Case Nine Low-Carbon Transformation Planning and Practice of Financial Institutions
1. Basic Situation
In November 2023, the United Nations Environment Programme released the “2023 Emissions Gap Report,” which pointed out that if global greenhouse gas emissions cannot be reduced below the levels proposed by current national contributions by 2030, the target of limiting temperature rise to 1.5°C will not be achievable, and extreme weather events will become more frequent. In this context, it is crucial for banking financial institutions to carry out low-carbon transformation work: on one hand, it can effectively avoid the transition risks and physical risks brought by climate change; on the other hand, it can help banks seize new business opportunities brought by transition finance.
In March 2024, the People’s Bank of China led the formulation and issuance of the “Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development” (hereinafter referred to as the “Guiding Opinions”), which is a programmatic guiding opinion for the new stage of national green finance development. Huzhou Bank actively responded to the regulatory requirements for financial support for green and low-carbon development. Under the guidance of the “Guiding Opinions,” Huzhou Bank explored and practiced overall transformation planning based on its own low-carbon development needs, achieving certain results. Huzhou Bank hopes to strengthen the pilot application of internationally mature transformation experiences domestically through the formulation and practice of transformation planning, contributing the wisdom of Huzhou Bank to addressing climate change.
2. Innovative Highlights
(1) Scientifically formulating a transformation framework based on carbon peak and carbon neutrality goals to promote the bank’s net-zero development
A scientifically effective transformation plan can help banks maintain competitiveness while mitigating and adapting to climate change, better addressing climate-related risks and opportunities; on the other hand, high-quality transformation planning can enhance the credibility of the transformation plan, preventing the risk of “false transformation” and ensuring that the bank’s investments in the transformation make a substantial contribution to achieving carbon peak and carbon neutrality goals. Based on this concept, the formulation of Huzhou Bank’s transformation planning considers scientific, practical, and flexible aspects.
First, in terms of scientificity. Under the principle of ensuring alignment with national carbon peak and carbon neutrality goals, the framework for Huzhou Bank’s transformation planning fully references the transformation planning cases from international organizations such as the Science Based Targets initiative (SBTi) and HSBC, ensuring the scientific nature of the transformation planning.
Second, in terms of practicality. On one hand, it fully considers Huzhou Bank’s existing capacity base, asset structure, and development planning to formulate corresponding transformation goals and measures; on the other hand, as a regional city commercial bank, all of Huzhou Bank’s assets are distributed in Zhejiang Province, thus incorporating the clean energy transition process and industrial development planning of Zhejiang Province into the emission path considerations. Integrating business realities with regional development highlights the applicability and rationality of the transformation planning.
Third, in terms of flexibility. Considering that the carbon neutrality transition paths in various industries are still not perfect and mature, Huzhou Bank’s transformation planning will establish a regular revision mechanism, that is, every year, based on updates to industry carbon neutrality transition paths and the gaps between practice and planning, implement a “look-back” mechanism for the planning to ensure an annual update and iteration, dynamically and step-by-step promoting the implementation of the transformation planning.
(2) Ensuring the feasibility of the planning with a focus on “implementability” based on business realities
In the process of formulating the transformation planning, Huzhou Bank, like other banking institutions, faces common difficulties: on one hand, Huzhou Bank is currently in a period of scale growth, and there is a stage-specific contradiction between the growth of business scale and the goal of net-zero emissions. On the other hand, the carbon neutrality transition paths of various industries are still not perfect, posing significant challenges for calculating carbon emission targets and planning transition paths for the asset side. To address these issues, Huzhou Bank will start from the existing foundation and gradually improve through pilot practices to overcome difficulties and bottlenecks.
First, strengthening goal orientation. From the dimensions of industry transition paths, credit industry structure, and asset scale growth rate, through a bottom-up approach, while formulating the overall carbon reduction target for the bank, set corresponding unit carbon emission intensity targets to guide the development of new business, addressing the stage-specific contradiction between scale growth and total emission reduction.
Second, focusing on key emission industries. Considering factors such as industry emission intensity, credit proportion, and total emissions, classify key emission industries and non-key emission industries. Key emission industries will prioritize referencing existing domestic industry research transition paths and key transition technologies, while industries with missing relevant information will reasonably supplement with publicly available research results from international organizations such as the Central Bank and regulatory agencies’ Green Finance Network (NGFS) and the International Energy Agency (IEA); for non-key industries with low credit proportion and emission intensity, use the national average reduction path to achieve full coverage of all assets.
Third, integrating with the optimization of the bank’s customer credit structure. Currently, Huzhou Bank has accumulated carbon emission data for about 70% of its corporate clients over the past three years. Based on this data accumulation, it will refine the classification and grading of carbon emission intensity in related industries, setting excellent values, average values, and access values, applying them to both existing and new clients to gradually optimize the structure of current clients.
(3) Relying on mechanism construction to clarify measures to promote the realization of transformation goals
First, focusing on risk policy adjustments. Incorporate the phased goals of the bank’s net-zero transformation into the annual risk policy formulation of the entire bank, ensuring that customer credit structure adjustments align with the transformation planning goals.
Second, reshaping credit business processes. Relying on the carbon accounting system for credit assets already developed by Huzhou Bank, integrate customer carbon emission data into the credit process, using carbon data to assist in enterprise credit risk management.
Third, enhancing team capacity building. On one hand, introduce high-level talents globally to provide professional support for the execution of transformation planning; on the other hand, conduct training on transformation planning to enhance the overall understanding of transformation planning within the bank.
3. Achievements
First, the level of digital intelligence has been effectively improved. Huzhou Bank’s low-carbon operation center has accumulated carbon emission data, intensity data, etc., from all branches and credit assets since 2021. At the same time, Huzhou Bank continues to strengthen its investment in financial technology, and in 2023, it established and launched a carbon accounting system for credit assets, embedding carbon accounting calculation formulas, achieving carbon accounting for over 70% of corporate clients in Huzhou region, reducing accounting costs through system support and ensuring the implementation of planning.
Second, significant results in its own operational transformation. Huzhou Bank has increased financial resource investment, establishing a 10 million yuan carbon neutrality bank construction fund to promote the implementation of transformation planning. Through rooftop photovoltaic installations, energy-saving renovations for lighting and cooling, and subsidies for employees purchasing new energy vehicles, the bank is promoting its own operations towards net-zero emissions. In 2023, the rooftop photovoltaic power generation exceeded 100,000 kWh, effectively optimizing the bank’s green energy structure.
Third, innovative transformation financial products support enterprise transformation implementation. Huzhou Bank launched products such as “Low-Carbon Growth Loan” and “Low-Carbon Pioneer Loan,” linking corporate ESG and energy efficiency performance with credit limits and interest rates, guiding industrial enterprises to focus on ESG and carbon reduction. Currently, over 1.53 billion yuan in related loans have been issued. In 2023, it was approved for the People’s Bank of China’s carbon reduction support tool, and by the end of December 2024, a total of 2.445 billion yuan in carbon reduction loans had been issued, resulting in a carbon reduction of 156,000 tons.
4. Promotion Conditions
The formulation of Huzhou Bank’s transformation planning is based on data accumulation, guided by scientific principles, and aimed at implementability, ensuring the realization of transformation goals through mechanism construction. Accordingly, the promotion conditions are summarized as follows:
First, a comprehensive net-zero transformation organizational structure is in place to ensure the formulation and implementation of transformation planning. Huzhou Bank has long attached great importance to green finance work, with a complete green finance governance structure and organizational system, cultivating a professional team of green finance talents, sufficient to support Huzhou Bank in formulating and implementing planning, promoting the bank’s low-carbon transformation development.
Second, a complete green finance and transition finance infrastructure is in place. Since becoming a national pilot zone for green finance reform and innovation in 2017, Huzhou City has continuously carried out the construction of green finance infrastructure, completing multiple national and local standards, providing methodological references for Huzhou Bank’s transformation planning. In addition, Huzhou City has developed a corporate carbon account module on the financial data engine, providing data support for Huzhou Bank’s corporate carbon accounting.
5. Outlook and Suggestions
It is suggested to use capacity enhancement as the internal driving force to form a virtuous cycle of development. Throughout the design and execution of the transformation planning, Huzhou Bank has always focused on the ideas of “commercial sustainability” and “systematic development”. In April 2024, Huzhou Bank specifically established the Huzhou Bank Financial Research Center, setting up more than a dozen research topics such as carbon emission accounting, climate risk stress testing, and carbon tariffs to serve overall development needs. At the same time, arrangements have been made in cutting-edge areas such as standard-setting research, information disclosure, ESG development reports, and climate risk management to maintain sensitivity to advanced concepts and future trends, enhance capacity building, and form a virtuous cycle of development.
During the formulation of Huzhou Bank’s transformation planning, there are still certain shortcomings regarding industry transition paths. The formulation of investment and financing transition targets and the evaluation of enterprise transformation effectiveness require industry transition paths as references, while the commonly used international transition paths are not compatible with China’s “dual carbon” goals, both in terms of time scale and regional scale, making them unsuitable as reference paths for Huzhou Bank’s clients’ transitions. In the future, Huzhou Bank will focus on key industries as breakthrough points, piloting transition path research. Specifically, based on previous carbon emission accounting results and client distribution, industries such as textiles will be selected as key industries, and typical enterprises willing to transition will be invited to conduct on-site research on production processes and technological reserves, compiling enterprise transition paths. Finally, the transition paths of typical enterprises will serve as the industry transition paths for Huzhou Bank’s clients.
The Green Finance Professional Committee of the China Finance Societyabbreviated as “Green Finance Committee,” is an academic research professional committee established under the China Finance Society, engaged in green finance research, promoting innovation in green investment and financing products and services, and facilitating the implementation of green finance policies.Official website: www.greenfinance.org.cnLong press the QR code to follow the WeChat account