Pursuit of carbon neutrality brings many financial opportunities, challenges

To achieve carbon neutrality, the power sector is bound to shift from thermal power to clean power. Most of China's coal-fired power plants will be phased out by 2045.

In this process, natural gas will play the role of "transitional energy", while clean energy, as alternative energy, will keep growing rapidly. Carbon neutrality in industrial sectors is expected to focus on tapping energy-saving potential and improving the efficiency of resource recycling, while the transport sector is expected to move toward electric, smart or automated vehicles powered by cleaner fuels.

The new energy vehicle industry development plan (2021-35), released in November 2020, has already taken effect. By 2025, new energy vehicle sales will account for 20 percent of total vehicle sales, and by 2035, the public vehicles will be fully electric.

All-electric cars will become mainstream. As a key means of achieving carbon neutrality, the process of innovation and application of low-carbon technologies is accelerating and is expected to lead to the formation of new industry chains and profit pools. All these provide direction for the adjustment of credit structure of financial institutions.

Financial innovation will give birth to new business forms and investment and financing models. In terms of the growth rate and scale of green credit, securitization has great potential. China's green bond issues have been the first in the world, and launched the exploration of climate bonds, blue bonds and so forth.

In the capital market, innovation and trading around key low-carbon technologies are very active, creating conditions for financial institutions to carry out equity investment in accordance with related laws and regulations.

The climate investment and financing guidance also calls for exploring the trading and innovation of carbon financial derivatives represented by carbon futures and the timely entry of investment institutions and individuals into coverage of the main trading body of the carbon market. The carbon finance market space will also be gradually opened up.

Given the special nature of climate-related financial risks and China's determination and strength to transition to a net zero carbon economy, financial institutions need to plan and arrange for an orderly transition to carbon neutrality well in advance, enhancing strategic adaptation to national climate policy and minimizing financial risks associated with climate.

Efforts are needed in understanding the potential risk to core financial risk and strengthen strategic planning and top-level design. Financial institutions should take the lead in combating climate change, set out clear climate objectives, and establish sound management systems to strengthen the supervision, assessment and evaluation of their climate work.

Capacity-building for climate change risk assessment and information disclosure-related work are also important. High-quality forecasts, detailed industry investment and financing policies and reducing the risk of climate change-related asset allocation will all be conducive steps in this regard.

Innovation capacity is needed in improving the multidimensional climate financial products. The pilot area of green finance can be taken as the window to accumulate the experience of financial innovation and window guidance.

Efforts shall also be incentivized to strengthen environmental and social risk management for overseas investment and actively participate in green Belt and Road construction.

The writer is a researcher at the Institute of World Economics and Politics, which is part of the Chinese Academy of Social Sciences in Beijing.

The views don't necessarily reflect those of China Daily.