Ma Jun said:

In the context of carbon neutralization, in the next 30 years, almost all traditional and high-carbon energy sources may disappear, and almost all high-carbon industries and enterprises will also disappear. If we do not actively adopt low-carbon and zero-carbon technology for transformation, these high-carbon industries and enterprises will face a survival crisis.

Financial institutions should begin to pay attention to the understanding and estimation of the risks of climate transition. If equity investors have shares in these high-carbon industries and enterprises, and these companies do not transform, then the future valuation of these shares is likely to become very small or even zero. If banks lend to high-carbon companies and these companies do not transform, then some long-term loans will go bad. My research team at Tsinghua developed a climate transition risk model to analyze several areas, including coal power, oil and heavy industry (including cement and steel). According to the analysis of the coal and power industry, if you continue to lend to coal and power companies, the probability of default on these loans will rise from about 3% now to more than 22% in 10 years' time. It is obvious that there will be a lot of financial risks in the high-carbon field, so financial institutions and investors need to identify, predict and take measures to prevent them.

For financial institutions, if they do not participate in this process, they will lose the greatest investment and business growth opportunities. In terms of industry, there are many areas that can be invested. The core of carbon neutralization is zero carbonization of energy. in the future, almost 100% of energy will be composed of renewable energy, which requires a lot of investment. In addition, there is transportation. Hainan has announced that electric cars will replace fuel vehicles within ten years, and there will be hydrogen-powered cars in the future. Not only cars and highways need zero carbon, but ocean transportation and aviation also need zero carbon. Construction is a bigger area, and our trillions of construction-related investments every year are still invested in high-carbon buildings. The future construction industry should be low-carbon in the short term and zero carbon in the long run, and the amount of investment is very huge. Industry is a very complex and huge field, from the point of view of green energy, energy saving, materials and so on, it takes a lot of innovation and green technology to achieve near zero carbon (it is almost impossible for industry to achieve zero carbon completely). In addition, carbon sequestration, a very important plate, is to rely on forestry for carbon sequestration. Of course, sustainable agriculture and marine projects will also contribute. Therefore, there are huge investment opportunities and business opportunities in the fields of energy, transportation, construction, industry and forestry.

Recently, Ma Jun, academic member of China Wealth Management Forum of 50 (CWM50) and president of Beijing Institute of Green Finance and Sustainable Development, attended the second "carbon Neutralization 2060" and Green Finance Forum and delivered a keynote speech. He discussed in detail the opportunities and challenges brought about by "carbon neutralization" to China Finance Online Co Ltd and how the financial system should be reformed to meet the requirements of "carbon neutralization".

The following is the full text of the speech.

I. opportunities brought by carbon neutralization to the financial and investment community

Xie Zhenhua, China's special envoy for climate change, has led a study by 18 agencies, and the team estimates that to be carbon neutral, China needs an additional 138 trillion yuan in green and low-carbon investment over the next 30 years. I think this number is relatively small. Previously, I led a study on green investment in Chongqing. In order to achieve carbon neutrality in a provincial economy like Chongqing alone, it is estimated that there will be 13 trillion green investment demand in the next 30 years. If this figure were mapped to the whole country, the green investment needed in the country's carbon might be close to 500 trillion. Therefore, I estimate that between 100 and 500 trillion, this is the opportunity to implement carbon neutralization to green and low-carbon investment in the next 30 years.

For financial institutions, if they do not participate in this process, they will lose the greatest investment and business growth opportunities. In terms of industry, there are many areas that can be invested. The core of carbon neutralization is zero carbonization of energy. in the future, almost 100% of energy will be composed of renewable energy, which requires a lot of investment. In addition, there is transportation. Hainan has announced that electric cars will replace fuel vehicles within ten years, and there will be hydrogen-powered cars in the future. Not only cars and highways need zero carbon, but ocean transportation and aviation also need zero carbon. Construction is a bigger area, and our trillions of construction-related investments every year are still invested in high-carbon buildings. The future construction industry should be low-carbon in the short term and zero carbon in the long run, and the amount of investment is very huge. Industry is a very complex and huge field, from the point of view of green energy, energy saving, materials and so on, it takes a lot of innovation and green technology to achieve near zero carbon (it is almost impossible for industry to achieve zero carbon completely). In addition, carbon sequestration, a very important plate, is to rely on forestry for carbon sequestration. Of course, sustainable agriculture and marine projects will also contribute. Therefore, there are huge investment opportunities and business opportunities in the fields of energy, transportation, construction, industry and forestry.

II. Challenges posed by carbon neutralization to the financial and investment community

China Finance Online Co Ltd should attach great importance to dealing with climate change, or the transformation risks brought about by carbon neutralization. There are two major risks in the field of climate change, one is physical risk, the other is transition risk. Physical risk means that if we do not deal with climate change, the global greenhouse gas emissions are excessive, and the temperature rises sharply, the future sea level rise will lead to the inundation of a large number of properties and other assets in the coastal areas of the world. It will also lead to more high-frequency and more intense natural disasters, including hurricanes, typhoons, fires, floods and so on, resulting in huge property and economic losses. However, if countries, including China, actively achieve carbon neutrality in the next 30 years, the low-carbon transformation of energy and economy will be very fast, which will bring transformation risks.In the context of carbon neutralization, in the next 30 years, almost all traditional and high-carbon energy sources may disappear, and almost all high-carbon industries and enterprises will also disappear. If we do not actively adopt low-carbon and zero-carbon technology for transformation, these high-carbon industries and enterprises will face a survival crisis.

Financial institutions should begin to pay attention to the understanding and estimation of the risks of climate transition.If equity investors have shares in these high-carbon industries and enterprises, and these companies do not transform, then the future valuation of these shares is likely to become very small or even zero. If banks lend to high-carbon companies and these companies do not transform, then some long-term loans will go bad. My research team at Tsinghua developed a climate transition risk model to analyze several areas, including coal power, oil and heavy industry (including cement and steel). According to the analysis of the coal and power industry, if you continue to lend to coal and power companies, the probability of default on these loans will rise from about 3% now to more than 22% in 10 years' time. It is obvious that there will be a lot of financial risks in the high-carbon field, so financial institutions and investors need to identify, predict and take measures to prevent them.

There are already some methods and experience in climate risk assessment and prevention. In the past few years, several domestic financial institutions have made financial risk models related to climate and environmental factors. Internationally, financial institutions represented by Europe have also done a lot of research. Financial institutions, including banks, insurance, securities and funds, should study these analysis tools and put forward ways to reduce high-carbon exposure and promote the transformation of high-carbon assets to low-carbon assets on the basis of quantitative analysis.

Third, what should financial institutions do in the face of opportunities and severe challenges?

The financial system and regulators need to do at least six aspects to enable the financial system to better meet the financial needs brought about by carbon neutralization and better guard against related risks.

First, green financial standards should be further improved to make them more in line with the goal of carbon neutrality.

In the past, when we formulated green financial standards, there were periodic considerations. For example, the green debt catalogue compiled in 2015 included clean coal projects at that time. At that time, haze was very serious, and it was a very important tool to improve the environment by using clean coal technologies such as desulfurization and denitrification and ultra-supercritical coal to bring haze down. Therefore, although the application of clean coal technology may produce carbon emissions, according to the conditions and policy preferences at that time, we also listed it as a green project.

But now the situation is different. In the past seven years, the national haze index (that is, PM2.5 level) has dropped by more than 60%, the water quality has also improved a lot, and we have paid more attention to carbon neutralization than ever before. In this context, the future standard setting of green finance should take carbon neutralization as the main goal or constraint. A project should not be included in the standard if it can meet one kind of environmental goal but at the same time damage another kind of environmental goal. The new edition of the Green Bond Catalog (draft), led by the people's Bank of China, has deleted high-carbon projects such as clean coal. Other green financial standards, including green credit standards and green industry catalogues, should also be revised in accordance with this line of thinking.

Second, environmental information disclosure

After enterprises have done carbon accounting, these data need to be disclosed so that financial institutions can know which economic activities and which projects are high-carbon, and provide support for investors to look for low-carbon projects. It is necessary to disclose carbon-related information at the enterprise level. In the future, regulators will certainly strengthen regulatory requirements on information disclosure, including for listed companies, bond-issuing companies, and even unlisted companies, and for small and medium-sized enterprises, will gradually establish mandatory carbon and climate-related information disclosure requirements. At the same time, financial institutions should also disclose carbon and climate-related information.

From the bank's point of view, it is necessary to know the carbon emissions and carbon footprint of the projects supported by the loan, and to systematically reduce the carbon footprint to zero in order to achieve carbon neutrality. Therefore, the calculation and disclosure of banks' carbon footprint is also very important, and it should become a mandatory regulatory requirement in the future.

In addition, information on brown assets held by banks and investment institutions should be disclosed. In the past, financial institutions voluntarily disclosed green assets, but now they should also be required to disclose brown, polluting and high-carbon asset exposures to guard against the risks posed by these assets. High-carbon assets may become bad debts in the future, and not knowing how many assets may become bad debts means that the financial institution does not understand the risks and cannot manage them well. Therefore, information such as the total amount and proportion of brown assets (that is, exposure) must be calculated and disclosed. The short-term challenge in this regard is that the definition of brown assets must be clear, which is that regulators should focus on research and clear content in the near future, so that financial institutions have uniform standards for disclosure.

Third, strengthen the incentive mechanism for low-carbon investment and financing.

In the past, there were some incentive mechanisms for green finance, including re-lending, local guarantee, interest discount and so on. In early 2021, I put forward a series of suggestions to strengthen the incentive mechanism in an article, which mainly includes two aspects:

First, it is suggested that the people's Bank of China should set up a larger re-loan mechanism specifically to support low-carbon projects, so as to reduce the financing cost of green and low-carbon projects.

Second, we should start to study the incentive mechanism to reduce the weight of green risk assets and improve the risk weight of brown assets. If the risk weight of green assets is reduced, it is actually a low-cost incentive mechanism for all green loans. Increasing the risk weighting of brown assets, including high-carbon assets, will increase the financing costs of these loans and guide banks and other financial institutions to reduce their support for these high-carbon projects.

Fourth, more innovation is needed at the product level.

At least dozens of financial product innovations that support carbon neutrality can be listed. For example, credit and bond products (or green credit and green bond products) could be considered linked to the carbon footprint. Interest rates on these financial products are linked to the carbon footprint of the main body or project that receives loans or bonds: if the main carbon footprint falls fast, interest rates fall; if they fall slowly or rise, interest rates rise. Therefore, this kind of products are the incentive mechanism to continuously guide enterprises to reduce carbon.

In addition, transformational finance is a kind of innovative tool that supports carbon reduction while preventing financial and social risks. Now Europe already has financial products of transition bonds and fair transition funds to support companies that are currently high-carbon but will be transformed into low-carbon or zero-carbon companies within a few years. Recently, the ADB discussed with me whether it is possible to find a company to conduct a pilot transformation of finance. For example, use some low-cost international funds, including equity investment funds, to acquire coal-fired power companies, become its major shareholders, and formulate a 5-7-year transformation plan to transform this coal-fired power company into a new energy enterprise within 5-7 years. This kind of financial innovation is most needed for carbon neutrality.

Fifth, financial institutions themselves should achieve carbon neutrality.

Financial institutions implement carbon neutrality, requiring their loans and investment projects to achieve carbon neutrality, as well as their own operations to achieve carbon neutrality. If it cannot be completely reduced to the expected target, then plant trees by buying carbon sinks or spending money, which are typical carbon neutralization methods that financial institutions have begun to operate. As a financial institution, although its own carbon emissions are very small compared to the companies it loans and invest in, these practices can set an example for corporate customers.

Sixth, international cooperation

Carbon neutralization is an activity with huge externalities. The beneficiaries of carbon reduction in any region are 7 billion people around the world, and international cooperation must be used to strengthen consensus and reduce "hitchhiking behavior". Therefore, China has played a very active and even leading role in many international platforms of green finance established in recent years, such as:

(1) in 2016, when China assumed the chair of the G20, China launched the G20 Green Finance Research Group (hereafter renamed as the Sustainable Finance Research Group), which promoted the formation of a global consensus on the development of green finance. During the Italian presidency in 2021, it proposed the resumption of the G20 Sustainable Finance Research Group and invited China and the United States to co-chair the group, which has now been formally resumed with the approval of G20 finance ministers and central bank governors. In the coming year and even years, China and the United States will work together to promote the formation of a global sustainable financial consensus under the G20 platform.

(2) the International platform for Sustainable Finance (IPSF) was initiated by the European Union in 2019, and China joined as the first sponsor member. Under this platform, China and the European Union jointly led the establishment of a working Group on Sustainable Financial Standards (Working Group on Sustainable Finance Taxonomy) to jointly promote the formation of a unified standard (Common Ground Taxonomy) based on Chinese green financial standards and EU sustainable financial standards. With this set of standards in the future, the transaction costs faced by cross-border green capital flows can be significantly reduced, and it can also be adopted by other countries, regions and markets on a voluntary basis.

(3) the Green Finance Network (NGFS) of the central bank, one of the eight sponsors, has now expanded into a platform for international cooperation between central banks and regulators with the participation of more than 80 countries. The platform is promoting many policy consensus in the field of green finance, including the impact of climate factors on financial stability, environmental risk analysis methodology, data and disclosure issues, and the relationship between biodiversity and financial stability.