The role of green financial instruments in supporting the energy transition is becoming increasingly prominent

At present, China's green financial system is becoming more and more perfect, with the deepening of the green and low-carbon transformation of energy, the green development of steel, transportation, construction and other fields is accelerating, the demand for green investment and financing is expanding, and the supporting role of green financial instruments is becoming more and more prominent.

There are four main types of green financial instruments

The core of green finance is that mature financial institutions provide financial impetus for the development of green industries with the help of mature financial instruments, mainly for financial products and services for environmental protection and sustainable development, including green bonds, green credit, ESG and carbon finance.

Green credit is the product with the earliest start, the fastest development and the most mature policy system in the development of green finance in China. From the perspective of service targets and mechanisms, green credit issuers are mainly banking institutions. Green credit policies usually include three core contents: first, the use of appropriate credit policies and means, such as loan types, terms, interest rates and quotas, etc., to support environmental protection and energy conservation projects or enterprises, second, to take credit punishment measures such as suspending loans, deferring loans, or even recovering loans for projects or enterprises that violate relevant laws and regulations on environmental protection and energy conservation, and third, lenders use credit means to guide and urge borrowers to prevent environmental risks and fulfill social responsibilities.

Green bonds have become an important financing channel for China's green industry, second only to green credit in scale. However, green bonds account for only about 1% of the total bond market, and there is still a lot of room for development. From the perspective of service targets and mechanisms, the government and industrial and commercial enterprises are the main force in the issuance of green bonds, and the overall trend is diversified. From the perspective of financial bond issuance, policy banks, large state-owned banks and various joint-stock banks continue to issue green bonds in domestic and foreign capital markets, while from the perspective of corporate issuers, central enterprises and state-owned enterprises are the main issuers of innovative products such as carbon neutrality bonds, sustainability-linked bonds and asset-backed securities (ABS).

At present, China's ESG development is still in its infancy, and the outstanding problems to be improved include: the small market size, the lack of a sound mandatory disclosure mechanism for non-financial information that affects finance, and the imperfect industry ecosystem. From the perspective of service objects and mechanisms, enterprises disclose the corresponding information according to the content contained in the evaluation system, rating agencies evaluate the ESG information disclosed by the enterprise, and ESG investors control risks according to the evaluation situation, reduce investment fluctuations, and improve long-term returns.

At present, China's legal system and policies related to carbon finance are not comprehensive, the carbon financial system is not perfect, and the degree of supervision is insufficient. From the perspective of service objects and mechanisms, the core of carbon finance is the financial activities carried out by relying on carbon emission allowances and CCER, such as common carbon custody, carbon pledge, carbon option, etc.

Play different roles at different stages of the project

In the project approval and preparation stage, green bonds, green credit and other tools are mainly used. By issuing bonds to investors to support projects that meet green standards, issuers can not only raise funds for the project, but also increase the social impact of the project. For example, in March 2021, the State Grid Corporation of China issued a 5 billion yuan green medium-term note, and the funds raised will be used for the construction of a number of ultra-high voltage transmission projects, reducing carbon emissions by about 770,000 tons per year. Green credit typically has a lower interest rate than regular loans, helping to attract more applications for loans for energy transition projects. At present, in the management of green credit, it is generally proposed that projects in the field of clean energy and those that meet the requirements of environmental protection standards can apply for green credit.

In the completion and operation stage of the project, ESG investment, carbon finance and other tools are mainly used. Paying attention to their own ESG information and improving their ESG evaluation results in the development of relevant projects or enterprises will help them obtain long-term investment support and achieve stable development. Carbon finance is mainly to develop the potential value of carbon assets of projects or enterprises, and by selling carbon allowances or participating in CCER emission reduction trading, the carbon emission reduction value of the project can be converted into a stable capital flow, thereby alleviating the short-term, medium- and long-term capital needs of enterprises.

The role of energy transition is reflected in four aspects

The role of green finance in the clean and low-carbon transformation of energy is mainly reflected in four aspects: carbon reduction, pollution reduction, green expansion, and growth.

In terms of carbon reduction, carbon emissions should be controlled at the source. With the tightening of carbon quotas and the increase of carbon prices, the carbon emissions of enterprises will significantly increase the operating costs of enterprises, which will force high-carbon industries to carry out low-carbon technological transformation and low-carbon transformation and development of industries. In addition to the carbon market, other financial instruments such as ESG investment can promote enterprises to accelerate the construction of environmental and social risk management systems, reduce their own carbon emission levels and adverse impacts on the environment, and help banking financial investment institutions to further tilt towards low-carbon projects and enterprises, so as to achieve a virtuous cycle of carbon reduction and carbon reduction for the entire industry.

In terms of pollution reduction, we will reduce the level of pollution discharge from highly polluting industries. By reducing financing support for high-polluting projects and enterprises, we will reduce the proportion of high-polluting enterprises and promote their transformation and development in the direction of low emissions and low pollution. At the same time, environmentally friendly projects and enterprises can get more financial support, so that the funds can be reused to develop low-pollution projects, so as to achieve the organic unity of high-quality social and economic development and gradual reduction of pollution emissions.

In terms of green expansion, we will promote the green transformation of traditional industries and the development of new green business formats. Green expansion is a concrete form of realization to achieve carbon reduction and pollution reduction goals. The green industry is the current frontier industry, with the difficulty of scientific and technological innovation, high investment costs, long return cycle, high risk of income fluctuations and other characteristics, through the enrichment of green financial tools, innovative support forms, can better meet the investment and financing needs of the development of the green industry, in order to ensure a stable cash flow at the same time, promote the green industry to increase scientific and technological research and development and innovation, through the scale effect to drive the industry cost reduction, so as to achieve a larger range and larger scale of green industry development trend.

In terms of growth, we will promote low-carbon transformation to achieve sustainable development. Lucid waters and lush mountains are invaluable assets. By promoting the development of green and low-carbon industries, we can achieve the organic unity of economic and ecological benefits, avoid the old path of "pollution first and then treatment" or "pollution while treatment", which is more conducive to the sustainable and high-quality development of the economy. At the same time, green industries include some strategic emerging industries, which can generate more jobs by providing strong financial support for these industries. Data shows that investing $1 million in renewable energy and energy efficiency could create nearly five more jobs than investing in traditional fossil fuels.

Author's Affiliation: Electric Power Planning and Design Institute