The report also presents an in-depth review of current methodologies used by financial institutions and their partners to better understand climate risk in their portfolios and create more effective plans to mitigate against it.
The report was authored by the Carbon Trust, with support from UK Partnering for Accelerated Climate Transition (UK PACT) - China Green Finance Programme. UK PACT is part of the UK Government’s International Climate Finance, which supports countries to respond and adapt to the challenges of climate change, and prevent its worst effects. UK PACT funding aims to support the development of knowledge in the private finance sector to accelerate the transition to a net zero economy, a key goal of the upcoming UN climate change conference, COP26.
By internalising climate transition risks, financial institutions can future-proof their investments and shift them away from high risk assets to those less likely to be disrupted or stranded by climate change. This will encourage more focus on investments with low climate risk, which will inherently be ones that either directly or indirectly support the transition away from fossil fuels.
This report is the output of a wider capacity building project on climate transition risk methodology, commissioned by the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and Tsinghua University Research Center for Green Finance Development. Financial institutions in China will be able to use the report to build capacity internally, enabling them to identify appropriate methodologies to assess climate risks and allocate capital to projects that have greatest alignment with the Paris Agreement.
The report focuses on China’s banks, which dominate the country’s financial market, providing three-fifths of total credit to the private sector. Following a recent change in law, Chinese banks are likely to see increased levels of international investment accompanied by heightened climate-risk assessment and disclosure requirements.
Chinese banks are also looking for new sources of revenue with interest income diminishing as a result of an ageing population, and increased leveraging in the residential sector combined with shrinking household savings. Many banks are looking to respond by providing innovative new products to clients, and the development of green products offers an opportunity for banks to diversify their offerings.
Lijian Zhao, China Country Manager, the Carbon Trust commented:
“Enhanced awareness of climate transition risks will have a ripple effect beyond a single institution, or market and will help to support China’s recent public commitment to become carbon neutral by 2060. This new report aims to help build a deeper understanding of the risks that climate change presents and support the selection of the right tools to manage this risk. We hope by increasing knowledge and building the capacity to take action, we can help create a more resilient international financial system that delivers sustainable outcomes for all.”
How to anticipate a Green Swan event (full report)
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Notes to editors
For further information please contact the Carbon Trust press office on +44 (0) 20 7170 7050 or press@carbontrust.com.
About the Carbon Trust
Established in 2001, the Carbon Trust works with businesses, governments and institutions around the world, helping them contribute to, and benefit from, a more sustainable future through carbon reduction, resource efficiency strategies, and commercialising low carbon businesses, systems and technologies.
The Carbon Trust:
- works with corporates and governments, helping them to align their strategies with climate science and meet the goals of the Paris Agreement
- provides expert advice and assurance, giving investors and financial institutions the confidence that green finance will have genuinely green outcomes
- supports the development of low carbon technologies and solutions, building the foundations for the energy system of the future.
Headquartered in London, the Carbon Trust has a global team of 200 staff, representing over 30 nationalities based across five continents.
About the UK International Climate Finance
International Climate Finance is the UK Government’s commitment to support developing countries to respond to climate change. At the UN Climate Action Summit in New York in September 2019 the UK announced a doubling of its International Climate Finance from £5.8bn over the period 2016-2020 to £11.6bn over the period 2021-2025. This places the UK amongst the world’s leading providers of climate finance. Programmes are focused on:
- Building the resilience of the poorest people and communities
- Building sustainable cities and transport systems
- Unlocking clean and affordable energy for all
- Halting deforestation and preventing irreversible biodiversity loss
- Since 2011, UK ICF investments have helped over 66 million people to cope with the effects of climate change; reduced or avoided 31 million tonnes of greenhouse gas emissions and mobilised £4.1 billion of public and £2.2 billion of private finance for climate change purposes in developing countries.
