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ESG investing
OpinionComment
Mathias Lund Larsen
Mathias Lund Larsen

Opinion | How China and the EU can work together to drive green bonds, ESG investments and sustainable finance

  • The EU’s consultative approach helps its standards to be widely adopted voluntarily, while China’s top-down approach allows policy experimentation
  • If both sides can coordinate their work, they can complement each other and push green finance forwards across the globe

Reading Time:3 minutes
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A solar power plant in Turpan, Xinjiang, in 2018. In China, financial system regulators can experiment with new policies without mandated restrictions. This active approach is simply not possible in the EU. Photo: Xinhua
Mathias Lund Larsen
Green investments have gone mainstream as portfolios divest themselves of fossil fuels to add green bonds and environmental, social and governance (ESG) investments instead. Over the past decade, green issues have gone from being a niche investment to the centre of financial markets, with more than US$30 trillion estimated to be sustainably invested today.
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But there are critical problems in driving green finance forwards. Among these are the dispersed standards applied across the world and the lack of innovative policies pushing markets in a green direction. The European Union and China are the most active in green finance, and it may be that their unique approaches can complement each other in addressing these two problems.

The EU has set many global standards. Its General Data Protection Regulation forced technology companies across the world to increase privacy protection, requiring any company with customers in the EU to adhere to the standard. This is happening now with its Sustainable Finance Disclosure Regulation (SFDR), which requires investors to disclose activities outside the EU.

This policy is based on a bottom-up approach, allowing market participants to take part in policymaking by voicing their preferences and ideas to the EU and to each other.

It is this consultative approach, specifically, that gives legitimacy to the EU’s standards, making them more likely to be adopted voluntarily. This is starting with the SFDR but is soon to include definitions of green projects and green bond standards.

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Unlike the EU, China takes a top-down approach. Based directly on the Chinese government’s will and needs, financial system regulators can experiment with new policies without mandated restrictions. This active approach is simply impossible in the EU, where central banks and regulators are only allowed a mandate to interfere in the market for risk reasons.

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Sustainability: Green bonds to help drive China's push towards carbon neutrality

Sustainability: Green bonds to help drive China's push towards carbon neutrality
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