Welcome to season 12 of Cleaning Up! If you want a sense of the trajectory of climate action, you have to understand China, and you have to understand finance. There is no one better to share insights on both than Dr Ma Jun, Founder and President of the Institute of Finance and Sustainability in Beijing.
Welcome to Season 12 of Cleaning Up! If you want a sense of the trajectory of climate action, you have to understand China, and you have to understand finance. There is no one better to share insights on both than Dr Ma Jun, Founder and President of the Institute of Finance and Sustainability in Beijing.
Between 2014 and 2020, Dr Ma served as Chief Economist and then Member of the Monetary Policy Committee of the People’s Bank of China. Over the subsequent years, Dr Ma played a key role in the development of sustainable finance in China and around the world. He led the drafting of China’s green finance and green bond guidelines; he led work on green finance at the G20; he pushed for the greening of China’s Belt and Road initiative; he set up initiatives with the global accounting and standards bodies; and he helped enlist the world’s major financial centres in the drive to green the capital markets.
Dr Ma is a towering figure in the area of green finance in China and in the world, and provides an invaluable perspective on one of the most significant players in the clean energy transition.
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Michael Liebreich
Hello. I’m Michael Liebreich and this is Cleaning Up.
Welcome to the first episode in Season 12. And as always, we have a great line-up of guests.
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Cleaning Up is brought to you by the Liebreich Foundation, the Gilardini Foundation and EcoPragma Capital.
Now, if you want to get a sense of the past and future trajectory of climate action, you simply have to understand China, and you have to understand finance. There is no one better placed to share insights on both than my guest today, Dr Ma Jun, Founder and President of the Institute of Finance and Sustainability in Beijing.
Between 2014 and 2020, Dr Ma served as Chief Economist and then Member of the Monetary Policy Committee of the People’s Bank of China. Like a number of other guests on Cleaning Up, Dr Ma was convinced of the need for decisive action on climate and environment by China’s apocalyptically bad air quality in 2014. And, as a banker he knew that the financial sector had to play its part.
Over the subsequent years, Dr Ma played a key role in the development of sustainable finance in China and around the world. He led the drafting of China’s green finance and green bond guidelines; he led work on green finance at the G20; he pushed for the greening of China’s Belt and Road initiative; he set up initiatives with the global accounting and standards bodies; and he helped enlist the world’s major financial centres in the drive to green the capital markets.
Dr Ma is a towering figure in the area of green finance in China and in the world. Please welcome him to Cleaning Up.
So Dr. Ma, thank you so much for joining us here on Cleaning Up.
Dr. Ma Jun
Thank you very much, Michael, for the invitation.
ML
It's a pleasure to see you. It's been some years since we met in person. It was, I think, definitely before COVID, on one of your trips to London.
MJ
Yeah, I've been to London many, many times, I think more than 40 times, but we had a break during COVID. And now I'm coming back.
ML
Well, maybe we won't fly as much. But certainly, it would be great to do this sort of thing in person. But could you start, as we always do, by hearing in your words, the very short version — because you've done so much — of your bio. What is it that you do?
MJ
Well, currently, I'm working on green finance, sustainable finance, as you know, but I used to be a macro economist for more than 20 years before I really turned myself into an environmentalist. That was about 10 years ago. So really, between the 1990s and in the following 10 years, I was an economist in the World Bank, the IMF and Deutsche Bank. Then, in 2013, that was the time of my turning point. I was still the chief economist for Deutsche Bank, in the Greater China region, and I was hosting a conference in China. That was, I think, the beginning of 2013 — it was January of 2013 — I remember that vividly. At that conference, I was talking to about 500 people, these are international investors about the Chinese economy and so on. And suddenly, everybody was coughing and for a moment, I couldn't hear myself. And really only on that day, I figured out that it was PM 2.5. You know, PM 2.5, right? That's the air pollution inidicator.
ML
That's right, so PM2.5 is the very small particles of— London, of course, we had the London smogs historically, those were PM10s. Those were big particles you could really not even see through. But in China at the time, the problem was the 2.5s, the smaller particles, and they reached an enormous peak, like 940 ppm—
MJ
You are right. Actually on that day it was 1,000 ppm in Beijing. And the safe level according to WHO is 25 ppm. So the entire city was like, the airport smoking room in terms of density of air pollutants. So really from that time I began to rethink the implication of everything we were doing in the financial sector, especially investment banking. And we know that, at that time, we loved financing the polluting activities, for example, you know, coal, coal-fired power generations, cement, petrochemicals, paper and all of these companies, they made a lot of money. And not just companies, but also the financier and, you know, us brokers. And the brokers were making money because we arranged the financing for the polluting companies. And the result of that, of course, after the economics, it was the social consequences. And I figured out from the WHO report that 12 million people die prematurely every year because of pollution, including air pollution, water pollution, land contamination. And I was totally shocked by these figures. So it really forced me to think about what's wrong in the financial system. You know, why the financial system was allocating so much money to polluting activities, which resulted in so much death. And in that year, 2013, I wrote a book, which was later published in English as well — the English name of that is The Economics of Air Pollution in China. The Chinese name is Fighting Air Pollution: the Big Bang Policy to Fight Air Pollution. And in that book, I proposed the idea of developing green finance in China, really changing the incentive structures so that more money will be allocated to cleaner, greener, less polluting activities. So that was the beginning of my journey towards green finance.
ML
And what we'll do, in the show notes we will put in a link to the English version of that book, and also to two other episodes. Because this resonates with two of our previous guests on Cleaning Up, which was Jonathan Maxwell, who was with HSBC at the time, and that same 2.5 episode was his epiphany as well to start something called Sustainable Development Capital, which is now a leading investor in energy efficiency and other solutions, based in the UK but operating globally. And we also had Lauri Myllyvirta, a few months ago, who talked about how he's been taking the data on air pollution and other issues, and making it available to create the kind of understanding and the background pressure to enable these societal changes. So those are two things for our listeners that I think will be relevant.
MJ
It really came to a point that catalysed a lot of thinking and solutions to the sustainability issues.
ML
It really did.
MJ
So really, after that, I was lucky to have the opportunity to join the PBOC, the Chinese Central Bank in 2014, that was 10 years ago. So starting from that year, I set up the green finance working group within the central bank, and we made 14 recommendations to the central government. And very quickly, the central government adopted these recommendations. I think it was because of the need for financing the cleanup of the air pollution. And at that time, we estimated that China needed something like 4 trillion RMB per year for environmental production, including dealing with air pollution, water pollution and land contamination. But the government only came up with 10% of the money, and the rest — 90% of the financing — has to come from the financial sector. So at that time, I wrote a proposal on green finance, and the government wanted the money. So it was a perfect match. And it became the green finance guidelines later in 2015 and 2016 in China.
ML
So I've got a couple of questions. One is: Did you frame it as a big problem that requires us to sink lots of money? Or did you frame it as: actually this is the next big opportunity? First question. The second question is why — People's Bank of China — why did you get the job? Was it your work on finance? Or they didn't really know you were about to go off in that direction? This is fascinating to me.
MJ
Yeah, I worked as a macroeconomist, I said to you, in the 10 years before I joined the PBOC. I spent a lot of time on monetary policy, the exchange rate policy, financial stability, and all of these finance, pure finance related, you know, macro issues. That's why they recruited me. But I became a green economist in 2013, one year before I started green finance policy research in the central bank. So it was an accident, in a sense, I was recruited as a macroeconomist, but I actually did the green finance work within the central bank because I think nobody was doing that. It was a vacuum. It's a clean space for me to start something. And because there was a huge demand for green finance within the system.
ML
And did you frame it as an opportunity?
MJ
We were not talking too much about the opportunity for the private sector at that time. It was really a demand from the government. The government knew that it needed money to fix air pollution and other pollution. And that's why the policy proposal was for the government, because we needed to formulate the policies and incentives for all the different ministries. We needed to convince the government rather than convincing the private sector guys. That's why the entire proposal was around how to mobilise money across the entire country to deal with air pollution as quickly as possible. But of course, it created a lot of opportunities for the private sector. In fact, since the policy guidelines came out — I think now it's about eight years ago — China has already developed with the largest green lending market — 30 trillion RMB outstanding — and the largest green bond market, 2.5 trillion RMB outstanding. All of these involved a lot of opportunities. For example, these instruments supported the largest renewable industry in the world, the largest EV industry in the world and the largest battery industry in the world. So these are real opportunities within the real economy. But of course, policymakers didn't think that much about 10 years later— how much GDP we could create, revenue we can create, how many jobs we can create, but we did that.
ML
It's a fascinating debate about what leads. Is it the real economy that then demands capital? Or can you create the real economy by allocating capital? Where do you sit? Because it's a very live debate with a lot of central banks now.
MJ
It's not the lack of money, it was the wrong allocation of money that was the problem. We had a lot of money, as I said, which we allocated to dirty activities, right? And the incentives were wrong, because we allowed them to make too much money. And that's why it channelled all the resources, in bringing people, technology, land, all into the polluting activities. And what we did, really in the past 10 years, in the green financial system, is to change the incentive. So that less capital is going into the polluting activities, and more is going into the green and sustainable.
ML
But let me just clarify. When you say we changed the incentives, there's two places you can do that. You can do that within the ministry of transport — or the transport sector, the energy sector, the building material sector, the real estate sector — or you can do it within the finance sector, by doing things that remove barriers, or change the cost of capital. There's a spectrum, of course, you need to do a bit of both. But where are you on that spectrum? What do you think works?
MJ
Yeah, I think the beauty of our system is that we were able to arrange an integrated approach, under the heading of sustainable finance, or green finance framework. Because at that time, we did this guideline as a concerted effort to consolidate the effort of seven different ministries. It was not just from the central bank. In 2015-16, I was leading the drafting of this document which involved the central bank, the banking regulator, the securities regulator, the ministry of finance, the NDRC, which is doing the planning of the real economy and the environmental ministry. So we had so many ministries with their policy tools, some in the real economy — for building transportation, energy and so on — some have the power on carbon markets and so on, and some have incentives in the banking system and some can incentivize the stock and bond resources. So we actually came up with 35 policy actions within the documents. And we designed a range of you can either call them incentives or disincentives because some of these are incentives, like the central bank coming up with cheaper financing for green activities. And we also had the disclosure requirements, you have to disclose your environmental impact. If you're doing green things, you reduce carbon, you reduce air pollution, water pollution, then you'll be viewed as a good guy by the regulator and by the markets. If the disclosure shows that you're doing the wrong thing, then you are penalised at many levels.... at the government level, by public opinion, by consumers and so on.
ML
So just to close on the question as I've framed it: real economy versus finance. Although the NDRC was only one, and the environment ministry, that was only two of the seven. But the NDRC, of course, then works with all the other ministries on the real economy and is extremely powerful. I think that's fair to say, for our audience, just to clarify.
MJ
Exactly, you know the Chinese system quite well. The NDRC is what they call the mini state council. It coordinates all the line ministries in charge of, for example, building, transportation, manufacturing and so on and so forth.
ML
I want to dive in on one thing that you said, which was about— You've got a lot of stuff around disclosure, and that feels very comfortable and I know that you've done extraordinary work and that's been going on in parallel with we'll come on to some of the work you've done globally and internationally. But you did say that the central bank gives a lower cost of capital to the people doing the right thing versus the polluting thing. And that's a big debate. With some people, particularly, you know in Europe, it would be the Germans who would say, level playing field and the central bank should not tilt the cost of capital towards anything, because then they're essentially second guessing policy. But I take it from those proposals that you made, you would not subscribe to that.
MJ
Well different central banks have different mandates. I was deeply involved in this and GFS, which is the central banks' network for greening the financial system, and I was sitting on the steering committee for four years. So we had a lot of debates on what central banks should do and can do in terms of pushing for greening of the real economy. And in China it was clear from the very beginning, the Chinese central bank has a mandate to facilitate and support structural transformation, including green transformation. So we had requirements — a mandated obligation — to stimulate reallocation of resources, especially capital, towards green activities. So very naturally, as early as 2017, right after the guideline was out, we started this green relending facility, which was offering a low-cost funding facility to selected green activities in some jurisdictions as a pilot. And later it became the decarbonization facility, which offers a low-cost funding facility to a larger number of green activities such as renewable energy, industrial decarbonisation, CCUS and so on. But in Europe and many other places, the central bankers do not have that mandate. In some central banks, they say "My mandate is only targeting inflation to 2%. That's it. So I have nothing to do with stimulating resource allocation for a particular sector." And some may view them as distortion to the economy, because the market signal is supposed to work. But our argument is that climate change is the area of most visible externality, which means that the market doesn't really work in this particular space. And you need to correct this market failure by government policy instruments, including the central bank instruments. So that's our theory behind pushing for structural transformation within the Chinese central bank.
ML
That's fascinating. I would love to see a debate between you and Milton Friedman or Hayek, or somebody on that. But that's not going to happen for obvious reasons. But let me just come to— That's all great, but then of course what's also happening, and it's still happening in parallel, is there is still a lot of money flowing in China to coal fired power stations and to polluting industries? And one of the concerns, and it's a concern that I raised— I was on an advisory board at the OECD, and in 2018, I said, "Look, we're now building this huge green industry globally. It's fantastic, but it's no good. if it's not actually shutting down and replacing — if it's just coming on top of — the old emitting polluting industries, we're not going to solve climate change." And is that a concern of yours when you see what's actually still being funded in China?
MJ
Well it's a fairly complex issue. On the one hand, China still heavily relies on coal as a main source of energy. And on the margin, the increase of power capacity, definitely the renewables is the majority of the increase. But the base of coal and coal fired power generation is so big, right, a small percentage increase will represent a fairly big absolute amount of increase. And the main issue that's been debated over the last few years, I think, not only in China, but in many other countries is energy security. For various reasons, you know, maybe geopolitics and maybe local factors. Periodically, we face power shortages, and a quick way of fixing power shortages is to turn up to coal-fired power generation, because they are ready, they're there, or to increase power production, coal-fired power generation, as well as coal mining. So there's a short-term conflict between energy safety, energy security, vis-à-vis sustainability or the primary objective. And, of course, within the finance sector, we're also seen that debate. You know, shall we actually invest, or lend, to coal fired power generation at this moment? I think the majority of banks including in China are actually saying, "I'm reluctant to do that, because I need to look beyond the next one or two years, where we need to fix the power shortage. I need to know whether in five years, 10 years, 20 years time these power facilities will still be used, or will they become stressed or distressed assets." So that concern is leading to reluctance of many banks, in fact, in China to fund coal fired power generation projects, even though they are being approved.
ML
And is this on the radar screen as a macroeconomic risk? Because I'm thinking more broadly than just coal fired power stations. We've seen how coal power production has gone off a cliff in the UK, over a decade went from 40% to nearly zero. And we see the same sort of thing happening in Europe and in the US, not really driven by policy, but ultimately driven by the sort of fundamental economics, which just kind of flips. But it's not just coal. You've got huge amounts of real estate, and a stressed real estate sector that has not been building clean real estate, you know, low carbon real estate. So is that another? I guess I'm grappling with: Are these stranded asset risks because of the transition and is there a discussion about that in China?
MJ
Well in many sectors, they're facing dilemmas. For example, in the real estate sector, I have a lot of conversations with real estate property owners on the need for them to renovate and retrofit their projects with new technology, decarbonising their real estate projects and so on. Then the first question is: Am I gonna make money on this? Can I get my money back within seven years? If it's too expensive, let me use old technology for now. And the other thing that's often been mentioned by property owners, who are reluctant to take on new technology, is that the new technologies are not safe, not secure in terms of delivering their promised green indicators and credentials and whatever. So I need to make sure that all the equipment you install will be working and with a very, very low probability of breaking down. So, all these are reasons why ideally we should move more quickly towards low-carbon technology in particular areas such as real estate and transportation, but then in reality, they're moving at a slower pace than we hope.
ML
Isn't there a huge sort of lifetime redundancy issue in the next few decades? So I was on the board of Transport for London and there was a particular bridge, you may know it, the Hammersmith Flyover, when you come in from Heathrow you go over it. And they suddenly discovered around 2012, when we had our Olympics, that it was ready to fall over because it was built in the 1960s, I think it was, and it then reached the point where it was redundant. Nobody thought about how it would be replaced. Building it cost a few tens of millions of pounds, in today's money, repairing it cost I think it was 120 million pounds. And isn't there an issue with China, which has all of the real estate, the transportation, the infrastructure of this incredible astonishing boom of let's say 1990 to 2020, that you've now going to have to replace it and it has to be replaced clean? Is that debate going on about how we actually move the finance system fast enough to deal with that challenge?
MJ
Yeah, that's a debate I think can be moved by what we call climate risk analysis by the financial institutions. And these finance institutions can actually impose this risk analysis on the project owners. You have to tell me if you use old technologies, carbon intensive technology, are your properties still going to maintain their value in 20 years time? Is the loan I extended to you going to be defaulted on because of valuation decline and your declining profitability? So these are the risk analyses that I think are becoming more popular. But it's not a mandatory requirement yet. It will be, in fact, you've probably heard about ISSB, right, the International Sustainability Standards Board, which is now aggressively pushing for adoption by different jurisdictions. And within that ISSB requirement, as to the climate-related information requirements, there is one piece that's called Climate Risk Analysis, and it essentially asks the company to tell the market, tell the financiers whether in 10 or 20 years time a project is going to survive all of these climate related shocks, including shift in consumer sentiment and declining demand and increasing operating costs.
ML
So I promised that we would talk about your international activities, which is where we first met, and they've been prolific. And I think probably the starting point is the G20. So China's presidency was in 2016, I believe, where you set up a working group on green finance. So you took some of that work that you had done over the three years, I guess, previously in China, and then use that platform to take it global? Is that how you saw it?
MJ
Sure. The idea started in 2015, when we were planning for the China Presidency of G20 in 2016. As you know, as a presidency, you can set the agenda on what is to be discussed. And, you know, on which topic you want to form a global consensus. So we decided to do this on green finance, because we believed that it's not only useful in China, but should also be helpful for many, many other countries in embarking on their green and sustainable journey. So in 2015, I think it was the early part of 2015 — March — I actually went to London and I saw Andrew Bailey, he was the Deputy Governor of the central bank at that time. And I told Andrew that China is thinking about launching a G20 green finance study group, which we hope will be co-chaired by China and the UK, or namely the PBOC and the Bank of England, to promote a global consensus on green sustainable finance. Andrew, I think he thought about that for five seconds. And then he said, "That's a good idea. Let's do it." And in the afternoon, he said to me, Mark Carney has agreed to this idea. So that was the beginning of the G20 green finance study group. So I was lucky to co-chair this group for a few years, together with my counterpart from the Bank of England. And later on this group was upgraded in 2021 to become the G20 Sustainable Finance Working Group, which should become the permanent mechanism within the G20 for coordination of sustainable finance record for many IOs (international organisations), and for setting up a global agenda, such as the G20 sustainable finance roadmap, and for kicking off new ideas including, for example, a few years ago, the G20 transition finance framework, and many of the G20 work, in fact, spilled over to other international organisations such as NGFS (Network for Greening the Financial System), for example, it was really inspired by the G20, and they began to work on the climate risk analysis and to produce tools and all of that.
ML
So, we just need to take a second because of the acronyms. You didn't you didn't create the acronym soup but we're both very fluent in them. So you've got the G20, which is the group of the largest economies in the world, I think most people know that. Then you mentioned ISSB and that's the...
ML
International Sustainability Standards Board.
ML
Right, so that's a set of accounting principles to make sure that risk is made transparent in a standardised way. Then there's NGFS. Did that come out of the G20 work, out of that working group? That's the Network for the Greening of the Financial System. But actually, isn't it all of the central banks around the world?
MJ
Not all of the central banks. In fact, it was some of the central banks. They came together in 2017, including the PBOC, the Bank of England and quite a few from Europe and so on. And we regard ourselves as a small coalition of the willing, meaning we are showing a lot of willingness to move ahead, to forge consensus on green sustainable finance collaboration. And we started in 2017 with only eight central banks and now it's more than 100. You know, all the other central banks and regulators were welcomed to join, and now it's over 100 central banks plus other regulators. So, that was inspired by the G20 because as I said, the G20, initially in 2016, already said, "Let's work on climate risk analysis." Then the NGFS took that sort of inspiration as a major area for its work. Also IISB has to do with the G20. Because in 2021, I remember, the G20 endorsed the launch of ISSB, so that the ISSB became a globally recognised standard setting body. Otherwise, it would be a regular NGO.
ML
And, you know, I have to also ask you: I sold my business to Mike Bloomberg, or to Bloomberg, the company. And we mentioned Mark Carney, we mentioned your work, ISSB. There's also the TCFD (Task Force on Climate-Related Financial Disclosures), which was started a bit earlier and I think worked in parallel. Did you work with Mike and Mark Carney on all of this?
MJ
Yeah, I worked with Mark Carney quite closely because of the G20. You know, in the first three years, the G20 green finance group, later on called Sustainable Finance Study Group, was co-chaired by China and the UK, namely by the PBOC and Bank of England. The Bank of England was chaired by Mark Carney, so we had a very close relationship on that platform. And, you know, Mike Bloomberg has worked on a lot of international initiatives, including TCFD, GFANZ and others. My various initiatives are also closely working with them as well.
ML
And for the audience, we'll also put a link into the show notes to my episode with Mark Carney, who came on Cleaning Up a couple of years ago. You mentioned another one of the acronyms that GFANZ, that's the Glasgow Financial Alliance for Net Zero, which was pulled together by Mark Carney at COP26, which was in Glasgow in the UK. With all of these acronyms and there are many, many more — we're also going to talk about a couple more — but one question is, have we reached some kind of a... Has all this green finance peaked, because we do see the news stories about State Street and JPMorgan and Black Rock kind of backpedaling coming out of the, what is it, theirs was the Climate Action 100+, which was the asset owners, asset managers platform. It was part of GFANZ, it was part of all the excitement in I would say in 2021, everybody got enormously kind of engaged in this. And since then we're seeing a little bit of backpedaling. Is that your impression? And is that serious? Should we be concerned about it?
MJ
Um, no, I think this is happening largely in the US. As you said, some of the US financial institutions left CA100. And I heard some quit GFANZ and some greater principles. But it doesn't affect the global landscape. You can see the system of finance, volume, in terms of fundraising has continuously increased in the last 10 years in a very strong way. And it will continue. I actually have estimated for China, that we're going to raise something like RMB480 trillion (USD 66 trillion) in the coming 30 years for green sustainable finance. And globally there are a lot of numbers, including a number that's cited by the G20, saying that we need 4 to 6 trillion USD per year for global climate action. So all these are much bigger numbers than we have today. Which means that the system of finance will have to grow very strongly in the coming years and decades. Now, the US issue, I think, is a little bit more political than technical, because there's some interest groups within the US that are trying to politicise the concept of ESG. And they're scared of some of these finance institutions when they operate in certain states. That's, I think, a US specific issue. But globally, as I said, we're pretty confident. Many, many other economies, especially the EU and China remain very committed to the goal of greening the financial system.
ML
I think that's correct. I share that analysis that it's very much something coming out of the US. Of course, the concern is that they have a presidential election and those pressures could be, you know, in one version of the future, those pressures could ramp up very considerably in the US. But I guess on the other hand, neither of us know who's going to win the election. But there are other concerns. What we also see, and even in Europe, there's a lot of concern about China's dominance of the supply chain in these clean energy sectors. Whether it's 90% of the wafers for solar. I've been in Spain, where they have a very strong wind industry. They're very concerned about the Chinese wind turbine manufacturers. Of course, electric vehicles and batteries, these huge market shares in processing the minerals, in producing the batteries. People are terrified about cheap Chinese electric cars flooding the markets. Does that not have implications for the finance sector? And for the ability to integrate, share, allow the flows of capital to work globally?
MJ
Now, again, this is a very complex issue. It involves some geopolitical considerations and some, you know, trade-related considerations, involving protecting local industry, protecting employment and so on. But generally speaking, I think many countries are adopting some form of industrial policy to promote their green economic activities. And there are examples like the US Inflation Reduction Act, the EU Green Deal, the Chinese Green Development Programme, including our incentives within the system. And in fact at the global level, like the G20, we're talking about encouraging countries to take action to incentivize green activities. But your question is more from the trade angle. Some countries are seeing these incentives within a particular country as causing trade frictions, because they may actually endanger their domestic industry, which is competing against imports. And I'm not a trade expert. But I do think we need to resolve these tensions — on the trade aspect — versus the need to promote a green economy, green transformation. And there are at least two things we can consider. One is at a global level, we need some sort of a global-level negotiation, ideally using the WTO as the platform, to define more clearly, what are the domestic subsidies, incentives for the green economy that should not be subject to trade restrictions and sanctions. So far, it's not clear. Anything can be subject to trade sanctions, even if you are aiming for promoting global climate action. The second thing is that we can promote more bilateral negotiation, for example, between China and Europe. I know some European countries are complaining about China putting export restrictions on some critical materials. And China's complaining about Europe trying to impose higher tariffs on our exports of solar panels, wind turbines, batteries and so on. But can we actually sit down and talk about a mutually beneficial deal which is you reduce your trade barriers on us, and we reduce our trade barriers on you, so that we can create a win-win situation.
ML
So I share your views on trade. I've actually been on the UK Board of Trade for three years, I've just cycled off it. And actually, I was very involved in the creation of something that became a WTO negotiation. It was the environmental goods agreement which nearly crossed the line in 2016 and then it sadly fell apart over something really crazy like, the EU didn't want Chinese bicycles, or something, apparently... But I think it was probably also quite related to geopolitics and President Trump's victory in the elections, and so on. So I share the view that we need to resolve these trade issues because that will drive down the costs of clean energy solutions and that's absolutely critical. These are very intermingled supply chains. But there is also a security....
MJ
And Michael, the other thing I think we can think about is, instead of selling everything to Europe, we can think about setting up joint ventures, Chinese joint ventures and producing electric vehicles and batteries in Europe, which I think will resolve part of the concerns on the European side. And by doing so, the Chinese investors actually can create more jobs in Europe, right?
ML
I think that would be very welcome. But bubbling under it, there is a geopolitical tension, because there's a lot of people saying, "Well, we're so dependent on the Middle East for oil, on the US for natural gas. Why would we resolve that and become so dependent on China for our technologies right across the industry." And it is so caught, it's across energy, transportation. So we can't ignore that it's a geopolitical security tension as well.
MJ
Yeah, that has to do with this supply chain resilience argument, which has a lot to do with geopolitical concern. And my argument is that if you overestimate the geopolitically led tension, you will have to resort to these trade restrictions. So it is a calculation of the geopolitical risks, that's a key. And miscalculation will lead to mistakes in the decisions of trade policies.
ML
Yeah, and I think it will end up with higher costs for clean energy. Look, there are lots of lenses where that would be bad, but through the climate lens, it would be bad because it would drive up the costs of clean energy.
MJ
Definitely, and it will slow down the pace of decarbonisation in many countries.
ML
Yep. So let me, let me come on to this thing: CASI, another of your acronyms. That's the Capacity-Building Alliance of Sustainable Investment, which is something that I think you created and you're spending a lot of time working on. Is that correct?
MJ
Yeah. The idea actually emerged in the last few years, when I was co-chairing the G20 Sustainable Finance Working Group. There were a lot of discussions on developing countries and emerging markets facing the problem of lack of capacity. Because the green system of finance is a very complex area, it requires a capacity to design policy, standards, disclosure requirements, and it requires the banks and other financial solutions to develop the financial products in the form of green loans, green bonds, green insurance, carbon market instruments. And also, we need to have third parties — the verifiers, carbon accounting guys, to provide all these very technical services. So the lack of capacity obviously became the key bottleneck in many countries. I think as many as 100 developing countries and emerging market economies are launching their green small finance market. In fact, you can see in the last 10 years, most of the sizable green finance transactions are happening in OECD countries and China, but the majority of other emerging market economies are still lagging behind. And that's why there was a growing consensus within the G20 to do more on capacity building. And last year, it was written officially in the G20 documents that we need to strengthen collective efforts on capacity building. And that's why to respond to this G20 call, I created CASI, the Capacity-Building Alliance of Sustainable Investment. And we launched this network of now 50 organisations at COP28 in Dubai, and it's now operational. Our aim is to train 100,000 people in emerging markets, developing countries. We'll be training the regulators like central bank people, the stock exchange regulators, and the security regulators and so on. Also, the financiers, the bank's asset managers and so on. And also third-party service providers, so that we can help create an ecosystem in many of the countries that need green finance. We are already launching our activities. For example, in Brazil, we're going to host our first face-to-face event for the Latin American countries. And in June, we are going to do this in Hong Kong for the entirety of Asia. And in the second half of this year, we'll be launching training events face-to-face for the Middle East and Africa. And on top of that, we'll be doing eLearning. We'll be putting like 100 hours of sustainable finance content on the web, and eventually create a certificate programme, so that after you complete 100 hours, you get a certificate from CASI that recognises your competence.
ML
That's really fascinating. So I had Professor Avinash Persaud, also on Cleaning Up. He's the initiator of the Bridgetown initiative, and he was talking about this huge cost of capital difference between, let's say, South Africa and Germany. So we talk about cheap wind, cheap solar, cheap EVs, cheap batteries. Also in China, everything's very cheap. But of course, if your cost of capital is 15%, it's not cheap. And you're coming at that issue... And the underlying issue is that not nearly enough money is flowing into the global south. And if we don't fix that, we're not fixing climate change. So you've come at this a different way, and said it's a capacity issue rather than a, in a sense, a Western or global financial market cost of capital issue.
MJ
Well both are right in some sense. There are a lot of people saying we need to mobilise a few trillion dollars per year for developing countries' climate action. And my question is: where do you get the 100,000 people to implement these projects? If you don't have the right people, the money going to these places will be wasted. And you will not see that much money, because after one or two failed projects, the money is not going to go there. And really, that's a bottleneck, a key bottleneck for sustainable finance development. And also we're not just talking about money flowing from north to south, the majority of green finance money will have to come from the domestic economies, from domestic savings, right? I would estimate that maybe 10% of the global south's climate financing should come from other countries, and 90% should be mobilised domestically. For that to happen, they need to have standards, for example, taxonomy to define green activities. They need to have disclosure requirements, based on ISSB for example. They should have their own products: a green bond market, green insurance market, and so on.
ML
Yes, we did some work when I was still with Bloomberg, on the attractiveness of different places for investment. And I think one of the absolutely key metrics was whether they have domestic capital formation, because the idea that it's all going to come from the established financial markets in the G20. just won't work.
MJ
Yeah, taking the MDBs (Multilateral Development Banks) as an example. Now, despite the very sizeable operation of the Multilateral Development Banks, they are a drop in the ocean relative to the total demand for climate finance and sustainability finance in emerging markets. That's why the MDBs can actually use their financing as a catalyst to crowd in a much larger amount of local finance to do projects that meet the climate and sustainability standards.
ML
And just for the acronym watches, the MDBs, that's the Multilateral Development Banks.
MJ
That's right. Such as the World Bank, ADB, and so on.
ML
And the BRICS Bank, you include that?
MJ
Yeah, BRICS banks are not called a new development bank. They have new names as part of this MDB family.
ML
A question for you on this focus on capacity building, which I think is absolutely right, I think we've got to work on the cost of capital but also on the skills and the ability to absorb the money and be productive with it. But did that focus also come out of your work on the Belt and Road? Because you did a lot around greening the Belt and Road, because there was this kind of realisation, I think around 2017, that the Belt and Road was financing a lot of stuff, which was essentially putting climate action out of reach.
MJ
Yeah, that was another initiative, which I and many other friends were creating back in 2018. It was hosted by the China Green Finance Committee, which I chair, and the City of London back in 2018. And we said that we need to green the finance that is going into the Belt and Road. Largely, it's in the emerging market economies. And we developed seven principles, asking the bank's asset managers, the insurance companies operating in these countries to assess the environmental climate risk, to disclose that information and to work with the community on ESG risk and so on. And after four or five years of operation, this network of GIPs — it's called the Green Investment Principles for the Belt and Road — has now expanded to a membership of 48 very large organizations, mostly financial institutions. Not only from China, Europe and the UK, but also from many emerging market economies. And we have set up regional chapters of the GIP, which does the capacity building on the ground. So, again, the GIP is another platform for capacity building, but it's for the 48 members, which are largely financial institutions. But CASI is a bigger network of 50 global organizations and we are targeting essentially everyone who is interested in green sustainable finance from developing countries' emerging markets.
ML
I just remembered a report, which I think you co-authored, which was on greening the Belt and Road. And it was quite stark about the risks if it was not greened. That it would essentially lock us into I think it was three degrees of climate change.
MJ
Yeah, I think that was 2018 or 19. My team worked with a couple of other experts, including Simon Zadek. And the conclusion was that OECD countries are going to decarbonize, according to their schedule, towards net-zero by 2050. But by then, if the developing countries are not decarbonizing, then they will become the majority of the carbon emissions in the world. And that basically highlighted the urgency of decarbonizing activities and finance, that's going to the emerging market and developing economies.
ML
Right. We're reaching the end of our allotted time... Actually, I've got one other question, which is, you started by referring to a lot of this as green finance. But now with particularly… you know, almost CASI is the endpoint of a process where it's called sustainable finance. Is there significance to that? Because, at least for me, sustainability is economic sustainability, social sustainability, it's not just about the environment. Whereas green, for me, is a more kind of limited factor. Is that how you see it?
MJ
Yeah, now, conceptually, green is a subset of sustainability. Green, in our sort of domestic context, would refer to financing activity, which is positive for the environment, for climate action, for nature, but has not included many social elements. And sustainability refers to the 17 SDGs, right. Which include not only the environment, climate and nature, but also social aspects, including poverty reduction, education, health, and so on, so forth. So in a sense, sustainable finance is broader than green finance. But in terms of total amount, they're pretty similar. Within the sustainable finance field, you can see the majority is green finance. And then another concept a lot of people are asking me about is climate finance. Climate finance in the Chinese context is 70% of green finance, because it's addressing the climate challenge by investing in climate mitigation and adaptation. And the rest of the green finance is really about the pure environment like — water pollution, air pollution, land contamination and nature positive activities. So they overlap, but size wise, I think, climate is here, green is here, and sustainability is there.
ML
Right, but some of those other areas, and I think there's a fascinating sort of trend, or at least people are still trying to get to volume on things like nature-based solutions and the other aspects of the environment and trying to create financial markets around those. But we've now got Brazil's initiative around sustainability. It's definitely putting things like social justice and human rights much more into the core of sustainable finance than climate, nature based solutions, green energy or green issues. Is that something that's going to kind of create tension, do you think? I'm thinking particularly in the context of the sort of cooling of relations globally around those issues.
MJ
I think more and more people in countries are moving towards the concept of sustainability from the narrower climate or green concept. And within sustainability, there'll be social considerations. And we certainly need to make sure that an activity that's positive for one SDG is not going to harm the other objectives that much. This is what we call do-no-harm principles. So a way to integrate different objectives is to apply the do no significant principle in your project selection, in your assessment of the impact. And social justice came in a few years ago in the G20 discussion, when we were talking about the transition finance framework. And the reason is that the transition, especially climate transition, in some areas, typically leads to sizable job losses. For example, you're talking about coal-fired power generation. Eventually it will be wiped out. And the people employed in these sectors will have to find new jobs. In fact, yesterday, I was hosting the chief economist from EBRD (European Bank for Reconstruction and Development). And they did a survey saying that of those people who are laid off from these polluting, carbon-intensive sectors, only 16% find jobs in other green sectors, and the majority — 80 something percent — either lost their jobs, or they go to another polluting industry. So that's a social problem, which is accompanied by the transition process. And we have to do something — not only rely on government efforts such as a social safety net, but also we need to have all the other players, including the corporates and financiers, to think about how to facilitate a just transition — meaning decarbonising but at the same time protecting employment as much as possible.
ML
Well, there's certainly a lot of knowledge about how not to do that right in the UK. Because, you know, we had massive unemployment, as we restructured our coal industry and some of our polluting heavy industry that was not economic in the 1980s. That recycling of people and skills and communities was not done well. So we're not good at that. Maybe we have some lessons.
MJ
Yeah, Michael, just to give you one interesting pilot to which is happening in the Chinese city called Fuzhou. This is one of the regional green finance pilot cities. They were the first to adopt a transition finance framework in China in the last two years. And within that they're building a just transition element. What they did is they require the companies who have received transition finance to assess the impact of a company transition on employment. If they say they're going to lay off more than 10% of their staff, then they're required to present a retraining and reskilling programme, in order to get transition finance. And then the government, after seeing this programme, will actually subsidise the loan by giving them an interest subsidy, lowering the funding cost. So this is a positive circle, I think, created by the framework, because the company suddenly realise that I have both an obligation and actually the opportunity to do something on just transition, because it will be encouraged by government and encouraged by the banks.
ML
And I think this issue of job losses is clearly a big part of the justice in the transition. But there's another part which is about traceability in the supply chain. There is concern, right across the board, about working conditions and so on in the supply chains. And that is starting to impact on the ability of finance to flow into companies. Is traceability... Is that something that in a sense, do you welcome the idea of that traceability because it's going to raise the standards everywhere? Or is that something that is going to collide with what we were talking about earlier about the need for trade and the need for integration of supply chains? Is that a concern to you or is it that you welcome?
MJ
In our terminology, we call that financing green supply chains, which means that you find the green supplier, which are typically small enterprises and give them incentives for example cheap money, so that they can further enhance the greenness or ESG performance. One example we had is in Guangzhou, back two years ago, I was involved in this green supply chain financing project. We had a special institute which worked on ESG, designing the ESG rating methodology to rate the supplier — small-medium enterprises — to give them scores on ESG. And then give the score to the big company which is going to order, because they buy all these raw materials and components. And Guangzhou will pick the good supplier with a higher ESG rating, then the government will arrange financing.
ML
And it is ESG? It's not just E?
MJ
It's not just E. It's actually a fairly complex rating methodology with many, many indicators and it's weighted and averaged and all of that. But it's an ecosystem, the big company uses the green supplier or ESG, you know, a supplier with a very high ESG performance. Then the banks will arrange cheaper financing for the supplier, and then the government will provide an interest subsidy through the banks to the supplier. That's how it incentivizes the greening of the entire supply chain.
ML
Yeah, look, I think you can tell behind my questions, the issue that I'm probing for is around the labour conditions and human rights within, particularly, the solar supply chain. It is a very top of mind issue for a lot of people that needs dealing with or I think it's going to become a real problem for climate action, and in other ways. Not just for progress for its own sake on social conditions, but also as a potential roadblock for working together on these climate issues. It's a very important issue to deal with.
MJ
Yeah, of course, in the ESG rating you can put in a lot of your social indicators, such as work safety and supply chain resilience and so on. So that using this ESG rating methodology you can guide the behaviour change of the firm.
ML
Dr. Ma, it's an enormous pleasure speaking with you. I think we've covered a huge amount of ground. And I thank you, you've been such a central figure, I hope the audience comes away understanding that after your epiphany — your your PM2.5 epiphany in 2013 — you've been absolutely central to pretty much everything that has happened in China and also internationally in increasing the flows of finance to the solutions to climate change. It's an absolutely heroic story and I thank you for it.
MJ
Thank you very much, Michael, for giving me the opportunity. And I'm looking forward to collaborating with your podcast.
ML
Well, thank you very much. I look forward to that very much as well. Thank you.
So that was Dr Ma Jun, Founder and President of the Institute of Finance and Sustainability in Beijing. Thank you for listening.
And as always we have put into the show-notes links to the episodes and resources mentioned in our conversation. So that’s: Dr Ma’s 2017 book, “The Economics of Air Pollution in China: Achieving Better and Cleaner Growth”; the paper by Dr Ma and Simon Zadek: Decarbonizing the Belt and Road; Episodes 14 and 113 with Jonathan Maxwell – Cheaper, Cleaner, More reliable; Episode 153 with Lauri Myllivyrta – Shedding Light on Energy's Dirty Secrets; Episode 84 with Mark Carney - The 130 Trillion-Dollar Man; and Episode 145 with Professor Avinash Persaud – The Bridgetown Initiator.
If you’ve enjoyed today’s episode, please make sure you like, subscribe and leave a review. Follow us on Twitter, LinkedIn, Facebook or Instagram, and sign up for the Cleaning Up newsletter at cleaninguppod.substack.com.