China’s green finance market seen quadrupling to US$10.4 trillion by 2031, but lack of ESG data holding back funds, products, UBS says

China’s sustainable finance market could more than quadruple to 70 trillion yuan (US$10.4 trillion) by 2031, according to Swiss investment bank UBS.

But the lack of useful and comparable environmental, social and governance (ESG) data is a major hurdle for the development of ESG funds or products in China, said Ronald Wu, UBS’ head of ESG and sustainability research in Asia-Pacific.

The size of the green finance market in the world’s largest emitter nation has already reached 16 trillion yuan, accounting for about 8 per cent of the country’s entire financial system, supported by President Xi Jinping’s pledge in 2020 for China to peak national emissions by 2030 and achieve carbon neutrality by 2060.

Close to 15 trillion yuan of China’s sustainable finance market consists of green loans, mainly from commercial banks, according to UBS. But assets under management of ESG funds has only reached around 500 to 600 billion yuan, representing a small portion of the market.

“If there are better information disclosures [by firms], it would make it easier for investors to include some Chinese companies in some of their indexes and products, which will play an important role in promoting the development of ESG investment,” he said at the UBS Greater China Conference 2023 on Thursday.

ESG disclosure requirements from both regulators or standard-setters will have a positive effect on promoting the development and growth of ESG funds and investments, he added.

Since the first green bond was issued in 2016, the cumulative volume of green bonds in China had reached 1.73 trillion yuan by the end of 2021, with an average annual growth rate of nearly 25 per cent over five years, according to data published by the China Central Depository and Clearing and the International Capital Market Association on Tuesday.

“China’s ‘dual carbon’ goal has been around for a few years, and China has a relatively long history of supporting its environmental work and goals,” Wu said. “We estimate that green financing will grow relatively fast in China in future.”

Wu also highlighted the importance of the upcoming climate-related disclosures by the International Sustainability Standards Board (ISSB), a new body set up by the International Financial Reporting Standards (IFRS) Foundation in late 2021 to consolidate various ESG reporting standards.

The IFRS Foundation signed a memorandum of understanding with China’s ministry of finance late last year to open an ISSB office in Beijing in mid-2023.

“We hope that it will serve as the beginning of a new journey that will witness closer cooperation between the two sides towards development and promotion of ISSB’s high-quality international sustainability disclosure standards,” Zhu Zhongming, China’s vice-minister of finance, said in a statement on December 29.

The Beijing office is expected to play a vital role in the development of the new sustainability disclosure standards.

“China is the world’s second largest economy and plays a vital role in supply chains for companies around the world – making it an important jurisdiction as the ISSB develops its global baseline of sustainability disclosures for the capital markets,” ISSB chair Emmanuel Faber said in a statement.