The Beijing-Brussels finance connection: the key to combating climate change

Since the signing of the Paris Agreement in 2015, countries across the globe have renewed their efforts to curb climate change. With China as the largest and the EU as the third largest greenhouse gas emitter, they are critical actors in this fight given their pure scale and role as norm setters for both developed and developing peers. While both have made strong commitments to undertake climate action and are cooperating on a number of fronts, they are taking substantially different approaches in their efforts.

In China, climate change efforts are orchestrated with a top-down mindset. The country’s leadership makes commitments to environmental efforts, which then becomes an integral part of the nation’s policy objectives and are carried out by a strong centralised governance model.

This prioritisation has taken scale based on the principle of an ‘ecological civilisation’ under Xi Jinping’s leadership. As a concrete example, Chinese green finance has developed rapidly since the Paris Agreement’s signing. Whereas financial system governance in most countries is based on narrow financial goals such as limiting currency fluctuations, creating employment, and financial stability, Chinese climate change efforts are integrated into its financial system governance.

Based on a 2016 policy document called the ‘Guidelines for Establishing the Green Financial System’, tasks and responsibility were distributed among multiple ministries. The following years saw a rapid scaling up of green finance that has led to China becoming the biggest green bond market in the world. Four hundred green funds are now in the process of being established and by 2020 listed companies will have mandatory environmental information disclosure requirements.

In the EU, climate change efforts are based on a combination of top-down and bottom-up approaches. While each country sets ambitious climate change targets and provides the direction for economic developments, actors are left with more leeway to develop solutions to meet these goals. This is also the case for green finance.

While the European Investment Bank was the first issuer of a green bond in 2007, the market only saw slow and gradual growth over the following years. Similarly, rather than having a single green bond standard for the EU, a number of voluntary standards were put forward by various European financial institutions and NGOs.

However, by 2018, the European Commission chose to change course and emulate China by launching an ‘Action Plan on Sustainable Finance’. This will create an official EU taxonomy for what qualifies as ‘sustainable’. The first step was the release of preliminary definitions in June 2019 for comments. The Action Plan will also produce a voluntary EU green bond standard and it is expected that most green bond issuers will follow this standard in the future. Having such clear standards makes it simpler for investors to compare green bonds and reduces issuance transaction costs. These steps aim to incentivise companies to issue green bonds rather than non-green alternatives.

With such efforts, China and the EU have positioned themselves as the most ambitious green finance actors on the planet. While differences exist between their approaches, both have expressed great ambitions on working together, as clearly illustrated at several recent EU-China summits. A concrete example of current collaborative efforts is the work conducted by the China Green Finance Committee (GFC), on behalf of the Chinese government, with the European Investment Bank (EIB) to harmonise green bond standards.

As both provide the largest international markets for green bonds, harmonising these instruments facilitates harmonisation across other sustainable financial tools. This GFC-EIB cooperation has produced two white papers that compare and map green bond taxonomies while providing recommendations for developing a common language for green finance.

It is clear that differences of environmental priorities will continue to exist between China and the EU. This inevitably results in different activities being defined as ‘green’ in each place as well as their prospective partners. By working together towards a solution, China and the EU offer a common framework of objectives and activities that allows for all green bonds standards to be comparable, while simultaneously allowing each country to include their own prioritised activities.

The best way to make China and the EU’s shared efforts universal is through the adoption of said framework by the International Capital Market Association’s Green Bond Principles. This step would expand the cooperation and knowledge exchange currently carried out by China and the EU on environmental information disclosure which is facilitating investment between countries and the creation of green infrastructure via the Belt and Road Initiative.

Looking to the future, China-EU cooperation is clearly indispensable in addressing global climate change due to their respective influences on the global economy and its mechanisms.  Closer cooperation on green finance will inevitably foster closer cooperation across other sectors, making our world even more ‘sustainable’.