MA Jun’s Remarks at the Venice Conference on Climate Change
On 11 July 2021, the International Conference on Climate Change was held in Venice, Italy. The conference was hosted by the Italian Presidency of the G20 and organized by the Bank of Italy and the Ministry of Economy and Finance, on the margins of the G20 Finance Ministers and Central Bank Governors Meeting. Dr. MA Jun, Co-Chair of G20 Sustainable Finance Working Group (SFWG) and President of IFS, delivered a speech on sustainable finance taxonomies, disclosures, incentives and products, and the progress of the work of G20 SFWG. The following is the full text of his speech.
Note: Dr. Ma Jun is the Co-Chair of G20 Sustainable Finance Working Group, President of Institute of Finance and Sustainability (IFS), and Chairman of Green Finance Committee of China Society for Finance & Banking
MA JUN’S REMARKS
11 July 2021
Let me start by thanking the Ministry of Finance and the Central Bank of Italy for inviting me to join this important conference. It is my great pleasure to take part in this discussion.
As many speakers have touched upon the importance of green and sustainable finance, I will keep my remarks focused on the question of how. Drawing from experiences in the sustainable finance market, I think a well-functioning sustainable financial system will need to have at least these four pillars:
The first pillar is taxonomy. Taxonomies, which define the boundary and classification of sustainable activities, provide the basis for all sustainable finance activities. Taxonomies can help prevent green-washing, protect market integrity, and provide the basis for measuring green performances and allocation of government incentives. There are several approaches to developing such taxonomies, including the top-down approach adopted by China, the EU and a few other jurisdictions, and the bottom-up approach, such as that used by the Climate Bond Standard. Of course, taxonomy is not the only tool for aligning investments with SDGs; its implementation requires the assistance of verification services and green/ESG rating methodologies.
The second pillar is disclosure. Green and sustainable investments should deliver environmental and other benefits to SDGs. These benefits should be calculated, measured and reported to inform investors interested in investing in sustainable assets. As exposures to polluting and high-carbon assets can generate financial risks to the investors, such environmental and climate risks should also be measured and disclosed. In the past few years, many governments and regulators have introduced environment and climate-related disclosure requirements, based on the TCFD recommendations.
The third pillar is incentive. Under the current pricing systems, many sustainable investments are not fully compensated for their positive externalities, thus resulting in underinvestment; while many polluting and high-carbon investments have attracted too much capital, as their negative externalities are not fully internalized. Therefore, public policy tools need to be used to properly account for these externalities. These policy tools include, among others, emission trading schemes, carbon taxation, policies encouraging the use of clean energy and other low-carbon products, as well as green finance incentives.
The fourth pillar is financial product innovation. A green finance system requires many financial products to meet the demands of different companies and projects. We need green loans, green bonds, green funds, green ABS, green ETFs, green insurance and carbon-related products. Each of them will play a role in supporting particular green and sustainable activities.
Much progress has been made in the past few years in the sustainable finance market, especially in these four areas that I described as four pillars. The question for us is: what international coordination mechanisms, especially the G20, should do to further accelerate the pace of sustainable finance development? This is precisely what the G20 Sustainable Finance Working Group (SFWG) is trying to answer.
Over the past few months, this working group, re-established by the Italian Presidency and co-chaired by myself on behalf of the PBOC and Sharon Yang representing the US Treasury, has held two official group meetings, and many consultation meetings with private sector representatives and IOs. We have decided to produce four major deliverables this year. The first is a G20 sustainable finance roadmap covering many of the issues I mentioned above. It will guide the work of G20 for the coming few years in this regard. The second, third and fourth items are topics that the working group will address this year, including approaches to aligning investments with SDGs, sustainability reporting standards, and roles of MDBs in supporting the implementation of the Paris Agreement.
Let me just give two examples of the issues that need global coordination, including via G20 SFWG. The first is about the approaches to aligning investments with SDG, including taxonomies and ESG rating methodologies. One problem that we are facing is that as many as 200 taxonomies have popped up over the past few years. This is equivalent to 200 languages used in the same market for communication, which may create confusion and segmentation within the market, increase verification costs, and potentially lead to greenwashing. As for ESG ratings, they also face the problem of having too many methodologies inconsistent with each other.
The second example of issues requiring global coordination is the sustainability reporting standard. There are many different types of reporting standards or frameworks, developed with different principles, as well as different content requirements and presentations. The proliferation of inconsistent reporting standards is also becoming a barrier to enhancing transparency and data availability.
In the areas as I mentioned earlier, we need to develop solutions to improve coordination and consistency. For example, we can encourage developers of taxonomies to use the same industrial classification, encourage different jurisdictions to adopt common taxonomies on a voluntary basis, and encourage the development of unified regional taxonomy, just like the EU did for the European market. As for reporting, we should support the IFRS efforts to develop a globally accepted sustainability reporting framework, with the flexibility to accommodate jurisdiction-and SME-specific requirements.
I am hopeful that, through our collective efforts, the SFWG will make concrete progress in forging consensus in many important areas that require global coordination.
Thank you very much, and back to you, Mr. Chair.
