The key to making good use of this finance is the central government's proposal to gradually shift from dual control of energy consumption to dual control of carbon emissions. China | Green | Dual Control

The meeting reviewed and approved documents such as "Opinions on Promoting the Gradual Shift of Energy Consumption Dual Control to Carbon Emission Dual Control".

In the report of the Twentieth National Congress of the Communist Party of China, the modernization of harmonious coexistence between man and nature was regarded as an important feature of Chinese path to modernization, and it was emphasized that we should "accelerate the green transformation of the development mode", and promote green and low-carbon economic and social development as the key link to achieve high-quality development. At present, China's ecological civilization construction has entered a critical period with carbon reduction as the key strategic direction. With the proposal of the "carbon peak and carbon neutrality" goal, and the gradual shift from energy consumption dual control to carbon emission total and intensity dual control system, this will be a systematic transformation of the economy and society, which not only requires the upgrading of governance capacity and system, but also requires a large amount of investment.

Transformational finance provides supporting services for carbon reduction and transformation activities

Since the proposal of the "dual carbon" goal, multiple institutions have estimated the required funds for the process, with a demand for funds ranging from around 14 trillion to 22 trillion yuan. Some of the funds are for low-carbon transformation financing needs of high carbon enterprises, which cannot be met solely by government financial investment. Financial institutions, social investment, and other active participants are needed. As a result, financial innovation concepts and products such as green finance, transitional finance, and sustainable finance have emerged.

Since green finance became a global consensus in 2016, China's green credit and green bonds have developed rapidly. However, the current green finance system is limited to supporting investment and financing activities that meet "pure" green standards, and it is difficult to obtain financial support for "brown" projects such as high carbon enterprises with low-carbon transformation intentions. In response to this, the G20 Sustainable Finance Working Group, co chaired by China and the United States, officially released the G20 Transitional Financial Framework at the G20 Leaders Summit in November 2022, guiding financial regulatory authorities of all members to establish transitional financial policies aimed at promoting financial support for high carbon emission industries to transition towards green and low-carbon. Many banks, insurance companies, securities firms, and other institutions in China have successively launched transformational finance businesses. For example, in April 2021, the China Interbank Market Dealers Association released the first batch of sustainable development linked bonds in China, with more than ten financial institutions such as Industrial and Commercial Bank of China and China Development Bank actively promoting the market as lead underwriters. As of October 2022, the scale of sustainable development linked bonds in China has exceeded 70 billion yuan, and the scale of transformation labeled bonds has exceeded 30 billion yuan. At the first International Carbon Neutrality Expo Green Finance Parallel Forum held recently, Shanghai's financial regulatory authorities also revealed that they are exploring the development of a transformation finance catalog with local characteristics. Multiple banks will participate in the formulation of relevant standards and continue to provide supporting financial services for carbon reduction and transformation activities.

Implementing Transitional Finance Should Handle Four Relationships Well

Although there have been many explorations, based on the analysis of transitional finance practices, it is necessary to handle the following four relationships well in order to better leverage the functions of transitional finance.

Firstly, handle the relationship between "change" and "unchanging" in the transformation financial standards. The implementation standards for green finance in our country are based on the "Green Industry Guidance Catalogue" issued by the National Development and Reform Commission. Industries within the scope of the Catalogue belong to the green industry and can obtain bank green finance credit or issue green bonds. But with the continuous iteration of production technology and processes, the scope of defining the green industry itself is also constantly expanding and changing. Especially, the independent energy-saving behavior of small and medium-sized enterprises is becoming increasingly widespread and cannot be included in the standards in a timely manner. This constantly upgrading transformation behavior will lead to the national catalog standards not keeping up with the changes in reality. In addition, some financial institutions, due to insufficient professional knowledge, are unable to identify whether the transformation plan of the enterprise is scientific and credible, and even more unable to support projects that are not included in the standards. At present, the National Development and Reform Commission has released a draft for soliciting opinions on the "Green Industry Guidance Catalogue", which has made significant adjustments and supplements to the classification and definition of green industries. It has added types such as energy-saving transformation of coal-fired power units, construction of green data centers, and energy-saving transformation of data centers, indicating a signal of constantly changing transformation standards. It can be said that the standards based on which transformation finance is based will inevitably accompany the entire transformation process, and the "change" of catalog standards will be a normal phenomenon. At the same time, the goal of low-carbon or even zero carbon environmental benefits should remain unchanged. The transformation of financial products should be linked to the transformation effect, and what kind of carbon reduction benefits are matched with what kind of financial support. The carbon reduction efficiency standards should at least meet the national benchmark level, and even the international advanced level, in order to use money on the cutting edge and truly generate environmental benefits.

Secondly, handle the relationship between the "behavior" and "outcome" of transitional financial support. Due to the fact that transformational finance is a financial tool aimed at the transformation process, which itself encompasses behaviors and outcomes, financial institutions should adopt a full lifecycle perspective when judging whether it belongs to "transformation". For example, the current transformation scenario includes both the upstream and downstream collaborative transformation driven by the "chain owner" in the industrial chain, as well as the digital transformation of service application scenarios. The former belongs to enterprises or industries undergoing energy-saving and carbon reduction transformation, involving the transformation from high carbon behavior to low-carbon behavior; The latter is achieved through intelligent transformation of devices and digital transformation of scenarios, improving the computing power and service efficiency of terminals, and achieving scene transformation beyond self transformation. From the results, perhaps the more scenarios served, the higher the comprehensive efficiency of energy conservation and carbon reduction. This breaks through the previous "one size fits all" classification rules based on standards. When financial institutions support enterprises or projects, they cannot judge whether they support them solely based on the presence or absence of "pure" energy-saving and carbon reduction behaviors. Instead, they should comprehensively judge the transformation effect from a broader perspective, including the service functions and effects of application scenarios. This can also encourage and help small and medium-sized enterprises to continuously innovate and carry out a large number of scattered carbon reduction activities.

Thirdly, handle the relationship between "overall" and "local" in the process of transforming finance. According to the support standards of green finance, traditional coal-fired power transformation and coal-based energy projects cannot receive support from green finance, which will cause some industrial transformation to stagnate due to lack of funds. Transformational finance will effectively supplement the scope of green finance support and achieve a more comprehensive transformation of various industries in the economy and society. However, according to the "2030 Carbon Peak Action Plan" released by the country, there are still areas that need to be focused on during the transformation process. Transformation finance can prioritize the five key industries mentioned in the plan, including electricity, steel, building materials, petrochemicals, and non-ferrous metals. A transformation support directory should be established around the energy cleanliness, raw material reduction, low-carbon technology innovation, carbon capture capacity development, waste and heat recovery projects in these industries, and ensure that the industry transformation path under this directory has reached consensus at the government and regulatory levels.

Fourthly, handle the relationship between the government and the market in the process of transforming finance. To promote the development of transformational finance, the main body is financial institutions and enterprises, but the "government side" also needs to play the role of policy standard setters. By formulating and introducing a framework and implementation plan for transformational finance, the boundaries of transformational financial services can be clarified, and clear basis can be provided for financial institutions to use transformational financial tools. At the same time, the government should also publicly disclose relevant information on transformation projects, transformation technologies, transformation processes, etc., establish a sharing platform for green development data, and provide financial institutions with information on screening projects; Set differentiated threshold indicators for industries with different technological levels and emission reduction potentials, introduce dynamic adjustment mechanisms, gradually establish a transformation financial support system suitable for China, maximize the mobilization of transformation actions in various industries through financial means, promote the guidance of transformation market entities to regularly disclose their transformation progress, and form a normalized information disclosure mechanism. The "market side" of transformational finance needs to innovate and form a self circulation model for the value-added of financial products, so that projects or assets supported by transformational finance can operate sustainably, and society can recognize the benefits of energy conservation and carbon reduction, so that the cost of transformation can be transmitted to the production or consumption side, thereby enhancing the enthusiasm of financial institutions and improving the efficiency of using transformation funds.

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