PROMOTING CHINA-EUROPEAN UNION COOPERATION ON GREEN AND SUSTAINABLE FINANCE
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SIPRI Policy Brief
February 2021
PROMOTING CHINA– SUMMARY
w Energy transition is an
EUROPEAN UNION essential element of the global
effort to meet the objectives set
COOPERATION ON GREEN out in the 2016 Paris Agreement
on climate change.
AND SUSTAINABLE FINANCE China and the European
Union (EU) have agreed to work
together to help deliver the
ian anthony, jingdong yuan and sun xia financing needed to achieve
energy transition, but more is
Energy transition is an essential globally—but the global energy
needed.
element of the global effort to meet system will have to be transformed To promote China–EU
the objectives set out in the 2016 alongside domestic and regional cooperation, this SIPRI Policy
Paris Agreement on climate change. efforts. Brief recommends: (a) explor
According to the International This SIPRI Policy Brief outlines ing a dedicated China–EU green
Energy Agency (IEA) and the how China and the EU can meet finance initiative; (b) present
International Renewable Energy their responsibility to scale-up, ing a joint China–EU proposal
Agency (IRENA), limiting the global mobilize and direct the finance on clear definitions and
mean temperature rise to below needed to transition to low-carbon standards of sustainable green
2°C is only possible with ‘an energy solutions. It focuses on the financing to the International
transition of exceptional scope, incentives and disincentives that Partnership on Sustainable
Finance; (c) generating a joint
depth and speed’.1 regulators in China and in the EU
curriculum to train staff in
A global energy transition of are creating in their respective
multilateral development
this scale requires more finance, jurisdictions and the measures that
banks, private investment
and that finance must be better might be available to close differ banks, insurance companies
targeted and must draw on public ences in approach in order to boost and green banks; (d) pursuing
and private sources. The shortfall investment to the necessary levels. joint finance for projects that
in investment in future energy In 2020 China made a commit find private capital difficult to
projects is estimated at $20 trillion ment to reach climate neutrality attract; and (e) deploying
(€16.5 trillion) between 2020 and by 2060, but at the 2021 World independent evaluation teams
2050. Furthermore, not all of the Economic Forum, Chinese to scrutinize how rating
$75 trillion (€62 trillion) already President Xi Jinping noted that systems are applied in energy
allocated is adapted to achieve this will require tremendous hard transition projects.
energy transition. 2 Most spending work. 3 The European Union (EU)
will be in China, the United States plans to become carbon neutral by
and countries in Europe—which 2050. The European Green Deal,
are among the top carbon emitters the set of policy initiatives at the
heart of achieving this goal, includes
transition to a clean, affordable
1 Organisation for Economic Co-operation
and secure energy system as a key
and Development (OECD), International
Energy Agency (IEA) and International element.4
Renewable Energy Agency (IRENA),
Perspectives for the Energy Transition: 3 Xi Jinping, President of the People’s
Investment Needs for a Low-Carbon Energy Republic of China, ‘Let the torch of
System (OECD/IEA and IRENA: Paris, 2017). multilateralism light up humanity’s way
2 The cost estimates are taken from forward’, Special Address at the World
Press, E. et al., Transforming the Energy System: Economic Forum, 25 Jan. 2021.
And Holding the Line on the Rise of Global 4 European Commission, ‘The European
Temperatures (IRENA: Abu Dhabi, 2019). Green Deal’, Communication from the2 sipri policy brief
The global Covid-19 pandemic the EU agreed to work together to
seems to have accelerated energy help deliver the financing needed to
transition planning. For example, achieve energy transition. 8
the EU has ring-fenced 30 per cent The regulatory framework for
of its €1.8 trillion post-Covid-19 eco sustainable finance was included in
nomic recovery funds for projects the European Commission proposal
that meet criteria established for for transatlantic cooperation
sustainable investment, including following the victory of Joe Biden in
€225 billion focused on energy the 2020 US presidential election.9
transition. 5 Public funds are needed Biden’s newly appointed special
to support important initiatives envoy for climate, John Kerry, has
that find it hard to attract private emphasized that one priority is to
capital such as energy efficiency ‘unlock new sources of sustainable
projects and the development of finance to green capital markets’.10
sources of renewable energy based To achieve this, the new US
on technologies that are not yet administration intends to promote
mature. Meanwhile, the volume close collaboration between the
of private investment into renew public and private sectors and
able energy projects, which far with other countries. Kerry has
outweighs public sector spending emphasized that cooperation with
every year, accelerated in 2020. 6 The China on climate-related policies
growth in net inflows into sustain should be seen as a ‘standalone’
able investment suggests that the issue protected from the friction
financial sector expects companies that exists in the wider China–USA
that demonstrate the sustainability relationship.11 It now seems possible
of their activities to outperform the that proposals for action submitted
market.7 However, the requirements for the 26th United Nations Climate
of energy transition are enormous, Change Conference (scheduled for
and anticipated investment is not November 2021) may be based on
sufficient. China–EU–USA dialogue.
When the People’s Bank of
China (PBOC) and the European VARYING APPROACHES TO
Commission were among the FINANCING PRINCIPLES
co-founders of the International
Compatible China–EU approaches
Platform on Sustainable Finance
to domestic and external financing
(IPSF) in October 2019, China and
could add momentum to the global
Commission to the European Parliament, the 8 International Platform on Sustainable
European Council, the Council, the European Finance (IPSF), Annual report, 16 Oct. 2020.
Economic and Social Committee and the 9 European Commission and High
Committee of the Regions, COM(2019) 640 Representative of the Union for Foreign Affairs
final, 11 Dec. 2019. and Security Policy, ‘A new EU–US agenda for
5 European Commission, ‘EU’s next long- global change’, Joint Communication to the
term budget & NextGenerationEU: Key facts European Parliament, the European Council
and figures’, Fact sheet, 11 Nov. 2020. and the Council, JOIN(2020) 22 final, 2 Dec.
6 Morningstar, ‘ESG fund assets recover 2020.
strongly, hitting USD 1 trillion mark in Q2 10 John Kerry, Special Presidential Envoy
2020’, July 2020; and Climate Policy Initiative for Climate, ‘Remarks at the Keynote Session of
(CPI) and IRENA, Global Landscape of B20 2021 Inception Meeting’, 21 Jan. 2021.
Renewable Energy Finance 2020 (IRENA: Abu 11 White House, Press Briefing by Press
Dhabi, 2020). Secretary Jen Psaki, Special Presidential Envoy
7 Tett, G., ‘Ethical investing has reached a for Climate John Kerry and National Climate
tipping point’, Financial Times, 18 June 2019. Advisor Gina McCarthy, 27 Jan. 2021.promoting china–eu cooper ation on green finance 3
transition to low-carbon energy In addition, the PBOC has
systems. However, China and the indicated that it will review banks’
EU differ over how to describe the performance in the green finance
energy transition, which principles sector (as a share of their total
should guide investment and how to business mix) on a quarterly basis.17
measure progress. The development of green finance
in China has also been reflected
China’s approach in external partnerships. In 2017
the PBOC was a co-founder of the
China promotes green investment
Network for Greening the Financial
principles that focus on reducing
System (NGFS).18 By the end of April
emissions but within what
2019, the number of
President Xi has called an open
NGFS members had
world economy that discards Proposals for action at the 26th UN
increased from 8 to
‘discriminatory and exclusionary
over 80, including Climate Change Conference may be
standards, rules and systems’.12
the central banks based on China–EU–USA dialogue
China has been working to estab
and regulators of
lish a green financial system for
many countries participating in the
roughly a decade. In 2012 the China
Belt and Road Initiative (BRI).19
Banking Regulatory Commission
In April 2019 Chinese and inter
issued green credit guidelines.13 In
national partners officially launched
2015 the PBOC issued a report by
the BRI International Green
its Green Finance Task Force that
Development Coalition (BRIGC) at
emphasized the urgent need for
the second Belt and Road Forum for
China to transition to a green and
International Cooperation. 20
sustainable development model and
In 2017 the Belt and Road
recommended the establishment of
Ecological and Environmental
a green finance system with special
Cooperation Plan and the associated
ized investment institutions, fiscal
Guidance on Promoting a Green
and financial policy support, and
Belt and Road were promoted at
financial and legal infrastructures.14
the first Belt and Road Forum and
In August 2016 the PBOC and six
adopted by 27 countries. 21 China’s
other government agencies jointly
success in bringing its population
issued guidelines for establishing
out of poverty has made it sensitive
the green financial system.15 In May
2020 the PBOC further proposed
that clean coal would no longer be green bond financing’, S&P Global Market
Intelligence, 9 Sep. 2020.
eligible for green bond financing.16 17 Bloomberg News, ‘China plans quarterly
look into banks’ green finance performance’,
12 Xi (note 3). 21 July 2020.
13 China Banking Regulatory Commission, 18 Banque de France, ‘Joint statement by
‘Notice of the CBRC on issuing the Green the founding members of the Central Banks
Credit Guidelines’, 24 Feb. 2012. and Supervisors Network for Greening the
14 Establishing China’s Green Financial Financial System: One Planet Summit’, Press
System: Report of The Green Finance Task release, Paris, 12 Dec. 2017.
Force (People’s Bank of China (PBOC)/United 19 PBOC, ‘Building a green belt and road
Nations Environment Programme (UNEP): with green finance’, 26 Apr. 2019.
Beijing and Geneva, 2015). 20 BRI International Green Development
15 PBOC, ‘The People’s Bank of China and Coalition, ‘Green development guidance for
six other agencies jointly issue “guidelines for BRI projects baseline study report’, 2020 Policy
establishing the green financial system”’, 1 Sep. Study Series, Dec. 2020.
2016. 21 Chinese Ministry of Finance, ‘Guiding
16 Yamaguchi, Y. and Ahmad, R., ‘Investors principles on financing the development of the
applaud China’s plan to ban clean coal from Belt and Road’, 16 May 2017.4 sipri policy brief
to poverty reduction, employment code of conduct for business or in
stability and rapid industrialization legislation. 23
in partner countries. These The EU is regrouping, rescaling
priorities are reflected in the and combining financial instru
guidance documents. However, ments in its new financial frame
while the guidance emphasizes work for 2021–27, to better tailor
respecting the existing international them to the UN 2030 Agenda
obligations of partners when for Sustainable Development.
making investment decisions, it The changes have been made
does not promote new ones. in a framework that treats the
internal and external dimensions
The European Union’s approach of the European Green Deal in an
integrated way. A quarter of the
The EU has promoted sustainable finance for distribution by the
investment principles as a condition European Commission under the
for trade, investment and tech newly unified Neighbourhood,
nology exchanges. Senior officials Development and International
have stressed that ‘human rights Cooperation Instrument is thus
and fundamental freedoms are earmarked for action supporting
non-negotiable’ and that promotion climate objectives. 24
of the principles that the EU sees In summary, if the different
as standards is an approaches to finance promoted
The EU will continue to design new tools essential element of by China and the EU spread
to benchmark projects against criteria policy. 22 By making through their respective regional
financing conditional arrangements and partnership
based on democratic governance and
on respect for stand frameworks, it may make
respect for human rights ards on governance international coherence harder.
and human rights
that are determined in Europe, the DEVELOPING FINANCIAL
EU is sometimes accused of using INSTRUMENTS TO PROMOTE
financial instruments to reduce the INVESTMENT
political control of sovereign states
over their own development path. The scale of demand for energy
The EU will continue to design transition has encouraged financial
new tools to benchmark projects markets to develop products and
against criteria based on democratic services to channel investment.
governance and respect for human Investment banks and financial
rights. It is also currently exploring services have increased their
how to take account of human rights knowledge about energy systems,
in business decisions by introducing how they work and how they
the 2018 Organisation for Economic are transforming. Multilateral
Co-operation and Development development banks, which have
(OECD) Due Diligence Guidance for long experience with sustainable
Responsible Business Conduct into 23 Krajewski, M. et al., Human Rights Due
EU practice—either as a voluntary Diligence Legislation: Options for the EU, Policy
paper (European Parliament: Brussels, June
22 Von der Leyen, U., President of the 2020).
European Commission, Statement by President 24 Montesi, C., ‘The external dimension
von der Leyen at the joint press conference with of the Green Deal’, European Commission,
President Michel, following the EU–China International Cooperation and Development,
Summit videoconference, 22 June 2020. 8 Apr. 2020.promoting china–eu cooper ation on green finance 5
development projects, are also large, international private financial
increasing their understanding. institutions and focus on projects
Insurance companies have learned implemented by major corporations.
more about how to price risk for Energy transition also requires a
energy transition projects. mix of incentives and disincentives
to move the large number of small-
Green financing and medium-sized companies that
make up global supply chains in the
In the global financial sector,
right direction.
innovation is responding to the
expanding demand for sustainable Information and standardization
projects. Green and sustainable
financing must make a wide range The OECD has documented
of projects ‘bankable’ and this difficulties that investors face
does not apply only to large-scale in understanding how potential
projects. Examples of innovations investments facilitate transition
include public green banks and to more sustainable activities. 29
green bonds. Green banks specialize In the future, investors will need
in supporting projects in ways additional, as well as more detailed,
that respond to local context information as they decide which
and for which generating profit companies and projects to include in
is a by-product of facilitating their investment portfolios.
sustainable development rather Without standard methods
than a main objective. 25 Green to assess environmental, social
bonds—another innovation where and governance dimensions of
beneficiaries promise to use activities along with appropriate
funds to support projects that benchmarks and measurements,
meet sustainability criteria—have projects might claim achievements
experienced rapid growth. A record that are not justified. A fragmented
high of $257 billion (€212 billion) approach might open the way for
worth of green bonds was issued projects that are not making a
in 2019—a 51 per cent increase over genuine contribution to energy
2018. 26 Overall, roughly €1 trillion transition. Disagreement over how
flowed into sustainable investment to classify the financing of coal-fired
funds in the first half of 2020, equal power stations is an example of
to the total amount for 2019. 27 the practical impact of lack of
Nevertheless, difficulties and standardization. 30
risk factors need to be addressed The global financial sector is now
to facilitate investment into energy asking how to generate detailed
transition. Green bonds represent a information, understand it and
small, if growing, share of the bond use it in investment decisions. An
market. 28 They are mostly used by active discussion has emerged about
25 Coalition for Green Capital, ‘The case
of green banks’, Presentation to Accelerating Secretariat of the Council, European Council
Finance for NDC Implementation through meeting (10 and 11 Dec. 2020), Conclusions,
National Financing Vehicles Workshop, EUCO 22/20, 11 Dec. 2020.
Kampala, 25 Feb. 2020. 29 OECD, Investment Governance and
26 Climate Bonds Initiative, ‘2019 Green the Integration of Environmental, Social and
Bond Market Summary’, 5 Feb. 2020. Governance Factors (OECD: Paris, 2017).
27 Morningstar (note 6). 30 Tan, H., ‘China is massively betting on
28 European Council, Issuance of an EU coal outside its borders: Even as investment
green bond is expected in 2021. General falls globally’, CNBC, 6 Apr. 2018.6 sipri policy brief
classifying green and sustainable finance for sustainable growth. 35
activities, measurable indicators The measures include an EU
of implementation, and reporting Sustainable Finance Taxonomy that
frameworks that integrate these will classify projects according to
indicators into financial reporting. the degree to which they support
China and the EU currently sustainability goals. A project
approach these issues differently. has to meet one of six objectives
to qualify as sustainable, the first
Assessment and implementation of which (making a substantial
contribution to climate change
Chinese banks have developed
mitigation) focuses heavily on
measures to implement the 2016
energy transition. 36
guidelines for establishing the
The EU is planning procedures
green financial system. 31 These
for disclosure and reporting to help
guidelines influenced the Green
private investors fully understand
Investment Principles for the Belt
whether a project is achieving
and Road Development published in
sustainability goals. EU measures
December 2018. 32
for disclosure and reporting
Chinese banks and funds
have been influenced by the 2017
that together provide roughly
recommendations of the Task
60 per cent of the financing of BRI
Force on Climate-related Financial
projects have begun to develop
Disclosures established by the
methods to classify projects
Financial Stability Board of the
according to their environmental
Group of Twenty (G20). The EU is
impact. The China Development
now assessing how to update a 2014
Bank has a four-tier classification
directive on non-financial report
for projects to guide investment
ing to guide companies with over
decisions: environmentally friendly;
500 employees on how to disclose
environmentally compliant; requir
measures addressing social and
ing rectification; and high risk. 33
environmental challenges in their
The Export–Import Bank of China
operations using standard criteria.
uses a method described as the ‘four
In consultation with the private
Nos’ based on an analysis of the
sector, it is developing qualitative
overall performance of the customer
indicators for factors such as
requesting finance as well as a
employee welfare, respect for
project assessment. 34
human rights and anti-corruption
The EU has been developing a set
of measures since March 2018 that
are intended to promote private
35 European Commission, ‘Action
plan: Financing sustainable growth’
Communication from the Commission to the
European Parliament, the European Council,
31 PBOC (note 15). the Council, the European Central Bank, the
32 ‘A first gathering for implementation of European Economic and Social Committee and
the Green Investment Principles for the Belt the Committee of the Regions, COM(2018) 97
and Road’, Paulson Institute, Commentary, final, 8 Mar. 2018.
26 Sep. 2019. 36 Council Regulation 2020/852 of the
33 Climate Bonds Initiative, Climate Bonds European Parliament and of the Council
Taxonomy, ‘China Development Bank’, Jan. of 18 June 2020 on the establishment of a
2021. framework to facilitate sustainable investment,
34 Export–Import Bank of China, White and amending Regulation (EU) 2019/2088,
Paper on Green Finance (Export–Import Bank Official Journal of the European Union, L198/13,
of China: Beijing, 2016). 22 June 2020.promoting china–eu cooper ation on green finance 7
that industry can understand and bring Chinese goods to markets in
apply. 37 Asia, Africa and Europe faster and
The European Banking Authority more cheaply.40 Recent agreements
(EBA) is developing guidance to between China and its partners in
help investors understand the the Belt and Road Forum emphasize
risks that projects might pose implementing international and
to sustainability goals as well as global agreements.41 While the EU
identifying ways and means for has promoted support to multi
investment managers to monitor lateral agreements as a key policy
risk reduction and mitigation driver for many years, recently it has
measures. Assessments are intended paid closer attention to projects that
to be comprehensive, covering can strengthen its resilience and
the physical, legal, financial and promote its own energy security.
technological risks associated with China–EU dialogue needs to
an activity and making a project manage the uncertainties, both
manager responsible for analysing internally and in their relations
risk along supply chains and within with each other, that inevitably
value chains. The EBA published surround energy
its first report in December 2019, transition, which China–EU dialogue needs to manage the
but this is expected to be a con is a huge, complex uncertainties that inevitably surround
tinuous process in cooperation task of permanent energy transition
with industry to refine and further duration. If a fully
develop assessment tools. 38 harmonized set of instruments is
currently out of reach, it would be
PROMOTING CHINA–EU beneficial for China and the EU to
COOPERATION have a full understanding of the
current methods used by the other.
Chinese and EU thinking on energy
Although they both participate in
transition and meeting climate
relevant forums such as the G20 and
challenges seems to be converging
the IPSF, a more focused bilateral
as the lines between developmental,
discussion would be valuable.
commercial and strategic object
If finance is generated within the
ives are becoming blurred. For
Chinese or European regulatory
China, the main drivers of Chinese
frameworks, lack of harmonization
overseas investments in the past
may not be a barrier if investors
were a strategic need for critical
understand the rules they must
natural resources and access to the
follow to qualify for financing and
transport routes bringing them to
report how they use it. However,
China. 39 The BRI was designed to
a patchwork of global standards,
promote energy security and to
rules and definitions could hamper
the joint financing of large-scale
37 A proposal for a revised Directive is
projects and perhaps also deter
expected in 2021. European Commission,
‘Summary report of the public consultation
some investors from taking on
on the review of the non-financial reporting
directive 20 February 2020–11 June 2020’,
Ares(2020)3997889, 27 July 2020. 40 Ratner, E. and Greenberg, M. R.,
38 EBA Action Plan on Sustainable Finance ‘Geostrategic and military drivers and
(European Banking Authority: Paris, 2019). implications of the Belt and Road Initiative’,
39 Economy, E. C. and Levi, M., By All Means Council on Foreign Relations, 25 Jan. 2018.
Necessary: How China’s Resource Quest Is 41 Ministry of Ecology and Environment,
Changing the World (Oxford University Press: the People’s Republic of China, ‘Guidance on
New York, 2014). Promoting Green Belt and Road’, 8 May 2017.SIPRI is an independent projects where risks and rewards approach could add momentum to
international institute have not been fully revealed. the discussion of global standards.
dedicated to research into As more governments make
conflict, armaments, arms or adjust national commitments 3. Work together to build capacity and
control and disarmament. skills
on carbon neutrality and carbon
Established in 1966, SIPRI
emissions, collaboration to establish
provides data, analysis and China and the EU could work
common standards must keep pace
recommendations, based on together to generate a critical
open sources, to policymakers,
to ensure that claimed achievements
mass of staff that understand the
researchers, media and the are substantiated.
needs of energy transition and
interested public. A focused China–EU dialogue
have the skills to assess projects
could play an important role in at
according to agreed criteria. A
GOVERNING BOARD least the following ways.
curriculum to train staff joining
Ambassador Jan Eliasson, 1. Explore a China–European Union multilateral development banks,
Chair (Sweden) private investment banks, insurance
green finance initiative
Dr Vladimir Baranovsky companies and green banks could be
(Russia)
As part of the bilateral investment a joint product.
Espen Barth Eide (Norway)
agreement reached in principle in
Jean-Marie Guéhenno (France) 4. Finance initiatives that find it hard
December 2020, China and the EU
Dr Radha Kumar (India) to attract private capital
Ambassador Ramtane
will address mutual investment
Lamamra (Algeria) in low-carbon energy solutions.
The private sector does not yet
Dr Patricia Lewis (Ireland/ To ensure that finance needed
regard some energy efficiency
United Kingdom) elsewhere is not diverted to internal
projects and renewable energy
Dr Jessica Tuchman Mathews projects and that carbon emissions
technologies as sufficiently mature
(United States) are not transferred to other regions,
to fund. Working together, China
China and the EU should open a
DIRECTOR and the EU could channel public
dedicated bilateral initiative focused
finance to such projects and
Dan Smith (United Kingdom) on joint finance for projects in
technologies.
third locations. A working group
could report progress to the annual 5. Facilitate independent scrutiny of
China–EU summit. rating systems
2. Contribute to clear definitions and Joint evaluation teams of Chinese
standards of green financing and European non-governmental
experts could evaluate rating
China and the EU have a common
systems for green and sustainable
view on sustainable development,
financing. This could build
climate change, energy saving and
confidence that policies such as
emissions reduction. But their
investments in different sources
principles, definitions and standards
of energy are part of a tailored
to assess green and sustainable
approach to meet climate objectives.
finance differ. China and the EU
Building confidence would
co-chair the IPSF working group
simultaneously reduce suspicions
on taxonomies, and a joint proposal
that finance is used as an instrument
on how to generate a coordinated
to promote narrower interests.
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