The Future Of Finance

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What are the chances of a green recovery? Where is China re its green push? Global green finance guru Dr. Ma Jun answers it all.

  • China should include more green projects in its post-COVID stimulus package, such as allocating proceeds to green projects from its special bond issuance & incentivising green consumption
  • Post COVID-19, more investors may be attracted to ESG due to better performance & lower volatility in the asset class
  • Regulatory action will pave the way for higher quality green finance products & for financial institutions to have a better understanding of environmental risks & take action to manage them

COVID-19 sent shock waves through the global economy and financial markets yet green bonds and ESG funds have proved to be more resilient in these turbulent times. To better understand why as well as the potential of green finance, CWR sat down with Dr. Ma Jun, the Chairman and President of Hong Kong Green Finance Association and the ex-chief economist of the PBOC, to discuss green recovery in China and the push for environmentally risk-aware financial institutions in post-COVID times. 

CWR: COVID-19 has had unprecedented impacts on the global economy and for financial stability. Countries are scrambling to act and there is much debate on saving lives vs. making money in some countries. Already, there has been a global retreat towards cheap fossil fuels and bailout of such industries to stimulate the economy as that is seen as more important at the moment. Is this the end of green development, what are the chances of green recovery? Where is China re its green push? 

Dr. Ma Jun (MJ): As part of the new stimulus package to offset the economic impact of COVID-19, China is planning a large number of new infrastructure projects. Some of these projects are green, such as charging stations for EVs and smart cities.

However, I believe that more green projects should be included in the package. This is particularly important for Chinese local governments which are the main planners and implementors of most new infrastructure projects.

The Chinese central government should also consider allocating a significant amount of proceeds to green projects from its special bond issuance. In addition, government stimulus for consumption should also consider its green impact. For example, consumer coupons or subsidies could be directed to encourage purchase of green consumer goods such as E-vehicles and energy efficient electronic appliances.

CWR: Markets have been extremely volatile during the current crisis. But green bonds as well as ESG funds have experienced less volatility. Why is that?

MJ: One possible reason is ESG funds, typically investing in companies with better corporate governance and more prudent management style, are less exposed to risky businesses and therefore are less susceptible to major shocks like COVID-19 pandemic.

CWR: Does this bode well for the future of ESG? Or will we see commitments stall given the downturn?

MJ: The fact that ESG investments performed better during the crisis would encourage more investors to participate in this asset class. In addition, many think tanks and policy makers are calling a green stimulus package post COVID, which imply that more green assets may become available for ESG and sustainable investment in the coming years.

CWR: What should investors and bankers watch out for post COVID in terms of green finance?

MJ: Post COVID, I expect more emphasis on environmental information disclosure by regulators, which will pave the way for higher quality green finance products on the market.

The Central Banks and Supervisors Network for Greening the Financial System (NGFS) is working on a few documents calling for wider adoption of Environmental Risk Analysis (ERA) by financial institutions. These ERA methodologies should be applied by banks and investors to assess and quantify the impact of their investments on the environment and climate. They will also help FIs to avoid unexpected financial risks arising from environmental and climate exposures.

CWR: You mentioned the NGFS and risks arising from environmental and climate exposures, do you think there is sufficient understanding of such regionally? Is there progress?

MJ: Not everyone is on the same page – many financial institutions (FIs) are not yet well informed on the importance of the Environmental Risk Analysis that NGFS is advocating. This summer, the NGFS will publish two documents, including the Overview of Environmental Risk Analysis, and the Occasional Paper on Case Studies of Environmental Risk Analysis Methodologies.

These two documents will provide a comprehensive review and detailed presentations of methodologies used by banks, asset managers and insurance companies to quantify the financial risks arising from their climate and environmental exposures.

For example, a few ERA models presented in these publications are used to estimate the future increase in NPL ratios of loans extended to fossil fuel companies. I am hoping that the availability of these methodologies will enable many FIs to better understand environmental and climate risks and take actions to manage these risks.

China Water Risk newsletter in May on “Systemic Risks – finance reset”. The original version can be found on CWR’s website here in English and Chinese.

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