Funding the green technology innovation pipeline: Lessons from China

According to the most recent IPCC report, we have hit a global record for greenhouse gas emissions (GHG) by pumping out 57.4 gigatonnes of carbon dioxide equivalent into the atmosphere. Last year, 2023, was the warmest year on record at 1.45 ± 0.12 °C above the pre-industrial average. Rather than cutting emissions, we continue to move in the wrong direction — but that can change.

Food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight supply chains account for more than 50% of global emissions. Decarbonization of the industrial value chain, therefore, offers a clear-win opportunity to cut emissions.

A successful transition demands a deep economic transformation, requiring the mobilization of private finance on a large scale. According to estimates, achieving net-zero carbon emissions will require additional global investments at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions.

A key enabler along the value chain is low-carbon technology, from upstream to downstream. Low-carbon technology at different stages requires tailor-made financial tools. Research and development phases need fiscal budget allocation and philanthropic capital. Commercially viable and near-commercial technologies will need a different source of capital.

China is well placed to help deliver and scale up low-carbon technologies and foster innovation chains to emerging and developing economies (EMDEs).

China is the main trading partner of more than 140 countries and is one of the best-positioned countries to define the pace and speed of global supply chain green transition. In China, this work is already underway. More than 800 large Chinese companies have set carbon neutrality by 2060 targets. Especially across the ICT, textile and manufacturing sectors, businesses are seeking to reach carbon neutrality ahead of national climate targets.

By 2050, China needs roughly $26 trillion green investment. China’s 14^th Five-Year Plan is expected to put $6 trillion investment in climate change related and digital economy support. The People’s Bank of China has established a special relending facility worth 500 billion yuan (about $70.47 billion) to support sci-tech innovation, technical transformation and equipment renewal. The interest rate of the one-year facility stands at 1.75%.

Green technology companies operating in any market, including China, not only need to drive the industrial value chains that can best nurture technological advancements, follow sustainability reporting standards and set ambitious carbon reduction targets and strategies, but they also need to understand investors’ language to ensure their financial position, performance and prospects.

Investors, for their part, need to understand the technologies and relevant opportunities and risks to their cash flow to become true enablers for scaling up green technology and avoiding greenwashing. Therefore, mutual understanding must be built between green technology companies and their investors.

Green procurement refers to the purchase of goods and services that cause minimal adverse environmental impact to provide opportunities for those with green technologies.

To this end, incubated by Alibaba, MYbank, a technology-driven internet bank, created a special financing platform for 6.23 million micro and small-sized enterprises. As at the end of December 2022, MYbank offered preferential interests on loans for 420,000 micro and small-sized enterprises, advancing their green development while providing them with easy-to-access inclusive financial services. MYBank included micro and small-sized enterprises in green supply chains in the coverage of its policies regarding green and inclusive finance. It also developed a range of new green finance products based on customer needs and formed a green and digital supply chain finance product matrix, including green procurement loans.

Banks are expected to continue to provide the majority of debt finance in China. This is so far taking the form of green loans (or “sustainability-linked loans”) as innovative products suitable for green transportation projects. China CITIC Bank, for example, provided a leading battery company in the middle of the supply chain specialized in green technologies with a prepayment financing solution by leading the formation of a domestic medium-and long-term US dollar syndicate working capital loan. This was a ten-year syndicated loan tailor-made to accurately match the term of the raw material supply contract, ensuring the stable supply of raw materials.

Another example is sustainability-linked loans that can be tailored for the operation stage of green technologies. Societe Generale China has completed the implementation of the sustainability-linked mechanism for the existing RMB 700 million ($97 million) bank acceptance draft facility available to multiple Chinese subsidiaries of Forvia, a leading supplier of automotive parts. Following the signing of a sustainability-linked term loan facility in June 2023, Societe Generale acted as co-borrower and implemented a similar structure to transform the existing bank acceptance draft facility into a sustainability-linked one.

Typical product areas in China also include the green stock market to simplify the verification or filing procedures for initial public offerings of green enterprises and for the establishment of green channel mechanisms for green enterprises.

Chinese companies are also working overseas, for example in Switzerland’s capital market. With the support of the China Securities Regulatory Commission and the Shenzhen Stock Exchange, GEM successfully issued Global Depository Receipts and listed on the SIX Swiss Exchange, successfully raising $381 million. This was invested in projects such as nickel resources in Indonesia and power battery recycling in Europe.

China’s journey has clearly started, with commercially viable and early deployment of technologies, innovative green finance products and clear signs of shifting investor preferences.

Looking forward, common taxonomy and new public and private sources of capital, restructured through financing mechanisms that lower costs of capital, are the likely direction China will take to scale up its innovation chain and build out the broader innovation ecosystem.