US-China and the Green Finance Opportunity
As climate change transitions from a philanthropic cause to big business, competition and geopolitical implications, will follow.
We are facing a moment that comes once in a generation: a climate boom. Entrepreneurs, companies, and governments worldwide are coming together to seek innovative ways to help the world transition to carbon neutrality. However, as climate change transitions from a philanthropic cause to big business, competition will follow and has geopolitical implications, particularly for the US-China relationship.
Entrepreneurs, companies, and governments are coming together to seek innovative ways to help the world transition to carbon neutrality.
To start, the political will to address climate change is intensifying. In the United States, President Joe Biden has made climate an “all of government affair,” incorporating it into economic, social, foreign, and national security policies. Around the world, both prosperous and emerging economies—from China to the EU to the Middle East—are pursuing a green economic recovery in the wake of the pandemic.
But political will alone will not be enough. The private sector must mobilize to generate the innovation and financing to make this transition a reality. The good news is that this is happening. While still just a small part of the global financial system, green finance has moved from a philanthropic act into the mainstream for business.
Political will alone will not be enough. The private sector must mobilize to generate the innovation and financing to make this transition a reality.
Financial institutions have realized the threat climate risk poses to financial stability—but also the commercial opportunity of climate. Leading investment banks, hedge funds, and other financial institutions around the world see the social and economic importance of a transition to a low carbon economy and are prepared to use the power of their platforms to promote it. According to Bloomberg NEF, a record $501 billion was pumped into just the energy transition in 2020.
Solar farm and wind power plant in Inner Mongolia, China
The urgency for addressing climate change has led to investment opportunities on a scale not seen since the technology boom in the 1990s. Climate investing is now extending far beyond traditional areas like renewables and infrastructure to food, technology, and automobiles. The prime example is Tesla—its stock surged 740 percent in 2020, and its market cap is now larger than General Motors due to the demand for products contributing to the carbon transition.
The urgency for addressing climate change has led to investment opportunities on a scale not seen since the technology boom in the 1990s.
On the finance side, assets in sustainable funds hit a record high of $1.65 trillion at the end of last year, up 29 percent from the previous quarter. In addition, global private equity firms, such as TPG, are launching international climate funds to invest in the development of technologies and solutions to help build “green equity” to balance the huge growth seen in “green bonds.” The availability of this financing—combined with increased pressure from governments and consumers for action—will help spur innovation in climate technologies.
The world’s largest asset managers, such as BlackRock, are identifying sustainability as a key priority and pushing the companies they own to increase climate disclosures. Just last month, shareholders of some of the biggest corporate carbon emitters—Exxon and Chevron—forced the companies to take steps to reduce their carbon footprints. This is a wave that can’t be turned back
China is going to be at the heart of this climate business boom. The country is now the largest consumer market in the world. But unfortunately, it is also the largest carbon emitter, which presents both an enormous challenge and a real opportunity to develop and innovate green business solutions. Take the business of environmental goods and services, which China has started to open further to foreign firms. A recent study by Goldman Sachs estimates a $16 trillion opportunity in environmental goods and services in the Chinese market, which could create up to 40 million jobs by 2060.
Sources: IEA, World Metal, Sino Carbon, MEE, World Bank, China Electricity Council, and Bloomberg
The launch of China’s carbon exchange will also create new opportunities. When it launches with just one industry, power, it will cover around 45 percent of China’s carbon emissions and be the largest exchange in the world. It will also bring 14 percent of global emissions under trading. When the seven other polluting industries (including construction, transportation, and chemicals) are added to the exchange, it will potentially account for almost 40 percent of global emissions. This market will draw thousands of global companies now seeking to buy carbon offsets to help them meet their climate commitments.
As a result, China will dominate in the carbon trading business. But even more importantly, carbon could become the new currency, with China creating the terms, the standards, and the pricing. China’s moves have been well-received, but we must ensure that the climate business does not turn into a climate clash. Already China dominates in certain climate technologies, such as new energy vehicles, solar panels, and lithium-ion batteries.
Healthy competition drives down costs, but competitiveness that leads to restricting technologies for reasons other than national security is not in anyone’s interest. Therefore, it is essential that the US and Chinese governments find a framework for dealing with competition and the inevitable differences that will arise.
The development and commercialization of new climate businesses are essential for the world to reach carbon neutrality. Therefore, supporting the innovation and implementation of these technologies and solutions is in all of our interest. Climate change can be good business, but if competition is not well-managed, it has the potential to be the next bilateral flashpoint.
