【News】China SIF Summer Summit | Finance Innovation to Facilitate Transition

The participants first shared their understanding of "transition finance" and "the relationship between transition finance and green finance".

Dr. YU Hua, former Chairman of Morgan Stanley Huaxin Fund, included all financial activities related to the transition and transformation of carbon-intensive industries into the scope of transition finance. To achieve the goal of net zero, new and clean energy should be developed on the one hand, and the traditional energy system should be upgraded and renewed on the other hand. Therefore, green finance and transition finance should coordinate and synergize with each other in achieving sustainability under climate change. The challenge of transition finance is to achieve reasonable revaluation and effective control of investment risks through investment practices in the transition process, thus making financial and social value contributions.

According to Mr. JI Bing, General Manager of BlackRock CCB Wealth Management, transition finance has a broader connotation and more macroscopic guidance than green finance, dedicated to turning brown into green and ensuring the orderly transition of carbon-intensive industries, maintaining market price stability and promoting a steady and healthy economic development. As carbon emissions are gradually reduced, the economic landscape will be reshaped. The net-zero transition will cause large-scale resource reallocation, the supply and demand situation will change, and the companies that can grasp the transition opportunity will stand out.

Ms. HAN Ning, Director of the Market Innovation Department of the National Association of Financial Market Institutional Investors (NAFMII), pointed out that transition finance encompasses many aspects of sustainability transition, such as environment, social responsibility and other economic elements, and its’ current focus falls on low-carbon and climate transition areas. Transition finance and green finance are complementary. Green finance provides financial support for the development of green industries or projects. In contrast, transition finance provides an essential financial tool to support the transition of carbon-intensive industries to green and low-carbon, both of which play a vital role in achieving green, resilient and inclusive economic development.

Ms. LUO Pengcheng, Head of Corporate and Asset Research of Shougang Fund Group's WW Research Institute, believes that transition finance and green finance complement each other. Green finance focuses more on long-term benefits and reducing long-term risks, In contrast, transition finance pursues long-term benefits and short-term benefits, as well as a balance between long-term and short-term risks, by supporting the transition of carbon-intensive industries to low-carbon and zero-carbon.

Moderator Ms. Grace GUAN said that one of the main features of transition finance is to provide financial support for the transition to low carbon for those high emission economic activities that the green taxonomy does not cover. From this perspective, transition finance can be seen as a capital market financing tool with specific attributes.

Afterwards, the panelists introduced the current development status, future direction, and challenges faced by transition finance from their respective fields.

Ms. HAN Ning, introduced that NAFMII introduced a sustainability-linked bond in April 2021 to meet the financing needs of various enterprises committed to achieving sustainable development goals. In May this year, under the guidance of the People's Bank of China, the NAFMII also introduced innovative transition bonds, mainly targeting eight domestic carbon-intensive industries such as power generation, steel and chemical manufacturing industries, to support the low-carbon transition of traditional industries. On June 22, the first batch of five transition bonds, including Huaneng International, Datang International and Chinalco, was successfully issued, which gained general popularity in the market. Many industry experts gave positive comments. Transition bonds are an essential supplement to China's green finance, which can effectively connect financial resources with the transition of the real economy, provide accurate direct financing in the public market for low-carbon transition projects in China's traditional carbon-intensive industries, and effectively meet the financing needs of low-carbon transition economic development.
 
Mr. Ji Bing, thinks that although most of the current transition finance products are bonds, the prospects of transition finance products will be extensive in the form of bonds or equity. They may be either on the asset or liability side; issued by either listed or non-listed companies; and raised in the public or private market. With the introduction of the "Dual-Carbon" policies, it is believed that more and more capital will turn to transition finance products in the future. BlackRock considers sustainability factors and transition risk as part of the critical modelling framework when measuring assets. It will apply more and better financial products and concepts toward the "Dual-Carbon" Goals to China's investment practice in the future.
 
From the perspective of industrial funds, Ms. LUO Pengcheng, shared some possible investment opportunities in transition finance. Ms. Luo mentioned that transition finance has a relatively small financial supply compared to popular sectors such as green finance, and the pricing will be more reasonable. In the context of transition finance and debt financing methods, Shougang Fund Group will also focus on equity opportunities through funds, Reits and asset securitisation to invest in new technology SMEs and infrastructure that can support economic transition and improve carbon emission efficiency. For example, in 2021, Shougang Fund led the issuance of the Shougang Reits Green Energy Project, the first domestic mutual fund with solid waste treatment assets as underlying assets, which can be invested in new project construction through expansion in the future to support green and sustainable development. The WW Research Institute has also launched a Reits Index on Shougang WW Fund, which supports infrastructure construction through passive investment in the future.
 
Dr. YU Hua, listed "sustainability of investment" as another major challenge in developing transition finance. How can the balance between financial returns and sustainability goals be maintained to keep the market's enthusiasm and confidence so that more investors can participate in the transition economy? Taking actively managed ETFs as an example, Dr. Yu Hua pointed out how transition finance products should effectively control risk to reflect the sustainability of investment and reasonable return. Dr. Yu also mentioned that CFA Institute has planned to introduce its ESG certificate examination to China, further promoting the exploration and cultivation of domestic transition finance talents.

The moderator, Ms. Grace Guan, while thanking all the guests for their sharing, called on all parties involved in the market and policymakers to join hands to innovate and achieve an orderly and just transition to reach a more sustainable future.