Abstract: With the increasing global concern about climate change, it is of great practical significance to promote the mainstreaming and normalization of climate impact management in investment and finance decisions, taking climate risk and benefit management in investment and finance as the starting point. Based on the summary and comparative analysis of the pathways and tools for climate impact management in investment and finance activities adopted by international institutions, this paper will explore and put forward scientific and reasonable policy recommendations for climate risk and performancemanagement in investment and finance activities in view of the current domestic situation.

Keywords: Climate Risk, Performance, Investment and Finance, Tools

Preface

Climate change is one of the common global challenges. Funding issue has always been at the heart of global climate governance and international climate negotiations. The Paris Agreement, signed at the end of 2015, regards “makingfinanceflows consistent with apathway towardslow greenhouse gas emissions and climate-resilient development” as an important goal and instrument. In order to give full play ofthe guiding role of government funds, fully mobilize social capital to invest in climate change mitigation or adaptation, and curb high-carbon investments, it is urgent to establish a sound climate investment and finance policy system, and targeted and innovative climate investment and finance system and mechanism.

As for assessment of climate impact of assets, both positive benefit evaluation and negative risk evaluation are important parts regarding promoting climate investment and finance decisions. In order to manage the climate risk of assets more efficiently and to promote more effective allocation of assets to fields tackling climate change, scientific assessment of the climate risk and benefit of assets is needed, and appropriate mitigation or adaptation measures based on identification and evaluation of climate risks and benefits are required to manage climate risk and benefit systematically.

Compared with the mainstreaming and normalization of environmental risk and benefit management in investment and finance decisions, the importance attached to climate risk and benefit management in investment and finance activities is far from enough, besides, policies and technological tools for climate risk and benefit management with respect to investment and finance are still at the initial stage. With the increasing global concern about climate change, it is of great practical significance to promote the mainstreaming and normalization of climate impact management in investment and finance decisions, starting with the climate risk and benefit management in investment and finance. Based on the summary and comparative analysis of the pathways and tools for climate impact management in investment and finance activities adopted by international institutions, this paper will explore and put forward scientific and reasonable policy recommendations for climate impact assessment in investment and finance activities in view of the current domestic situation.

I. International Practices on Climate Risk and Benefit Management in Investment and Finance Decisions

At present, it has become a consensus in the world to integrate the management ofclimateimpact factorsinto investment and finance activities[1, 2]. Some international multilateral, bilateral financial institutions and policy banks in developed countries have carried out exploratory practices in this regard and have developed various policy and technological tools. Examples of specific policy and technological tools for climate risk and benefit management in investment and finance activities and their applications will be selected from the World Bank, the EU Department of International Cooperation and the UK Green Investment Bank.

(i) Policy tools

1. World Bank

Multilateral banks have long been the main body for implementing climate investment and finance activities, as well as the instrument and innovative leader for climate impact management in climate investment and finance activities. Institutions such as the World Bank, the Asian Development Bank (ADB) and the Global Environment Facility (GEF) have accumulated certain experience regarding policy and technological tools in managing climate risks and benefits in their investment and finance activities.

Multilateral banking institutions, represented by the World Bank, have integrated the assessment and management of climate risks and benefits into their planning, implementation of investment and finance activities and statistical monitoring. With regard to climate risk management, in August 2016, the World Bank issued a new environmental and social security policy [3], namely, Environmental and Social Framework (ESF), and announced that the policy will apply to all investment and finance projects of the World Bank from October 2018. The ESF places more emphasis on climate change and the promotion of climate resilience than the Bank’s previous security policy, including a range of climate change considerations in its specific standards, and covering mitigation and adaptation, and also requires: (1) borrowers to assess total greenhouse gas emissions in some cases; (2) project leaders to monitor resource efficiency and assess climate benefits.

In addition to managing climate risk in investment and finance projects, the World Bank has also focused on the climate benefits of investment and finance projects by establishing a systematic monitoring and reporting tracking process, namely, the Common Principles for Climate Mitigation Finance Tracking[4]and the Common Principles for Climate Adaptation Finance Tracking[5], to ensure the credibility and measurability of their targets or commitments in the areas of renewable energy, green transport and climate resilience, and to monitor climate-related investment activities.

2. European Union

With regard to risk management in investment and finance activities, the EU regards the Integrated Policy on Environment and Climate Changeas a basic policy for the planning, assessment and implementation of all investment and finance activities. The policy attaches attention to climate-related risk factors throughout the life cycle of investment and finance activities and calls for implementing the principle of climate mainstreaming through appropriate management policies and assessment mechanisms. According to the requirement of the policy, corresponding climate risk assessment and management procedures should be followed in the four key links such as planning, design, implementation and evaluation of investment and finance projects. At the same time, the policy also covers a series of guidelines for different domains to regulate investment and finance activities in specific sectors, besides, further policy arrangements are made on how to take account of climate risk factors in specific sectors [6].

At the same time, the EU has paid more and more attention to the benefits for climate change mitigation or adaptation generated by assets in its investment and finance activities. The EUcontinues to promote the development of sustainable finance. In January 2018, the EU launched the groundbreaking Sustainable Financing for EU Economiesand formulated the Action Program on Sustainable Finance(released in March 2018), and the two policy papers have become benchmarks for new EU regulatory framework. As policy instruments of EU for promoting sustainable finance, both the Sustainable Financing for EU Economiesand the Action Program on Sustainable Financehave taken promoting low-carbon transition in investment and finance or investment and finance for climate resilience as their primary goals, so as to leverage more private capital to support low-carbon transition or enhance climate adaptation capacity. In order to implement such measures, the EU has also established a mechanism for disclosure, monitoring and reporting of climate investment and finance activities to track climate impacts on a continuous basis, published regular reports on Climate Benchmarks andBenchmarks’ESG Disclosuresto track and disclose listed companies, banks and insurance companies in Europein accordance with relevant recommendations and indicators, so as to ensure that private capital plays a corresponding role in promoting climate adaptation and low-carbon development.

3.UK Green Investment Bank

The UK Green Investment Bank (GIB) is the world’s first green investment bank led bythe UK government, investing mainly in green and profitable infrastructure projects. The UK Green Investment Bank has formulated a series of systematic documents related to policy and technological tools to achieve its investment process, the most important of which is theGreen Investment Policy. The policy acts as the main institutional and planning document guiding Green Investment Bank to consider green-related risks and benefits in their investment and finance activities. With regard to green-related risks or benefits, climate change mitigation and adaptation are considered to be the most important aspect. Through this top-level policy, the Green Investment Bank aims to leverage private capital into the climate sector, including offshore wind power, onshore renewable energy, energy efficiency, waste and biomass [7].

Regarding implementing the above-mentioned measures, the green impact assessment with climate risk and benefit as the main content is an essential component of the investment and finance decisions and supervision process of the Green Investment Bank. Based on the assessment, the UK Green Investment Bank alsorequiresadoptingmitigation and adaptation measures in investment and finance projects to address possible climate risks, carry out dynamic monitoring and feedback during the implementation of projects and issue relevant reports on green impact of investment and finance.

Table 1 Policy Tools for Climate Risk and Benefit Management

(ii) Technological tools

1. World Bank

With respect to technological tools, the World Bank has developed a set of Environmental and Social Standards (ESS) under its environmental and social framework, together with corresponding technical norms and assessment methods, which have been regarded as supporting technological tools in implementing policies. As a cross-border and globalrisk factor, climate risk factors have been integrated into several sub-standards of environmental and social standards, such as Assessment and Management of Environmental and Social Risksand Impact(ESS1), Resource Efficiency and Pollution Prevention and Management (ESS3), Community Health and Safety (ESS4). In response to such standards, the World Bank has also developed and instrumentalized corresponding climate risk assessment methods. During the planning and design phase of investment and finance, the World Bank’s climate risk screening tool provides an initial screening of the level of climate risk of a project. Detailed climate risk assessments may not be required for projects with lower climate risks, but more in-depth climate risk assessments shall be required for projects with moderate risks in accordance with relevant requirements.

In terms of climate benefit assessment, the World Bank and other multilateral development banks have taken Climate Finance Tracking Methodas their principle in assessing, calculating and evaluating the benefit of investment and finance projects in climate mitigation and adaptation. The specific technical requirements for the climate investment and finance tracking tools are shown in Table 2. As for investment and finance projects with adaptation and mitigation benefits, multilateral development banks adopt different principles and procedures for evaluating their benefits.

Table 2 Standards and Principles for Climate Finance Tracking  

2. European Union

In terms of technological tools, EU has also provided a set of relatively mature climate risk standards and procedures, namely,Climate Risk Assessment (CSA)as the basis for implementing climate risk management policies. Similar to Environmental Risk Assessment, CSA is a set of technological tools including standards, assessment methods, and industry guidelines. It aims to assess the risks of investment and finance projects at various stages, and propose mitigation or adaptation measures accordingly. Although it is not necessary for all investment and finance projects to carry out climate risk assessment, possible climate risk factors at various stages of aproject have been integrated into the overall risk management process through the tool. With the effective assessment of the vulnerability risk of the project to climate change, the negative impact of the project on climate change can be reduced and funds can be directed to projects with positive climate benefits more effectively.

Meanwhile, EU is actively developing technological tools to promote investment and finance activities with positive climate benefits. In June 2019, EU published a series of standard documents, such as theEU Taxonomyand the Voluntary Low-carbon Benchmarks, focusing mainlyon climate mitigation. Such documents provide tools for EU in identifying climate impacts and assessing the benefits of investment and finance activities. Among them, the EU Taxonomyis formulated to provide policymakers, industry and investors with practical tools to clearly identify economic activities consistent with the 2030 goal, so as to help investors identify investment opportunities that contribute to a low-carbon transition.

3. UK Green Investment Bank

With respect to technological tools, UK Green Investment Bank relies mainly on the Green Investment Handbook, which acts as aguide to assess, monitor and report climate impact of investment and finance projects. In addition to the handbook, there are other technological tools for specific implementation, such as the Green Impact Report. The tool has provided methods for quantitative assessment of climate or other green impacts and a series of guidance, lists and table templet, and besides, it also provides an effective methodology for assessing, monitoring and reporting the climate or green impact of investment projects on a day-to-day basis.

Table 3 Technological Tools for Climate Risk and Benefit Management

II. Reference and Enlightenment of Climate Risk and Benefit Management in Investment and Finance of International Institutions

Research and practical activities on climate change factors in relevant international investment and finance activities reflect the will of governments and international organizations to integrate climate change into investment and finance decisions, as well as practical actions to develop specific technical guidelines. The international experience mentioned above provides a good reference for China to integrate climate change factors into investment and finance decision-making process:

A top-down policy model. International experience has shown the importance of integrating climate impacts into top-level design and implementing objectives through relevant specific policies. It can be seen that both the World Bank, the EU and the Green Investment Bank have mainstreamed and institutionalized their attention to climate impacts through policy tools. The consideration of climate impact factors can be guaranteed throughout the whole process of investment and finance activities by formulating policies, and the monitoring, reporting and evaluation of established climate investment and finance objectives can be achieved through top-down implementation and bottom-up feedback.

Considering both positive and negative impacts. As for integrating the impacts of climate change into investment and finance decision-making process, both negative climate risk and positive benefits should be considered, and mechanisms for assessing and managing both aspects should be compatible with the development phase. Climate risk management should be integrated into relevant mechanisms or processes, and investment and finance activities should be directed to pay more attention to climate benefits.Actions for climate change mitigation and adaptation should be integrated into all aspects of investment and finance, and relevant subjects or organizations should be encouraged to participate actively.

Taking both policy and technical measures as tools. Drawing on the experience of the World Bank and other institutions, climate risk management and benefit assessment should serve the established climate objectives, and they have developed corresponding technical standards and methods except for corresponding policies, taking both policy and technical measures as tools. The key to implementingpolicies and achievingobjectives is to establish systematic proceduresand mechanisms, including well-developed standards, technical specifications and evaluation methods, and to systematize the corresponding policies and technical standards into documents and guidelines.

III. Countermeasures and Suggestions on Climate Risk and Benefit Management in Investment and Finance

Climate investment and finance started late in China, so, the integration of climate change factors into investment and finance is still a new topic in China and there are few related theoretical research and practical cases. At present, cases concerning integration of climate change into investment and finance practice in China are still on a trial basis, and there are no corresponding supporting mechanisms in policy, technical standards, evaluation methods, etc. With reference torelevant foreign practices and experiences, it is suggested that China strengthen the management of climate risks and performance in investment and finance activities from the following aspects:

Integrating climate risk and performance assessments into investment and finance assessments

At present, there is no mandatory requirement to evaluate climate-related risks or benefits in the assessment process of investment and finance in China.Attention to climate risks is only required in the feasibility study or environmental assessment of few types of projects, and no clear evaluation indicators and evaluation methods are given. Therefore, it is suggested that climate impact factors be taken into account in investment and finance assessment through relevant policies and regulations, technical standards or guidelines, and appropriate assessment indicators be designed to ensure that climate change factors can be fully taken into account in the decision-making process.

Technical standards and toolkits for improving climate risk and benefit management

Due to lack of relevant technical standards or evaluation norms as guidelines, and lack of practical experience, there are certain challenges for the subjects of investment and finance activities to manage climate risks or conduct investment and finance activities with climate benefits. In order to integrate climate change factors into the assessment of investment and finance activities, it is suggested that relevant research on integrating climate change factors into investment and finance decision analysis should be carried out on the basis of analysis onexisting practical experience, and besides, guidelines for climate risk and benefit assessment of investment and finance projects should be formulated to improve technical standards and toolkits for climate risk and benefit management.

Encouraging the extensive participation of investment and finance

It is a relatively new concept in China and the world to integrateimpact of climate change into investment and finance decisions, which requires broad participation of investment and finance bodies. On the one hand, the concept of climate risk management and climate benefits concerning investment and finance should be fully popularizedto relevant institutions, and investors who are committed to contributing to the fight against climate change should be cultivated; on the other hand, the capacity of relevant subjects in climate investment and finance should be trained to provide them with relevant technical support, so as to ensure that they can incorporate policy initiatives into their investment activities through technological tools in the climate and financial fields, and gain the long-term sustainable investment and finance capacity.

References:

[1]Zheng Chong. Environmental Risk Management in Banks: International Experience and Enlightenment [J]. Reference, 2012 (9).

[2]Liu Yuan, Zheng Jing, Yu Xiaolong. Mainstreaming of Environment and Climate in the EU and its Enlightenment for the Greening of “Belt and Road Initiative” Investment and Finance [J]. Environmental Protection, International, 2019(05).

[3]World Bank Environmental and social Framework.https://www.worldbank.org/en/projects-operations/environmental-and-social-policies.

[4]Common Principles for Climate Mitigation Finance Tracking. https://www.worldbank.org/content/dam/Worldbank/document/Climate/common-principles-for-climate-mitigation-finance-tracking.pdf.

[5]Common Principles for Climate Adaption Finance Tracking. https://www.worldbank.org/content/dam/Worldbank/document/Climate/common-principles-for-climate-adaption-finance-tracking.pdf.

[6]European Commission. Integrating the environment and climate change into EU international cooperation and development. https://publications.europa.e u/e n/publication-detail/-/publication/7887e701-3f4e-11e6-af30-01aa75ed71a1/language-en/format-PDF/source-83767061.

[7]Green Investment Handbook. http://greeninvestmentgroup.com/green-impact/green-investment-handbook/.