusion. A lot of
Speaker 2: transaction costs
Speaker 2: and the potential for greenwashing.
Speaker 2: That's why I strongly feel right now that we need
Speaker 2: to move towards
Speaker 2: consistency, comparability and eventual convergence of taxonomy in the world.
Speaker 2: The same thing happened to the E. S. G. Rating
Speaker 2: methodology back five years ago, there are very very few
Speaker 2: rating companies working on that now. I think a few
Speaker 2: dozen
Speaker 2: um companies providing different rating methodology.
Speaker 2: So the correlation of MsG ratings are very low. Uh
Speaker 2: if one company says this is a good one, you
Speaker 2: know high SD score and the other
Speaker 2: reading companies that is very low. So who do you believe? Right.
Speaker 2: Unlike the credit rating agencies they provide, you know, results
Speaker 2: which are very very correlated. So we need to consolidate
Speaker 2: these methodologies and improving their consistency and transparency
Speaker 2: And that's the effort we're making in this year's G-20
Speaker 2: sustainable finance working group which was reestablished by the italian presidency.
Speaker 2: And once again, I have a pleasure to coach here.
Speaker 2: This working group now together with us colleagues
Speaker 2: and we're looking into you know, ideas and options on
Speaker 2: how to improve
Speaker 2: comparability
Speaker 2: interoperability and eventually uh consistency of these standards and methodologies
Speaker 2: for simple finance
Speaker 1: June, could you expand on that a little more? And since,
Speaker 1: you know, we are talking about the G-20 Sustainable Finance
Speaker 1: Working Group that, you know, the coordination among major economies
Speaker 1: and how will likely develop economy developing economies, we're not
Speaker 1: quite there yet.
Speaker 1: How they would coordinate with the bigger countries like china
Speaker 1: and the US and cross border green capital flows, I
Speaker 1: think is an integral part of all this. How would
Speaker 1: that get facilitated?
Speaker 2: Uh Certainly there's lots of issues require international coordination, that's
Speaker 2: why the G 20 system of Finance working group are
Speaker 2: focusing on these
Speaker 2: topic that requires highest level of coordination,
Speaker 2: for example, uh Taxonomy yesterday, rating issues we mentioned already
Speaker 2: and reporting standards and sensibility is also very important
Speaker 2: because there's so many agencies now putting out different frameworks
Speaker 2: and standards for similar reporting.
Speaker 2: Some are focusing on climbing,
Speaker 2: some on climate environment. Some are saying we need to
Speaker 2: do also biodiversity related reporting.
Speaker 2: Some are saying we need to do this on a
Speaker 2: voluntary basis.
Speaker 2: Some saying we need to do this on a compulsory
Speaker 2: basis
Speaker 2: and ah
Speaker 2: and some uh you know, producing specific templates and others
Speaker 2: are saying, you know, let's leave it to the
Speaker 2: um the companies for them to decide what to do.
Speaker 2: So, all these issues I think require coordination and
Speaker 2: Uh this year we have a G-20 summit finance role
Speaker 2: map
Speaker 2: um coming out, I think we're going to see that
Speaker 2: in october
Speaker 2: Um this year, when the G-20 comes to a conclusion
Speaker 2: and within the road map will highlight the need
Speaker 2: for coordination. These are specific areas
Speaker 2: and also I need to further um take actions to
Speaker 2: improve
Speaker 2: um
Speaker 2: uh risk management, risk reporting
Speaker 2: and on establishing a framework of transition finance
Speaker 2: and also on the need to look into how finance
Speaker 2: can
Speaker 2: protect biodiversity
Speaker 1: uh from the broader multilateral. Just to focus on ASIA
Speaker 1: for for a moment. Um What are the opportunities for
Speaker 1: regional cooperation in Saudi Asia right now?
Speaker 2: Um I think in Asia there's lots of opportunity because
Speaker 2: demand for system of finance is huge. We have
Speaker 2: in a huge countries like china and India
Speaker 2: and Indonesia in terms of population
Speaker 2: um and also carbon emissions or carbon intensity high are
Speaker 2: in these developing countries. So in the future the demand
Speaker 2: for sustainable finance, I think it will be massive.
Speaker 2: Um We can call it on many many different areas.
Speaker 2: For example standards
Speaker 2: can Asean countries think about developing a regional taxonomy
Speaker 2: Instead of you know, 10 or 11 smaller technology me
Speaker 2: that's applied to individual countries with limited liquidity.
Speaker 2: And also we need to collaborate on developing green technologies
Speaker 2: and investing in these sectors.
Speaker 2: Just give you example, domestic is doing great in investing
Speaker 2: green tech
Speaker 2: including in china
Speaker 2: and china has a great production
Speaker 2: um capacity. We can produce a lot of a lot
Speaker 2: of things. We have a much lower cost than many
Speaker 2: other countries.
Speaker 2: So by combining the uh the investment technology, production facilities,
Speaker 2: we probably can produce, you know, low cost equipment in
Speaker 2: many areas such as renewable equipment
Speaker 2: batteries and the E. V. S for the rest of
Speaker 2: the world of course for Asia
Speaker 2: and also within the green finance market. Um there are
Speaker 2: a couple of fairly developed
Speaker 2: um markets in areas such as you know Hong kong
Speaker 2: Singapore being open
Speaker 2: uh and with a lot of expertise I think they
Speaker 2: need to serve the rest of the Asia especially emerging
Speaker 2: markets better
Speaker 2: by providing financing at affordable cost.
Speaker 2: And in this regard back a few years ago, the
Speaker 2: china Green Finance Committee,
Speaker 2: which I cheer and city of London, we set up
Speaker 2: a
Speaker 2: uh set of principles called Green Investment Principles for the
Speaker 2: belt and road
Speaker 2: largely to mobilize financing and helping emerging markets
Speaker 2: um to finance their green infrastructure.
Speaker 2: And in fact the DBS is one of the members
Speaker 2: of signatories of the Green Western principles.
Speaker 2: So annually we're holding conference
Speaker 2: um and also asking a working group to develop ideas
Speaker 2: on how to
Speaker 2: you know enhance transparency measuring environmental impact and also innovate
Speaker 2: on financial products um to help these emerging markets
Speaker 1: very, very encouraging june I'd like to develop the last
Speaker 1: part of the podcast going back to china
Speaker 1: last year on this podcast we had paul Hebert who
Speaker 1: had financial stability of the european central bank
Speaker 1: and he told me that most of his time is
Speaker 1: not spent on looking at, you know, banks value at
Speaker 1: risk from financial shock but looking at their risk in
Speaker 1: the portfolio from climate shock. So give us a sense
Speaker 1: of the climate risk and financial risk intersection in the
Speaker 1: context of china.
Speaker 2: Indeed, greenhouse system of finance has two major aspects
Speaker 2: which are well recognized. One is mobilization, we need to
Speaker 2: mobilize more funding for green investments and secondly,
Speaker 2: it's about risk management, namely managing risks arising
Speaker 2: from the environmental climate exposure
Speaker 2: um for fine institutions
Speaker 2: Just give you some ideas. Um many banks uh in
Speaker 2: the world are telling us that they have 10 or 20%
Speaker 2: of the assets
Speaker 2: which are called high carbon assets,
Speaker 2: our assets that's exposed to climate risks.
Speaker 2: And uh in some regions, I think in the very
Speaker 2: um sort of carbon intensive uh countries or regions, I
Speaker 2: think they're fine institutions may have higher exposure
Speaker 2: to these high carbon assets
Speaker 2: and these assets face a lot of risks in china,
Speaker 2: we have done a study
Speaker 2: Showing that the potential default rate of simple power companies
Speaker 2: can go up from the current 3% to 22% within
Speaker 2: 10 years
Speaker 2: because of energy transition,
Speaker 2: because energy transition means that the demand is going to
Speaker 2: go down for these companies and the cost will go
Speaker 2: up as they will have to pay high prices.
Speaker 2: Um you know, to uh to actually pay more to
Speaker 2: buy the carbon quota or if they want to continue
Speaker 2: producing at the current scale with carbon intensity
Speaker 2: and uh with the worsening of the financial performance, the
Speaker 2: funding costs will also go up because
Speaker 2: the rating companies will actually downgrade them uh and therefore
Speaker 2: forcing them to
Speaker 2: except the high funding costs or even, you know, out
Speaker 2: of the financial market.
Speaker 2: So all these are province which are facing the high
Speaker 2: carbon
Speaker 2: companies which are the high carbon exposure for the banks
Speaker 2: and financial institutions.
Speaker 2: So in china, we are now asking the financial institutions
Speaker 2: began to
Speaker 2: looking to the measurement and reporting
Speaker 2: of these risks.
Speaker 2: For example, some banks that began to uh use a
Speaker 2: definition of brown
Speaker 2: uh taxonomy and began to measure, you know, how much
Speaker 2: assets we have in this brown space.
Speaker 2: And I think more than a dozen chinese banks began
Speaker 2: to do environmental and climate risk analysis in the form
Speaker 2: of stress testing
Speaker 2: and they are now stress testing against different industries
Speaker 2: such as a coal fired power generation steel cement.
Speaker 2: All these are now being worked on.
Speaker 2: And the central bank just issued a
Speaker 2: guideline last month to the chinese bank that they will
Speaker 2: be required to report on the climate and environmental information
Speaker 2: on a mandatory basis going forward.
Speaker 1: So
Speaker 1: again, this was staying with china beyond this one example
Speaker 1: that you gave about one bank.
Speaker 1: What's your sense of china's financial sectors preparedness with respect
Speaker 1: to climate change.
Speaker 2: Um
Speaker 2: Now, in terms of mobilization, I think the chinese bank
Speaker 2: are doing quite well. We have now
Speaker 2: 13 trillion RMB uh words of green loans already, which
Speaker 2: is the largest number in the world, of course,
Speaker 2: still growing very rapidly in the first half of this year.
Speaker 2: The green loans are growing at the pace of roughly 15%
Speaker 2: year on year, much faster
Speaker 2: than the overall loan growth.
Speaker 2: But in terms of risk control, I think it's still
Speaker 2: in the very early stage.
Speaker 2: As I said, um about a dozen bank began to
Speaker 2: conduct environmental climate risk analysis,
Speaker 2: But we have 4000 banks in China
Speaker 2: and some banks are beginning to report
Speaker 2: the climate information to the regulators. It's only on experimental
Speaker 2: basis now and it will take some time, I think,
Speaker 2: to
Speaker 2: cover the anti banking sector
Speaker 2: as a manager, I think. Not yet, really. Uh so
Speaker 2: engaged in
Speaker 2: climate risk measurement and management yet. So it will be um,
Speaker 2: you know, a long way to go towards a
Speaker 2: sort of full of framework for climate risk management within
Speaker 2: the chinese financial system.
Speaker 1: So lots on the agenda, lots of work to do.
Speaker 1: And clearly you're keeping very busy, I suppose my final
Speaker 1: question to you is that, you know,
Speaker 1: how hopeful are you because you see the global bureaucracy
Speaker 1: at work in various multilateral
Speaker 1: discussions and deliberation that you sit in and I'm sure
Speaker 1: you've had moments of frustration, like you were talking about
Speaker 1: having multiple layers of taxonomy that are often conflicting and confusing.
Speaker 1: So has even if you've had a long career in
Speaker 1: private sector now, public sector and now in the
Speaker 1: global multilateral space, uh are you optimistic that that will
Speaker 1: make tangible progress?
Speaker 2: I would say, I'm cautiously optimistic. Um as I said,
Speaker 2: a couple of things are promising uh for example, a
Speaker 2: lot of large economies are committing to a carbon neutrality
Speaker 2: and I'm sure many others will follow, partly because of
Speaker 2: peer pressure.
Speaker 2: And I'm glad that G-20 re established the system of
Speaker 2: finance working group this year
Speaker 2: after a pause of two years, which is a good sign,
Speaker 2: partly because us is coming back to paris agreement, and
Speaker 2: US China is now co chairing
Speaker 2: uh this uh working group and making it more feasible
Speaker 2: to achieve a consensus
Speaker 2: Within the G 20 space.
Speaker 2: But still, you know, different countries have very different priorities.
Speaker 2: Um and sometimes, you know, on issues like
Speaker 2: whether we should be uh utilizing carbon taxation,
Speaker 2: establishing um you know, carbon markets, removing fossil fuel subsidies.
Speaker 2: Still lots of lots of debate
Speaker 2: uh in the international community, it's not easy because
Speaker 2: At G-20 level and many other international forum, the consensus
Speaker 2: based decision making process needs to be followed. And as
Speaker 2: long as one major member is objecting to a potential consensus,
Speaker 2: it's very hard to move.
Speaker 2: That's why we need to have a lot of skills.
Speaker 2: Two
Speaker 2: sort of a facilitated the formation of consensus sometimes by
Speaker 2: twisting the language so that we can all come to
Speaker 2: the same page.
Speaker 2: So, uh you know, our actually matters in a sense
Speaker 2: that we make more efforts, make smarter efforts. Things can
Speaker 2: move faster.
Speaker 1: So from economic analysis to climate diplomacy. Do you know
Speaker 1: you've made quite the transition yourself?
Speaker 2: Thank you to move for the invitation. It's great to
Speaker 2: have the conversation with you
Speaker 1: june. Thank you for your time. I mean, I cannot
Speaker 1: think of anything as more consequential than this issue. So again,
Speaker 1: we really, really appreciate your time and insight. I'd also
Speaker 1: like to thank our listeners for being part of this conversation. Uh,
Speaker 1: Kobe time was produced by martin, Tuckey,
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