The GIP Webinar on Financial Support for Transition to Net Zero was successfully held by Standard Chartered, co-chair of the GIP Working Group 3, on 23 February 2021 (Tue), with support from the GIP Secretariat and Hong Kong Green Finance Association. The event attracted over 130 representatives from GIP members.
1. Opening Remarks
Thomas Heller, Professor of Political Economy at Stanford University and the Chairman of the Board of Directors at Climate Policy Initiative, addressed three changes in his opening remarks:
- The first is the transition to a net-zero economy. It is the mainstreaming of climate, which represented a regime shift – from state to the society and everyone. Meanwhile, it also raised a set of questions about what we need to do, such as timing and coordination.
- The second is the recent trend of green finance. It demonstrated that market has the great potential to drive change, even in the absence of strong state behavior, which is in the favor of combating climate change. However, China and many other Asian countries have relatively new infrastructure, which poses challenges if these young and amortized fossil fuel-related investments are to be replaced by new green investments.
- The third is the transition risks. With climate-related physical risks being manifested, we need to consider not only the disclosure of transition risks, but also their management, from a systematic level. In the case of China, on one hand, it is burdened with rather new infrastructure brought by a huge transition not long ago. On the other hand, it has also learnt great lessons from previous transition, which will be of benefit to itself and other countries as well.
Tracy Wong Harris, Head of Sustainable Finance for Greater China and North Asia at Standard Chartered Bank, and Deputy Secretary-General of Hong Kong Green Finance Association (HKGFA) introduced how Standard Chartered and HKGFA have worked with the GIP:
- Standard Chartered pledged to stop financing new thermal coal mines and coal-fired plants. It has also set financing goals for UN SDGs and climate neutrality goals of its own portfolio. It has been an active financier in the Belt and Road region and firmly supports the work of the GIP.
2. Session I: Innovation for Climate Transition
Dr. Barbara Buchner, Global Managing Director at Climate Policy Initiative, presented an overview of global climate finance and the work of the Global Innovation Lab for Climate Finance hosted by CPI:
- Global climate finance has seen steady increase in the past decade, passing the half trillion benchmark since 2017 but still falling short of what was required to realize Paris Agreement goals.
- China has been the largest source of climate finance globally. However, looking at an annual investment demand of $1.4 trillion for the next decade, it is faced with an investment gap of $1 trillion, three to four times of what was currently provided. Key barriers include private sector’s limited access to formal financing channels and the green capital deployed by public institutions, lack of diversity in financing actors, high search costs for impact-oriented investors, etc.
- There are strong opportunities to encourage innovation in small and medium-sized banks, green funds, PPP structure, green financial pilot zones, and BRI countries. There is also huge growth potential for climate finance, through Fintech, retail investing, increasing awareness of green financing instruments, and increasing channels for foreign capital participation.
Dr. Alexander Fisher, Director Biodiversity, Climate and Environment at GIZ China, introduced Germany’s experience of innovation towards a low carbon society:
- Financial aspects of German energy transition and coal phase policies
- German electricity relies rather heavily on coal (two-fifths of energy supply), with the largest fleet of coal-fired power plants in Europe;
- It has issued legislative acts with goals to phase out coal power and expand renewable energy capacity. Phase-out of coal-fired power plants are done through tender processes, as an innovative PPP approach. The first tender took place in 2020 and covered 11 bids with varying capacity. Early entry into the tender process is encouraged by higher permissible value.
- Budget funding by German government of up to EUR 40 billion will be made available for support of structural change in coal-mining parts of Germany until 2038, including EUR 14 billion for the lignite mining areas and up to EUR 26 billion for research and other assistance programs in the affected areas.
- German government green bond
- A Twin-bond structure, with specified range of use of proceeds for the green tranche and extra impact reporting;
- Investors can exchange the green bond for a conventional one at any time.
- Transformation of German Utilities E.ON & RWE as asset swap
- RWE aims to be carbon neutral by 2040. The government has finalized its contract with the company to close all of its remaining coal-fired power plants by 2038, in line with the country’s planned coal phaseout, which will see RWE receive EUR 2.6 bn in compensation.
- An asset swap took place among innogy, E.ON, and RWE, splitting up innogy and reincorporating its renewable energy assets into RWE, with E.ON taking on the remaining networks and energy supply businesses. E.ON’s wind and solar power plants were also passed to RWE under the deal, turning the latter into a pure-play power generator and energy trader.
Carel Cronenberg, Associate Director and lead MRV, EBRD, shared his insights about the new EU Taxonomy and transition finance:
- EBRD recently adopted a new green economy transition approach and pledged to become a majority green bank by 2025.
- The transition will have significant impact on the capital market, while shaping the capital market in a way that access to green financing will become easier.
- The EU Taxonomy has included sections on decarbonizing carbon-intense industries, where financial instruments are needed, such as transition bonds. The taxonomy mainly focuses on economic activities instead of measures, which would mean changing the businesses of companies – setting targets, seeking opportunities, taking climate-related corporate governance and resilience into account, exiting from carbon-intense industries and managing transition risks.
- It is important to see how different taxonomies can exist next to each other and give clarity to the rest of the world. In countries with outdated technologies and dependent on the exportation of resources, such clarity will give confidence in investors to support transition.
3. Session II: Financial Products for Net-zero Transition
- There has been an exponential growth in the green and sustainability-linked product market globally with a focus on the social bonds in 2020 under the COVID-19 outbreak. The trend reflects the increasing awareness of institutions around the world to be mindful of transparency in their decarbonization strategies.
- The Just Transition Fund (JTF) by the European Commission has an aim to alleviate the impact of the transition by financing the diversification and modernization of the local economy. The current stage is for regions with high carbon-intensive industries to prepare just transition plans for programming and subsequently implementing JTF resources.
- Exact principles to guide transition products are yet to be published but documents from ICMA, AXA, APLMA, etc. are helpful guidance on the types of disclosures required. The papers also demonstrate sectors in favor of transitions, such as the aviation and shipping industry or steel and energy sectors.
- There is a material change in the insurance industry to a prospective looking, where more risk analysis measures are taken into consideration, posing possible discouragements to carbon-intensive industries.
- Suggested enablers for transition markets to scale up are: 1. Incorporating on pricing climate externalities, 2. Education and capacity building in the market on transitioning and sustainability.
- Other than improving data disclosure, a key enabler lies in the unification of sustainable finance standards and taxonomies globally, where China and the European Union are in discussion to set-up a taskforce for further discussions.
Isabel Blanco, Associate Director and lead sector economist, EBRD suggested, “Transition finance in low carbon assets and services will pave the way for a sustainable future, compatible with the objectives of the Paris Agreement on climate change. This can be done through a range of innovative financial tools, beyond the traditional loan or equity injections. Transition finance should also target communities affected by the impacts climate change –climate justice- and communities whose livelihood currently reliant on carbon-intensive, stranded sectors –just transition.”
“Transition finance has the potential to become the most impactful innovation in climate finance as it provides for a holistic relook at a borrowers climate strategy, with a convergence to alignment with international standards and pathways,” remarked Rahul Sheth, Head of Sustainability Bonds, Debt Capital Markets, Standard Chartered Bank.
Victoria Land, Head of Sustainable Banking, Asia-Pacific, Credit Agricole CIB pointed out, “With the increasing focus on institutions needing to create defined, accountable, transparent decarbonization pathways, this area of the market, and the sustainability-linked product, in particular, will continue to significantly grow in interest and importance to funding approaches going forwards.”
“Transition financing, in short, consists of five dimensions, abbreviated as STIRD: Standards, Technology, Investment, Risk, and Disclosure. We provide Green Insurance Products & Services (GIPS), such as, photovoltaic related index insurance, catastrophe models, environment risk analysis tools, to empower future energy with Risk Intelligence (RI). RI aims to make environmental risks visible, quantifiable, and manageable.” Wang Shen, Director, Department of Strategies & Solutions, China RE CRM shared his definition of transition financing with the audience.
Tracy Wong Harris, Head of Sustainable Finance for Greater China and North Asia at Standard Chartered Bank, and Deputy Secretary-General of Hong Kong Green Finance Association (HKGFA) wrapped up the session with encouragements, “Transition finance is the gateway to achieving carbon neutrality which requires urgent actions and innovations across the whole eco-system to scale up!”.