Like their counterparts in developed countries, China’s main financial regulators are more and more taking an interest in climate change faced by China’s financial institutions, whose total assets stood at 353.19trn yuan ($54.26trn) as of December 2020, more than three times its GDP. For example, policy framework as well as incentive mechanisms for green finance is highlighted as one of the 2021 priorities by the People’s Bank of China (PBOC), China’s central bank.

Why?

The interest stems from a concern that climate change poses a threat to financial stability. Generally speaking, climate-related risks faced by financial institutions mainly include physical risk and transition risk. While a physical risk, both acute and chronic, results from extreme events because of climate change, a transition one is the climate risk resulting from mitigation challenges as societies decarbonize.

What to do?

In order to measure the impact of climate change on financial institutions, there should exist a reporting and disclosure standard. Regulators in developed countries such as Switzerland, New Zealand, and the UK plan to make such climate-related disclosure mandatory. China is also following suit. For example, by the end of June 2021, 13 banks headquartered in the Great Bay Area (GBA) in Southern China are required to publicly disclose their annual report of climate change. Moreover, more Chinese financial institutions have voluntarily disclosed the stress test of climate change-related risks, including the Industrial and Commercial Bank of China (ICBC), the world’s largest lender by assets.

Challenges!!!

First, there are no uniform standards for measurements and reporting of climate change-related risks worldwide. As a result, financial institutions might cheery-pick the most flattering numbers and methodologies. Second, existing reporting mainly focuses on current risk. However, the financial threats from climate change mostly reside in the future. Last but not the least, the awareness of climate change by Chinese financial institutions is still at the beginning stage, which partly hinders the development of green finance in China.