Client
Expertise
Finance
Impact
Helping China’s financial sector better understand climate transition risks.
CHALLENGE
How can financial institutions standardise and improve climate risk assessments?
Chinese financial institutions play a critical role in driving capital towards the country's transition to a low carbon economy. However, a current lack of appropriate assessment methods and tools makes it harder for financial institutions to measure and manage the climate-related risks they face. As domestic regulatory agencies and other market actors develop solutions to better manage climate risks, Chinese financial institutions must rapidly supplement their assessment methods and tools with those that are appropriate for the domestic context.
In doing so, financial institutions can begin to identify the opportunities presented by the transition towards a decarbonised future.
SOLUTION
A toolkit for financial institutions to assess climate transition risks in the local context
As part of the UK PACT China Green Finance Programme – a programme that aimed to support the development of knowledge in the private finance sector to accelerate the transition to a Net Zero economy – the Carbon Trust engaged in capacity building and provided workshops to Chinese financial institutions on climate transition risks. In tandem, we outlined the methodologies financial institutions can use to understand and integrate these risks into their existing risk management frameworks. To achieve this, we:
Interviewed Chinese financial institutions, policymakers and experts to capture a snapshot of the industry’s current understanding of climate transition risks and practices for managing these.
Analysed existing international climate transition risk methodologies and tools for China’s financial sector to refer to and build upon.
Shared step-by-step recommendations on how regulators, financial institutions and tool developers can work together to upgrade assessment tools and set up climate risk assessment pilots.
Discover more in the report ‘How to anticipate a Green Swan event: preparing Chinese financial markets for climate transition risk’
In our report, we recommend that Chinese financial institutions adopt the following five-step approach to kick-start or accelerate their understanding and management of climate transition risks:
- Assess portfolio risk.
- Measure the magnitude of the risk.
- Reduce the risk by increasing investments in green activities.
- Encourage and support portfolio companies to undergo sustainable transformation towards green development.
- Evaluate the effectiveness of actions taken and disclose the results in alignment with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations.
IMPACT
Building confidence and fostering consistency in assessing climate transition risks
Enhanced awareness of climate transition risks will have a ripple effect beyond any single institution and will help to support China’s recent public commitment to become carbon neutral by 2060.
By increasing knowledge and building the capacity to take action, our report can enable financial institutions to identify appropriate methodologies to assess climate risks, create effective plans to mitigate these risks and allocate capital to projects that are most aligned with the Paris Agreement. This will help create a more resilient international financial system that delivers sustainable outcomes for all. As such, it can help to:
Strengthen the Chinese financial sector’s understanding of climate transition risks, build their confidence in assessing these risks and empower them to take action.
Integrate climate transition risks into financial institutions’ broader risk management processes to inform financing and investment decisions. The Central Banks and Supervisors Network for Greening the Financial System (NGFS) handbook features our overview of climate transition risks, methodologies and tools.
Standardise how climate transition risks are assessed and accounted for across China in line with international standards.
The Carbon Trust delivered valuable work that has played an important role in aligning some of the world’s largest companies with international best practice on climate finance standards and were a pleasure to deal with throughout the project.
