CFA Institute 10 February 2022
Progress in Greening the Financial System: Lessons Learned and Looking Forward
CFA Institute Alpha Summit APAC
Virtual Session: Video On Demand
CFA Institute Alpha Summit APAC, a two-day virtual conference focusing on the investment industry’s biggest challenges and most compelling trends across Asia Pacific, was held on 10-11 February 2022.
Government funding will not be enough to support the “greening” of financial markets and economies, but policy incentives and other tools can be used to stimulate the development of green finance. Investors also have a key role to play in developing the next generation of market-based instruments that can go beyond such conventional methods as green bonds and carbon markets. What are the next steps to mobilize green finance and investment? How can we anticipate potential transition risks and shocks? What are the best ways to hone our skills to produce better environmental risk analysis?
- Dr. Ma Jun, chairman and president of Hong Kong Green Finance Association and co-chairman of the G20 Sustainable Finance Working Group
- Mary Leung, CFA, head of advocacy for APAC at CFA Institute
Watch the Video
The Need for Sustainable Finance
Consensus has been reached on various aspects of a green finance agenda. The G–20 Sustainable Finance Study Group was upgraded to the Sustainable Finance Working Group in 2021 and created a road map to guide the international work of sustainable finance in the coming years.
Highlights include six cross-market harmonisation principles that will help new developers of sustainable taxonomies. The G–20 working group also pledged its support for the International Sustainability Standards Board. This new body aims to develop an internationally consistent set of reporting standards. The group is also exploring improvements to the transition finance framework. As Dr. Ma notes, “There are already 200 taxonomies. Some are developed by country authorities and others by industrial associations or companies.”
Why a Harmonised Ethical Approach Matters
Having too many standards that define sustainability may be confusing and could lead to higher levels of greenwashing as well as to increased transaction costs. For these reasons and given the many other potential benefits of taking a straightforward approach to a complex subject, the G–20 road map focuses on six standards. Among these standards are measures covering taxonomy, carbon intensity, transit finance, and biodiversity.
With the need for brevity and consistency in mind, the International Sustainability Standards Board was established to develop an internationally consistent set of sustainability reporting standards.
The potential difficulties of having too multiple standards, principles, and frameworks are illustrated by the case of an international fund manager who runs a portfolio of 30 stocks listed in a variety of countries, each with distinct reporting demands. Possible issues could arise with applying and interpreting the various requirements in different geographies.
The Implications of Net Zero for Financial Companies
Institutional investors will play a central role in the move to net zero, as they need to ensure that capital is efficiently allocated. With the Glasgow Financial Alliance for Net Zero committing more than US$100 trillion to the net-zero transition, participating financial firms will need to ensure that they have individuals on their boards to oversee environmental, social, and governance (ESG) issues and processes. Companies also must develop a clearly stated ethical strategy with quantitative goals and must allocate resources toward achieving these objectives. Another important aspect is the integration of ESG principles into various parts of the investment process. “I think it’s important for a unit to be established within each organization in charge of ESG strategy and managing ESG-related risks,” says Dr. Ma.
What Net Zero Means for China
Taking a consistent approach will help guide disclosure and make it easier to report the size of a company’s carbon footprint, measure whether this is declining over time, and assess risks within the business. China launched a green financial policy framework in 2016. This framework contains four pillars: taxonomy, disclosure, policy incentives, and a suite of relevant products. Over the past year and a half, the system has evolved, and China announced its aim of reaching peak carbon levels by 2030.
Recent activities have included refinements to the taxonomy, so it is consistent with environmental objectives, including carbon neutrality, and a requirement by the People’s Bank of China for 21 local banks to conduct stress testing on climate risk. These institutions will lend to relevant projects, and the central bank will fund 60% of the loan amount at a considerably lower cost than the market rate. This appears to be having an impact, with green loans and bond issuance rising substantially last year. “I think China will begin to use more international practices. So far, the methodology is largely focused on stress testing against carbon pricing,” observes Dr. Ma.
China's Burgeoning Carbon Market
China began experimenting with local carbon markets in 2013. Currently, seven regional offices have opened, and a national carbon market opened in the middle of last year. This market currently covers the coal power–generation companies but will be extended to include eight major sectors, including steel, cement, petrochemicals, and aviation. Although the market may be significant, it is not particularly liquid. Once financial firms are authorised to participate, liquidity should improve, with Dr. Ma adding that “there are also discussions on opening up the carbon markets to foreign investor participation.”
The Social Impact of Net Zero: A Work in Progress
The G–20 working group is exploring net-zero’s social impact: “Some transition activities may lead to unemployment, and we will need to measure such negative impacts and develop options to mitigate these,” suggests Dr. Ma.
Other critical topics in scope include the affordability of system financing in developing countries and emission-trading policy incentives that could encourage private-sector capital participation in green finance.
Sustainability: The Need for Industry Education
The developments that have taken place and those planned for the coming years will create a need to develop financial-industry talent. Interest is growing in this subject, driving a need for more training. The Hong Kong Green Finance Association considers how best to create and introduce educational resources. Among the options are collaborations with academic institutions as well as internships, and conversations are taking place with the government on the possibility of funded placements.
CFA Institute Alpha Summit APAC 2022
Virtual Sessions - Video On Demand:
- Welcome and Opening Remarks: Think Beyond the Horizon
- Fireside Chat: Progress in Greening the Financial System—Lessons Learned and Looking Forward
- Panel Discussion: Climate Change Risk – Action for Industry Stakeholders
- Panel Discussion: Global and Regional ESG Regulations and Standards – Implications for the Financial Services Industry
- Panel Discussion: The Pandemic’s Impact on Shareholder Activism
- Keynote and Fireside Chat: SDG Investing
- PGIM Sponsored Session: 2022 Best Ideas - The Road to Renewal
- Panel Discussion: Managing Pension Funds for Sustainable Long-Term Return
- Panel Discussion: Trends and Changes in Capital Markets Formation
- Fireside Chat: Future of the FinTech Eco-System
- Panel Discussion: Investment Management Professional of the Future
Dr. Ma is the founder and president of Institute of Finance and Sustainability (based in Beijing). He is also the chairman of Green Finance Committee of China Society for Finance and Banking, co-chair of the Steering Committee of the Green Investment Principles for the Belt & Road, and co-chair of the International Platform on Sustainable Finance (IPSF) taxonomy working group.
Previously, Dr Ma was director of the Center for Finance and Development at Tsinghua University. He served as the chief economist at the People’s Bank of China (PBOC)’s Research Bureau and was a member of the central bank’s Macro-Prudential Committee. Before joining the PBOC, he worked at Deutsche Bank, where he was managing director/chief economist/investment strategist for greater China. Prior to that, he worked as a senior economist and economist at the World Bank and the IMF and he was a research fellow at the Development Research Center of China's State Council. Dr. Ma was co-chair of G20 Sustainable Finance Study Group (2016-2022),
Dr. Ma published numerous books and articles on monetary policy, financial market, and green/sustainable finance. He led the drafting of China’s green finance guidelines in 2015-16 and facilitated the global consensus on scaling up green finance under the G20 framework during 2016-18. Over the past decade, he provided advices to policy makers in many areas, including monetary and macro prudential policies, RMB internationalization, green finance, and the Belt & Road initiative.
Dr. Ma received his PhD in Economics from Georgetown University, and his master's degree in Management Science from Fudan University. He has received numerous awards for his research and policy advocacy and was ranked # 1 Asia Economist by Institutional Investor for four years in a row from 2009-2012.
Mary Leung, CFA, is the head, standards and advocacy, Asia Pacific, at CFA Institute. She is responsible for the development, maintenance, and promotion of capital markets policy perspectives in the APAC region. She also oversees the promotion and development of CFA Institute professional standards in the region. Mary has over 20 years of experience in the global financial industry, having worked in corporate finance, wealth management advisory, and fund management. Previously, she was with Coutts & Co, where she was director of Business Development and Management for North Asia. Prior to that she was executive director at UBS AG, where she led the Corporate Advisory Group in Hong Kong. With experience in both the buy- and sell-sides, Mary has a strong understanding of the drivers and dynamics of different investor groups, including institutional investors, corporates, family offices, asset owners, and high-net-worth individuals. Mary graduated from Peterhouse, Cambridge with a degree in Engineering. She is a CFA charterholder and speaks English, Putonghua, and Cantonese.