2010 to 2019 was the hottest decade in history, with 2019 ranking as the second hottest year on record. Sea level rise has also been reported as the highest in the historical observation data. Sea ice in the Arctic and Antarctic has been decreasing for years. The need for climate action is more urgent than ever.
Chinese financial institutions have a vital role to play in decarbonizing the global economy and must act fast to avoid the economic and environmental risks of climate change, and to support China’s new 2060 carbon neutral target. CDP’s questionnaire –which is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) – asks financial institutions to disclose information on their governance of climate-related issues, on their climate-related risks and opportunities in their financial portfolios, as well as their financed emissions and exposure to carbon-related assets/sectors.This helps financial institutions understand what investors require.
The power of the
finance sector – and a gap in robust disclosure
Through research supported by UKPACT (Partnering for Accelerated Climate Transitions), we found that, despite the fact that Chinese financial institutions are still in the early stages of TCFD alignment, there are significant early gains.
Launched in 2018, the goal of the China-UK PACT program is to advance the UK-China green finance agenda through disclosure and demand-led capacity building. The program reviewed levels of environmental disclosure from Chinese financial institutions and their alignment with the TCFD framework.
The project worked in a targeted manner with 4 Chinese FIs, members of the UK-China Green Finance Pilot. Two of these FIs and five non-pilot FIs responded to CDP’s questionnaire in 2019 – a total of 7 FIs (10.8% of the sample). Responding to CDP’s questionnaire showcases the FIs level of alignment with TCFD (see mapping below) and thus provides an excellent baseline for future alignment and leadership in the FI space.
Figure 1. CDP questionnaire corresponds with TCFD Framework
In our analysis of all finance companies disclosing through CDP on climate change in 2019, we found that among the total of 356 worldwide, seven of 65 invited financial institutions were from China. This compares with 67 of 143 and 26 of 62 financial institutions in Europe and UK respectively.
According to the 2019 CDP data, Chinese financial institutions lagged behind in 2019 compared with European and British financial institutions. Only one Chinese financial institution achieved a B score, which was the highest score among all the Chinese financial respondents. In contrast, the majority of the other Chinese financial institutions received a D.
However, the B score was an exceptional achievement for a first-time discloser, demonstrating that the level of readiness to align with TCFD was already high. This achievement points to leadership potential – i.e. for Chinese financial institutions (FIs) to become trailblazers in the sector and start leading the way.
Where is the gap on TCFD alignment for
Chinese financial institutions?
Looking at companies’ performance by module in the CDP climate change questionnaire, we could see a clear gap between Chinese financial institutions and their global counterparts in terms of TCFD alignment, based on 2019 CDP data. Chinese financial institution disclosers overall lack quantitative information and practices in the ‘Governance’, ‘Target’ and ‘Metrics’ sections of the questionnaire that relate to the TCFD framework, particularly on target-setting, scope 3 data and emission breakdown (where respondents are asked to break down their emission data by production activities, business divisions and business facilities).
Measuring quantitative information is especially difficult for global financial institutions, due to the difficulty of finding a universal method to measure the impact from investments. Despite this, 83% of global financial institutions disclose their scope 3 impact, much higher than the proportion for Chinese financial institution disclosers alone.That said, there are some areas where the Chinese financial institutions are outperforming, or at least compare favourably with, their global counterparts. For example, R1 identifying, assessing and managing climate-related risks, and S1, climate related strategy and low-carbon transition plans.
Figure 2. Chinese financial disclosers performed well in climate related “Governance”, but faced challenges in disclosing scope 3 data compared with global financial disclosers
CDP respondents disclosed more environmental management information
A deeper look at the four pilot Chinese financial institutions’ disclosure performance in alignment with TCFD recommendations reveals a much more obvious gap between companies disclosing through CDP and those who did not respond to the CDP questionnaire.
Based on the analysis, the two institutions that did not respond to the CDP questionnaire merely disclosed scope 1 and scope 2 emissions in their sustainability reports, leaving their scope 3 emissions data and targets blank. In contrast, CDP respondents disclosed more details about their environmental management.In particular, as a result of disclosing via CDP’s questionnaires, one respondent not only provided quantitative targets for its absolute and intensity emissions, but also quantified its impact of scope 3 in investment. This institution gained a B, which was abovethe global average score in the financial services sector.
Figure 3. Status of the
4 pilot financial institutions in China aligned with TCFD Framework
Compared to global peers, Chinese financial institutions are still in the early stages of TCFD alignment. Too few are disclosing through CDP, which can accelerate TCFD alignment, and providing assessment of Scope 3 and setting acceptable environmental targets are challenges for those that do.Helping financial institutions to apply effective reporting methods as well as encouraging stakeholders to lead continuous corporate engagement will be the next steps to improve the transparency of China market.
Given their critical role in tackling our environmental challenges, organizations in the sector across China must now ramp up their efforts to meet market demand and investors’ needs for comprehensive, reliable disclosure.