Development trend and practice of green finance in China's securities industry
Chen Gang, Chief Research Director and Director of the Institute of Orient Securities
Since 2005, China's carbon emissions have been the world's largest, and in the context of global climate cooperation and international negotiations, energy conservation, emission reduction and carbon neutrality are China's practical challenges. Carbon neutrality has become a major strategic decision in China. As the most important intermediary structure in the capital market, securities institutions should become a bridge connecting industry and capital, a medium for connecting green technology and transformation needs, and helping the development of green investment.This paper examines the trend of green finance in China from the perspective of the securities industry, and takes the practice of Orient Securities as a sample to explore the application and innovation of domestic securities companies in green finance。
In the short term, carbon neutrality is a cost, which will increase the burden on enterprises to a certain extent. However, from a long-term perspective, carbon neutrality meets the development requirements of enterprises and has a huge market and growth space. The United Nations Development Programme has predicted that the world will need to invest between $5 and $7 trillion a year before achieving the 2030 Sustainable Development Goals, but at the same time, it will bring $12 trillion in market opportunities every year.
This also shows that the role of finance in the process of achieving carbon neutrality cannot be ignored. Internationally, the Paris Agreement has clearly highlighted the important role of finance. After years of exploration, China has initially established the policy ideas of "three functions" and "five pillars" for green finance development. That is, give full play to the three functions of resource allocation, risk management and market pricing of finance to support green and low-carbon development, and explore and form the "five pillars" of the green financial system, including the green finance standard system, financial institution supervision and information disclosure requirements, incentive and constraint mechanism, green financial products and market system, and green finance international cooperation.
Implemented on the shoulders of the securities industry, securities companies can make a difference in four aspects: investment research, investment financing, foreign cooperation and innovative products of green finance. First, securities companies can improve the level of green finance research and investment business, increase research investment in low-carbon fields such as photovoltaics, new energy vehicles, and hydrogen energy, form an investment and research team with fine division of labor in the industrial chain, broad international vision, and stable professional echelon, and develop public fund products focusing on ESG and other themes. Second, in terms of investment and financing business, securities companies can increase their efforts to develop and accumulate the demand for green financial services throughout the life cycle of the industry, and help high-carbon enterprises carry out cost control and transformation and development. Third, through all-round cooperation with policy banks, securities companies can actively fulfill their obligations as underwriters in the issuance of green financial bonds and jointly serve the development of green economy. Fourth, in terms of innovative products, securities companies can innovate and develop carbon finance business, quotation and inquiry of carbon emission rights, carbon finance business consulting, research and other services, continuously improve the level of financial services to the real economy, and help the economy achieve low-carbon transformation.
Specifically, in terms of national policies for carbon neutrality, the "1+N" dual carbon policy points out the direction of green investment. The State Council issued the "Opinions on Complete, Accurate and Comprehensive Implementation of the New Development Concept and Doing a Good Job in Carbon Peaking and Carbon Neutrality", which has become the top-level design of China's 3060 goal and is also one of the "1+N" policy system. In terms of N, the State Council's Action Plan for Peaking Carbon Emissions before 2030 makes overall arrangements for more than 30 national, local, field, and industry policies and measures related to carbon peaking and carbon neutrality. At the local level, most provinces and cities have issued policies to clarify short-, medium- and long-term carbon emission reduction plans. The policy planning of these regions and industries is the focus of research and investment direction of securities companies.
At the industrial level, in the field of traditional industries, "first establish and then break" will become the core idea of ensuring energy security and achieving low-carbon transformation in China in the future. Photovoltaic power generation, wind power, nuclear power will develop rapidly, and will become the main force covering incremental electricity demand during the "14th Five-Year Plan" and "15th Five-Year Plan" period, and gradually replace the share of thermal power after 2030. It is estimated that by 2025 and 2030, China's total installed power capacity will reach about 32.7 and 4.48 billion kilowatts from 2.2 billion kilowatts in 2020, respectively; the proportion of wind power and photovoltaic installed capacity will increase from 24.3% in 2020 to 39.1% and 52.2% respectively. In 2025 and 2030, the proportion of wind power and photovoltaic power generation is expected to increase from 9.5% in 2020 to 19% and 28% respectively.
In the field of new energy, photovoltaics, new energy vehicles, batteries, etc. have gradually become China's advantageous industries. In terms of the photovoltaic industry, by 2021, the global output market share of China's four major industrial chain products of modules, cells, silicon wafers and polysilicon has reached more than 78%, and the global proportion continues to increase, occupying an important position in the global industrial chain. In terms of new energy vehicles, China's share of global new energy vehicle sales has continued to rise from 2020 to 2022, reaching 64%, making it the world's most important new energy vehicle market. In terms of power batteries, from 2020 to 2022, the power shipments of major Chinese enterprises have grown rapidly, accounting for 60% of the total global shipments, which is the most important part of the world's new energy vehicle industry chain. The new energy industry and industrial chain are the key research and investment directions of securities companies.
In terms of green bonds, China has become the world's second largest green bond market in 2021, and it is also a positive response of the Chinese market to carbon emission reduction. The People's Bank of China released the 2021 edition of the Catalogue of Green Bond-Supported Projects, which for the first time unified the definition of green projects by domestic regulatory authorities. The issuance of the China Green Bond Principles is not only conducive to the standardization and standardization of China's green bonds, improving the credibility of green bonds, but also promoting the integration of China's green bonds with international standards. In terms of climate investment and financing, programmatic documents and pilot notices have been issued, clarifying that climate investment and financing is an important part of green finance, guiding and leveraging more funds to invest in the field of climate change.
In terms of carbon market, China's carbon market has been steadily established. In 2011, China proposed to gradually establish a carbon emission trading market, began to prepare for the construction of the national carbon market in 2015, started the national construction process of the phased carbon market in 2017, launched the online trading of the national carbon market in 2021, and completed the clearance of the first compliance cycle of the national carbon market.
The development of the carbon market has brought new businesses and new opportunities to securities companies, mainly as follows. First, carbon pricing can provide signals to attract more investment in clean energy, ultimately realizing China's vision of carbon neutrality. The price trend of the national carbon market will have a profound impact on the investment and production decisions of society, industry and enterprises. At present, there are large differences between domestic and foreign carbon prices, and the international carbon price is on the rise. This presents long-term opportunities for related businesses to develop. Second, in terms of promoting energy conservation, emission reduction and burden reduction for managed enterprises, securities companies can develop carbon spot trading, carbon pledge, carbon repurchase, carbon bond trading, matching market supply and demand and other methods according to customer needs. Third, in terms of participating in various emission reduction projects, securities companies can develop various modes of CCER development and trading to achieve cash flow benefits from carbon reduction. Fourth, in terms of providing a variety of asset management methods, securities companies can develop carbon lending and carbon custody contracts, set up carbon funds, etc. Fifth, in terms of assisting enterprise risk management, securities companies can help customers reasonably construct investment portfolios, hedge risks, improve investment returns, and guide capital flow to a green, low-carbon and sustainable development path through hedging and asset hedging; And can develop forwards, swaps, options and other carbon derivatives, according to customer hedging needs and derivative structure to quote, to obtain effective risk hedging after the spread income. Sixth, in terms of carbon market support tools, securities companies can develop carbon index trading; Carbon insurance tools can also be developed, on the one hand, in order to avoid risks in the development of emission reduction projects, to ensure that project emission reductions are delivered on time and in full; On the other hand, it can reduce the investment risk or default risk of both parties to the project, and ensure the smooth progress of project investment and transactions. All in all, carbon finance brings new and diverse investment opportunities to the securities industry. As a comprehensive brokerage, it can also provide enterprises and society with all-round and one-stop professional comprehensive financial services such as securities, futures, asset management, wealth management, investment banking, investment consulting and securities research.
Finally, the importance of ESG research will become increasingly prominent. ESG is responsible investment by considering non-financial information such as environmental, social and corporate governance to extract the long-term value of the company, evaluate the company's performance and sustainability, and use it as a basis. ESG provides a framework for assessing corporate sustainability, and green finance provides funding and financial tools to achieve sustainable development. Together, they drive business and society in a more environmentally friendly and sustainable direction.
So how does the securities industry practice green finance? Orient Securities started early in green finance, actively developed green finance, and has fully incorporated ESG factors into its investment business. In terms of research, Orient Securities has increased its green research, as the only financial institution to participate in the compilation and release of the "Energy Blue Book - China Energy Development Frontier Report", and will jointly study and compile the "Climate Economy Blue Book: China Climate Finance Development Report" with the Chinese Academy of Social Sciences, PetroChina and other institutions, aiming to establish climate-related macro and micro financial risk assessment models. In addition, the company also released the first "Orient Securities Carbon Neutrality Index" in the industry, and cooperated with Xinhua News Agency China Economic Information Service to develop and compile the Xinhua Carbon Science and Technology Index, focusing on scientific and technological innovation in the field of energy conservation and carbon reduction, and continuing to promote a virtuous cycle of "technology-industry-finance".
In terms of green bonds, Orient Securities has completed a number of green bond first innovative projects, such as the first batch of carbon neutral green asset-backed commercial paper (ABCP) products in China and Shanghai, the first "carbon neutral" corporate bond for green buildings in China, and the first green technology innovation exchangeable corporate bond in China.
In terms of carbon emissions trading, Orient Securities started early, establishing a carbon finance team in 2018, participating in the carbon market training of the Environmental Exchange and carrying out the construction of solutions, risk control and technical systems. On January 30 this year, the China Securities Regulatory Commission (CSRC) approved the qualification applications of six securities companies, including Orient Securities, to participate in carbon emission trading by themselves. After the approval, Orient Securities took the lead in landing the first carbon emission rights trading among the six approved securities companies in the same batch, completed the first carbon allowance trading on the Shanghai Environment and Energy Exchange on March 1, and successfully landed the first Shanghai carbon quota forward SHEAF transaction on April 13. As a financial institution, Orient Securities participates in domestic carbon emission rights trading, which will help enrich the domestic carbon market trading entities, further enhance the activity of carbon market trading, and help achieve the "dual carbon" goal. It is conducive to expanding the service chain of FICC financial products, creating a one-stop service brand of green finance, relying on the advantages of parent company Shenergy Group in the energy field, and exploring a high-quality green securities development path of "integration of industry and integration". Orient Securities will improve the company's ability to serve the development of national green finance with more diversified investment varieties and models through service performance, investment and financing, market trading and asset-backed services.
In terms of asset investment management, Orient Securities adheres to the concept of value investment and responsible investment, while pursuing value investment returns, it also incorporates social and environmental responsibilities into investment decision-making, and continues to promote sustainable and high-quality economic development. By establishing a responsible investment management structure, applying responsible investment strategies, and conducting responsible investment research and communication, ESG factors are fully integrated into investment business. Orient Securities Asset Management, a subsidiary, launched the Dongfanghong ESG Sustainable Investment Hybrid Securities Investment Fund, and China Universal Fund issued financial products such as China Universal China Securities Shanghai Environmental Exchange Carbon Neutral ETF. As of the end of 2022, the total amount of assets under management related to sustainable investment strategies exceeded RMB280 billion.
In terms of internal management, Orient Securities attaches great importance to ESG management and practice. Orient Securities is one of the earliest securities firms in the industry to carry out systematic ESG management, establishing sustainable development concepts, goals and actions, and building a sustainable development management structure, gradually integrating ESG factors into the company's strategy, business and risk management.
Orient Securities has formulated and fully implemented the five-year sustainable development plan, focusing on the sustainable development goals in the four major areas of governance, economy, environment and society during the 14th Five-Year Plan period, and has achieved important results in supporting the high-quality development of the real economy, promoting the healthy and stable operation of the capital market, promoting green and low-carbon transformation, and fulfilling social responsibilities. From 2021 to 2022, more than 200 billion yuan of funds have been guided into the field of sustainable development; Total Scope 1 and Scope 2 GHG emissions decreased by 12% compared to the previous year; From 2021 to 2022, the Group invested 64.36 million yuan in public welfare funds in the social field, and the coverage rate of employee volunteer services reached 26.87%. In 2022, Orient Securities was repeatedly recognized by international rating agencies and capital markets for its outstanding performance in sustainable development. In 2022, it maintained an A grade in the MSCI ESG rating for two consecutive years, the highest rating among Chinese securities companies that have received public ratings. At the same time, Orient Securities has been included in the Hang Seng A-share Sustainable Development Enterprise Index for two consecutive years, which has maintained 30 constituent stocks, and only three domestic securities companies have been included at present, and only two domestic securities companies have been included for two consecutive years.
In the future, Orient Securities will continue to implement the plan to achieve carbon neutrality at the operational level by 2025 and net-zero emissions in its portfolio by 2060. During the "14th Five-Year Plan" period, 450 billion yuan of funds will be guided into the field of sustainable development through investment and financing business, and the average annual growth rate of sustainable investment and financing will not be less than 9%. We will further build and give full play to the characteristic advantages of "energy investment bank and green brokerage", provide customers with full-cycle and full-chain green financial services, and actively strengthen international cooperation to improve cross-border service capabilities of green finance.
The above are the actions, achievements and experiences of Orient Securities in green finance. The goal of carbon neutrality and the development of green finance require the joint efforts of many parties, and securities companies should effectively play the intermediary function of capital financing, have the courage to shoulder the important tasks entrusted by the times, and strive to promote the transformation of the real economy of green financial services.
To sum up, green development is both a challenge and an opportunity. Green finance not only serves but also benefits from green development. China's securities industry has a long way to go and has a long way to go.
Author: Chen Gang, Chief Research Director and Director of the Institute of Orient Securities.
Graduated from the University of Science and Technology of China with a doctorate in management science and engineering, he is mainly engaged in securities research, and has won the Shanghai "May Fourth" Youth Award, Shanghai "Golden Talent", New Fortune Best Analyst First Place and other awards.
