Enhancing disclosure to scale up sustainable finance in China and beyond

May 12, 2022|Written by Cheng Lin|People's Bank of China

Financing is imperative to a green future. But with trillions of dollars in investment needed to achieve the goals of the Paris Agreement, public finance cannot meet this target alone.

Timely and high quality data is the key to informed investments and financial risk supervision, especially for sustainable finance, which is essential for the transition to a net-zero economy. And disclosure is one of the fundamental pillars of sustainable finance development – along with taxonomy, incentives, financial products and capacity building – to help achieve this.

Environmental Disclosure in the Banking Sector of China: Practices and Experience, released in 2021 by the Beijing Institute of Finance and Sustainability with support from the Global Environment Facility, reviewed disclosure efforts by financial institutions in China with a particular focus on the banking sector.

The report provides a number of policy recommendations for China’s financial stakeholders to improve disclosure. This includes standardising disclosure content and format, reinforcing the accuracy and credibility of data by incorporating third-party verification, and optimising the use of data with improved feedback mechanisms from practitioners and data users.

Standardising green finance disclosure in China

As one of the five pillars of China’s green finance development, strengthening environmental disclosure has been a priority. Green finance first took centre stage in 2016 following the issuance of the Guideline on Building a Green Financial System by the People’s Bank of China. Since then, green finance in China has undergone rapid development, evidenced by rising investment volume and diversity of green financial instruments ,and supported by top-down and bottom-up approaches. As of December 2021, the outstanding balance of green loans in China amounted to 15.9tn yuan (over US$2.5tn); the annual issuance of green bonds reached 600bn yuan (close to $100bn).

Alongside the country’s fast-growing green finance market, China’s framework for sustainability disclosure has been constantly developing and largely aligned with international best practice. The policy and regulatory environment, especially in the financial sector, has remained a critical driver.

In July 2021, China’s central bank issued its environmental information disclosure guidelines, which focused on carbon and took into consideration the four pillars of the Taskforce on Climate-related Financial Disclosures (TCFD), marking the first set of standards with specific requirements on environmental governance, risk analysis, impact assessment of financing activities and others. In addition, the bank officially started an evaluation on banks’ performance, a complimentary policy to enforce disclosure.

Looking beyond the finance sector, China’s Ministry of Ecology and Environment has published its reform plan for the environmental information legal disclosure system, which provides a roadmap to establishing a completely compulsory environmental information disclosure mechanism for domestic-listed companies and bond issuers by 2025. Several new rules on environmental information disclosure have been issued to support this plan, the latest being in January 2022.

In the meantime, major financial institutions in China have actively initiated a pilot project on disclosure to align with international best practices. Jointly launched in 2018 by big financial firms from China and the United Kingdom, the UK-China Climate and Environmental Information Disclosure Pilot has started disclosure against the TCFD framework and, in return, informed the policymaking of disclosure in China. Since then, more Chinese financial and non-financial firms have become TCFD supporters and have started (or are considering) doing TCFD-aligned disclosure.

Disclosure data accuracy and feedback mechanisms

In China and elsewhere, improving data accuracy and credibility has attracted ongoing efforts by financial firms. This is especially the case for firms working on carbon accounting, whose efforts can help achieve both climate disclosure and net-zero goals.

One possible solution still being developed is enhanced automation of data collection and reporting from their clients. This would both streamline data sharing and reduce the costs of disclosure and reporting. We are seeing a lot of digital technology companies devoting resources to the disclosure data automation process.

And on the climate disclosure data user and data collector feedback loop, we are seeing financial regulators come in to address this challenge. One promising sign of progress was the creation of the International Sustainability Standards Board (ISSB) at Cop26 last year in Glasgow.

Through the ISSB and its sustainability standards, regulators worldwide are planning to endorse a global baseline for environmental disclosure and reporting with an aim to expect auditable information from major players on the market. If this is possible in the near term, the data inconsistency issue and feedback loop will likely be closed.

Disclosure standards and regulation remain top agenda items

Notwithstanding the fast development of sustainability disclosure frameworks, there are still many challenges in China and other countries. The recent State of Play report by the UN-convened Financial Centres for Sustainability reviewed sustainable finance development at the financial centre-level and found that the top two challenges facing financial centres both relate to disclosure: the thirst of quality data and uniform disclosure standards that guarantee the accountability of data.

In China and other parts of the world, the quality and scope of disclosure have continued to be limited. According to the TCFD’s 2021 progress report, companies are inclined to disclose more on “climate-related risks and opportunities”, but much less so on other TCFD-thematic areas and recommended disclosures. Taking greenhouse gas emissions as an example, only 37% of companies disclosed their scope 1, 2, and 3 emissions, per TCFD recommendations. Moreover, disclosure requirements must also gradually extend to other sustainability topics such as biodiversity to better reflect the risks and opportunities on the value and future of businesses.

As the 2021 G20 Sustainable Finance Synthesis report identified, lack of clarity and consistency in existing disclosure frameworks hinders the integrity of global sustainable finance market. Strengthening consistency and comparability between disclosure framework and tools is beneficial to the use of disclosed data to inform investment decisions, notably when capital flows across countries and continents.

To this end, the ISSB was created to develop a global baseline standard for sustainability disclosure, based on existing market practices like the TCFD. This standard aims to establish a global baseline for sustainability-related information disclosure, while leaving flexibility for small- and medium-sized enterprises and national/sub-national jurisdictions to design their own context-specific disclosure “building blocks”.

Existing disclosure standards and practices need to adapt to meet the demands of other overlapping and urgent sustainability considerations. Due to their “non-green” nature, transition finance and its underlying assets and activities require stricter oversight and monitoring that will prevent “transition washing”. Biodiversity has also been recognised as a potential source of financial risk by central banks in the Network for Greening the Financial System. Enhanced disclosure on nature- and biodiversity-related risk will soon become an important component of reporting frameworks.

Mainstreaming disclosure is an essential step towards aligning China’s financial system with sustainability, but is far from sufficient to guarantee a sustainable financial future. Disclosure must be the starting point for an ongoing effort to develop new climate-related targets and implement or enhance existing climate goals.

This article was first published by the Green Finance Platform for the Aligning Finance Policies project, which seeks to advance dialogue and collaboration towards international consensus on best practices to green the financial system.

This page was last updated June 7, 2022

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