China’s Transition Woes

As it struggles to kick its coal habit, the country moves forward on transition and reporting requirements to stay on track with climate commitments.

Reality certainly did not match rhetoric on climate action last year. A host of oil majors receded on their climate commitments, key financial institutions started to leave climate action consortiums, and major economies like the US and UK began backsliding on their net-zero pledges.  

China, the world’s second largest economy, was no less lackluster on its pledges to tackle the climate crisis. 

Power generation from coal in China increased by 12% from 2020 to 2023, delivering 44% of overall power generation growth, according to recent research from the Centre for Research on Energy and Clean Air (CREA). An estimated 114 gigawatts (GW) of capacity were approved for Chinese coal power projects in 2023, with 70 GW still in construction.  

As a result of increased coal use and investment, China could miss several climate targets it has set for 2025 unless drastic action is taken soon, the CREA has warned.  

Back in 2021, the country committed to strictly limiting coal consumption growth and new coal power generation. It also set targets to increase the share of non-fossil fuel energy sources to 20% and get more than 50% of this increase in energy use from renewable sources. However, these targets are now severely off track.  

As such, China faces a difficult balancing act. “It is leading the world – not just Asia – on clean energy technology, at least doubling the production capacity of solar, wind, electric vehicles and batteries every two years,” says Christina Ng, Managing Director at Asian-focused think tank Energy Shift Institute. “But like most other markets, China is also concerned about energy security, especially as it experienced early coal power plant closures in the northern provinces that led to schools and households freezing – and deaths – a few years back.” 

As a result, Ng explains, the country has continued to invest significantly in coal power, which remains a contentious issue. 

“China’s increased investment in coal does not necessarily mean an increase in coal consumption for power generation, as this energy capacity is often used as a backup for renewable energy,” she adds. 

Green regulation moves  

In public statements, China has maintained a positive rhetoric on climate action. On 19 February, President Xi Jinping reiterated the country’s commitment to a “green transformation” during a central government meeting. 

The government has also announced coordinated efforts to reduce carbon emissions, control pollution, expand green initiatives and promote growth. As part of these efforts, China has also sharpened its focus on green and ESG regulation. In 2023, the China Green Bond Standards Committee issued a series of guidance, while the National Financial Regulatory Administration (NFRA) has proposed to gradually form financial policy arrangements that align with climate targets and incorporate transition finance. Major policies, such as the China Emissions Trading System and the China-EU Common Ground Taxonomy-Climate Change Mitigation, have also come into force.  

But one of the most significant regulatory moves was announced on 8 February when the Shanghai Stock Exchange, Shenzhen Stock Exchange and Beijing Stock Exchange together published sustainability reporting guidelines, currently subject to public consultation.  

If implemented, the new rules would bring more than 400 companies into scope, requiring them to disclose their ESG governance and strategy across a range of fields including climate change, biodiversity protection and the circular economy.

The rules would also require Scope 3 reporting of emissions and of a company’s impact on the environment and society – commonly known as “double materiality”. Double materiality reporting is already a requirement under the EU’s Coporate Sustainability Reporting Directive (CSRD), which sets it apart from disclosure rules set by the International Sustainability Standards Board (ISSB).  

Back in 2022, the China Securities Regulatory Commission indicated that the country would adopt the disclosure rules recommended by the ISSB, which has an office in Beijing. While the consultation put out by the three stock exchange did not make explicit reference to the ISSB or other sustainability standards, it did also mention that companies should use “recognised international, national, industry or local standards” in their disclosures.  

“Incorporating the ISSB standards into China’s domestic framework would provide a baseline of comparable information that will be incredibly useful for investors,” says Valerie Kwan, Director, Stewardship and Corporate Engagement at the Asia Investor Group on Climate Change (AIGC). In a submission to China’s stock exchanges, AIGCC recently also voiced its support for double materiality and the disclosure of quantitative indicators, in particular. 

“China has not been a leader in adopting international standards in the past,” Ng adds. “Transparency has also been a problem, so this proposal would be a very positive step if finalised.”   

Transition finance

As part of their proposals, China’s stock exchanges have also included the disclosure of transition planning under sustainability reporting requirements – which, besides the CSRD, is also part of reporting requirements under other regimes in the UK and the US.  

“Several regions, including Shanghai, Huzhou, Chongqing, Hebel and Tianjin, have introduced transition finance policies or standards,” says Dr Guo Peiyuan, Chairman of SynTao Green Finance – the founding organisation of China’s Sustainable Investment Forum.  

In 2021, the People’s Bank of China (PBoC) stated that it would prioritise transition finance, while transition finance standards for iron and steel, coal power, building materials, and agriculture are currently under development. 

Meanwhile, UK-based NGO Climate Bonds Initiative (CBI) has been lobbying China on transition finance. Wenhong Xie, Head of China Programme at the CBI, says that while the country was not an early adopter, change is now happening.  

“There have been a lot of conversations and meetings with the PBoC on a standard or taxonomy for transition finance, but with some back and forth mainly because they need to coordinate with other ministries,” Xie explains. “It’s getting a little bit hard for them to align their vision.” 

International relations

Though China is moving to align internationally on green and ESG finance, historically, it has not relied on overseas investment to finance its development. Foreign contributions accounts for only about 3% of China’s total investments.

“But it remains the Chinese central bank’s aim to attract private finance, domestic and foreign, to support the country in funding its net zero goals,” Ng says.

In line with this, the AIGCC launched a new working group last year to meet growing interest from investors in the Chinese market. The group is co-chaired by Peiyuan and Flora Wang, Head of Stewardship, Asia & Portfolio Manager at Fidelity International. 

According to Kwan, during the group’s inaugural meeting, high-level government official Chai Qimin, Director of Strategic Planning at the National Centre for Climate Change Strategy, stressed the need for investment in the country. China’s Ministry of Ecology and Environment finds that to achieve China’s 2060 carbon neutrality goal, an estimated 139 trillion RMB (US$21 trillion) in investment will be needed, with a long-term funding gap of 1.6 trillion RMB per year. 

But in a climate of simmering international tensions, many investors remain wary of China – a problem that Cary Krosinsky, Executive Director of the Sustainable Finance Institute and Professor at Brown and Yale University, has spent much of his career on. In 2021, he wrote a book explaining why financial cooperation between the West and China was vital to solve the world’s sustainability challenges – although there is seemingly no easy way to achieve this. 

“We had [former US climate envoy] John Kerry in our class five years ago, and he was pretty upset that the previous [Trump] administration had broken the US-China relationship that he had strived to build in the lead-up to the Paris Agreement,” says Krosinsky. “In effect, he was very keen [for both sides to] work together to ramp up renewable energy, the developing world in particular.”  

As the world’s second largest pool of wealth capital, China should technically be an attractive investment destination,  Krosinsky argues. “Financial sector players in the West continue to try to figure out how to play in China and assess elements such as how much a company is worth, and whether they will be able to get their money out of the country,” he adds .“For a country with the second largest number of billionaires in the world and attractive growth potential, there’s a race to tap into that – despite challenges.”  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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