China raises the bar on investor regulations to promote green finance

China’s banking and insurance regulator has sent its strongest signal yet that banks and insurers will have to support the green economy. With a focus on real world outcomes and a strong emphasis on stewardship, it establishes a new level of commitment for Chinese financial institutions, strengthening their role and responsibility in transitioning the economy towards carbon neutrality.

The China Banking and Insurance Regulatory Commission (CBIRC) has introduced a set of new guidelines which require banking and insurance entities to establish strategies, processes and capacity to support the transition to a sustainable future. Among other things, this includes explicit requirements that these entities need to “reduce the carbon intensity of their asset portfolios in a gradual and orderly manner, and eventually achieve carbon neutrality of asset portfolios”.

Under these guidelines, for the first time, China’s financial regulator is specifying green finance and ESG related requirements for banks, (re)insurance companies and insurance asset management companies. Prior to its issuance, green finance has generally been encouraged rather than required.^[1] Importantly, the new rules also establish robust implementation and assessment to ensure compliance. Although there is no direct legal enforcement, the guidelines are regarded as binding. The results of the implementation will feed into CBIRC’s rating of financial institutions, decisions on granting market access, and performance reviews of senior managers.

This is a welcome policy development, which significantly updates responsible investment expectations for Chinese investors. The next step for the Chinese market could be to align these broadly structured green finance responsibilities for banks and insurers more explicitly with the country’s carbon-neutrality goals – by requiring financial institutions to develop and disclose transition plans towards those goals.

What is covered in the new guidelines?

The new Green Finance Guidelines for the Banking and Insurance Sectors require certain banking and insurance institutions to:

• Enhance governance for green finance, through setting out policies, strategies, process, targets and internal assessment methods for green finance;
• Incorporate ESG factors into risk management and investment decisions;
• Monitor the ESG performance of investee companies and prevent adverse impacts on the environment and society;
• Deliver sustainability outcomes, including aligning portfolios with carbon neutrality goals and addressing any negative impacts of finance activity;
• Conduct investment ESG due diligence; and
• Make public disclosure on green finance strategy, policy, and status of development.

How do China’s guidelines compare with global regulatory developments?

Introducing ESG regulations for investors is an emerging regulatory priority for financial regulators around the world. These measures typically revise investor duties to require investors to incorporate ESG factors into investment decisions and stewardship, take consideration of beneficiary or clients’ sustainability preferences and report to their beneficiaries or clients.^[2] For example, the EU commission and HK Securities and Futures Commission recently have introduced similar requirements through amendments to existing investor regulations.

Compared to equivalent rules in some other markets, the CBIRC guidelines contain some notable and ambitious developments , including the following aspects:

• They are focused on real-world outcomes: The guidelines go beyond requiring financial institutions to incorporate ESG factors in investment decisions and risk management processes. They explicitly require the banking and insurance institutions to align portfolios with carbon neutrality goals and to prevent and address adverse impacts on the environment and society.
• Prioritising stewardship: The guidelines view institutional investors both as capital providers and as stewards who can support and enable the green transition of the economy and society. This includes driving decarbonisation solutions, enabling the transition of carbon intensive industries and curbing the expansion of high emission projects. Banking and insurance institutions are required to exercise investor rights and embed clauses in investment contracts to ensure adequate ESG risk management at investee companies, setting out milestones and targets for assessing and tracking investees’ ESG performance, and establishing channels of engagement for stakeholders.

Alignment with market trends and major investor initiatives

All this suggests increasing alignment between Chinese regulators, and the expectations of major investor initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ) – which calls on investors to help finance the net-zero transition for the whole economy.

However, these guidelines are only a first step. The sector now needs to follow through with implementation, and the regulators could help by more explicitly linking the new requirements (particularly those in relation to setting out green finance policy, strategies, and goals) to carbon neutrality goals and priorities. Banks and insurance companies should also be required to disclose their transition plans, actions and progress towards these goals, in order to ensure accountability and credibility.

GFANZ, for example, recently recommended that investors develop a net-zero transition plan, setting out goals, actions and accountability mechanisms to align their business activities with net zero. At all points, the emphasis is on delivering emissions reductions in the real economy. In fact, potential upcoming regulations in the UK (Transition Plan Taskforce) and the EU (Sustainability Reporting Standards) have a specific focus on requiring companies and investors to develop and disclose transition plans towards climate goals.

What will be the impact of these guidelines?

All in all, the CBIRC Guidelines mark a significant step forward on China’s road to establishing a robust regulatory framework for sustainable investment. The impact could go far beyond the banking and insurance sectors.

These guidelines do not cover China’s whole financial industry. Institutions under the remit of China’s securities regulator, the CSRC, and its pension fund regulators, the Ministry of Finance and the Ministry of Human Resources and Social Security, are outside its scope. The PRI is continuing to engage with these other regulators to follow the CBIRC’s lead, and introduce ESG regulations for public funds, private funds, and pension funds. This would ensure a harmonised approach to regulating ESG investing.

Yet in any case, the actions of banking and insurance companies will cascade down the investment chain and influence asset managers and service providers, becoming a key driver for mainstreaming responsible investing. This will help with the ongoing alignment of financial flows with carbon neutrality and sustainable development goals in China. Following the implementation of these guidelines, the insurance asset management association of China launched a stewardship initiative in September with a clear focus on delivering sustainability outcomes.

By requiring the banking and insurance sectors to manage ESG related risks of overseas projects, the guidelines could also have significant impacts beyond China’s borders.

The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.