Will green finance bring investment opportunities? -A series of studies on carbon neutralization

Core point of view

The promotion of carbon peak and carbon neutrality will change the investment logic of financial markets and create more investment opportunities. We believe that for stock investment, the future focus on the new energy industry, which benefits from the demand-driven new energy industry, and the technological reform leader of the traditional industry, which benefits from the supply contraction, the core logic of the latter is that in the process of technological transformation, carbon quotas will become its value-added assets. this is also the market's biggest expectation gap; For bond investment, it is expected that the short-term impact of carbon neutralization on the credit debt of traditional industries is limited, but it is long-term beneficial to the technological reform leaders of traditional industries. With the help of "carbon neutralization", green bonds will usher in new opportunities, and the scale of issuance and transactions will be further expanded. Although the current green derivatives are still in the early stages of development, the Guangzhou Futures Exchange was officially approved and established at the beginning of this year, which is expected to create new opportunities and investment space for the development of carbon finance and even the whole green derivatives in China.

Stock: the new energy industry, which benefits from the demand, and the technological reform leader of the traditional industry, which benefits from the contraction of supply.

The promotion of carbon peak and carbon neutralization will directly benefit the equity market investment opportunities of two types of industries, one is the new energy-related industries represented by photovoltaic, wind power and UHV, and the other is the investment opportunities of enterprises with strong capacity for environmental protection and technological transformation in traditional industries. the former benefits from demand-driven, while the latter benefits from supply contraction. In the first category, the energy production end is mainly the gradual substitution of wind power and photoelectric for traditional energy power generation, the energy transport end is mainly UHV transport and the laying of Electroweb, and the energy consumer side focuses on the related industry chain of new energy vehicles. For the second category, the current round of carbon neutralization will help leading enterprises in existing traditional industries to continue to promote technological transformation and capacity upgrading of environmental protection. In the process of technological transformation, carbon quotas will become their value-added assets, such as electric power, coal, natural gas and iron and steel, chemical industry, building materials and other industries.

Bonds: "carbon neutralization" helps, green bonds usher in new opportunities

It is expected that the short-term impact of carbon neutralization on the credit debt of traditional industries is limited, but it is also the logic of carbon quota value-added in the process of technological transformation. China's green bond market will usher in new opportunities. The development of China's green bond market began at the end of 2015, starting late but developing rapidly. By the end of 2020, China has issued green bonds of about 1.2 trillion yuan, second only to the United States, and the stock of green bonds is 813.2 billion yuan, ranking second in the world. At present, the financing scale of corporate green bonds is still much smaller than that of green loans, and there is still a lot of room for development in the future. As an important tool of green financing, green bonds can not only provide more stable financing for the transformation of enterprises to environment-friendly, but also provide investors who pay attention to ESG standards more in line with the investment concept.

There is a large market space for green derivatives in the future.

At present, China's carbon market is dominated by spot trading, and carbon financial derivatives mainly rely on various carbon emissions exchanges, including carbon forwards, carbon options, carbon swaps, etc., but the trading scale is still small and the system is still not standardized. Compared with the more mature overseas carbon markets based on derivatives trading, there is still much room for improvement in the development of green derivatives in China. Various local exchanges in China are also trying all kinds of green derivatives, but carbon finance is still in a sporadic pilot state, the regional development is uneven, and there is a lack of systematic and perfect carbon financial market. therefore, it can not effectively meet the carbon asset management needs of emission control enterprises. However, recently, there has also been a new breakthrough in the construction of China's carbon financial market. On January 22 this year, with the consent of the State Council, the China Securities Regulatory Commission formally approved the establishment of the Guangzhou Futures Exchange. We expect that the national carbon financial derivatives market will start from a wide period of time, and unified trading venues and standardized contracts will create new opportunities and investment space for the development of China's carbon finance and even green derivatives as a whole.

Other products of the green financial system will also have more room for development.

Green financial system refers to the institutional arrangements to support the transformation of the economy to green through green credit, green bonds, green stock index and related products, green development funds, green insurance, carbon finance and other financial instruments and related policies. At present, China's relevant green funds have been gradually established, green trust, green insurance and green leasing are in the initial stage of development, and the trading of environmental rights and interests such as carbon emissions rights, water rights, emission rights and energy use rights are also gradually developing and improving. we expect that with the promotion of carbon neutrality, China's green financial system will be gradually improved, which will provide investors with a more international trading system and richer trading products. With more transparent trading data, there will be more market space for related products.

The promotion of carbon peak and carbon neutrality will change the investment logic of financial markets and create more investment opportunities. We analyze possible investment opportunities in terms of stocks, bonds, derivatives and other areas. For stock investment, in the future, we will focus on the new energy industry, which benefits from demand, and the technological transformation leaders of traditional industries that benefit from supply contraction; for bond investment, with the help of "carbon neutralization", green bonds will usher in new opportunities, and the scale of issuance and transactions will be further expanded. Although the current green derivatives are still in the early stages of development, the Guangzhou Futures Exchange was officially approved and established at the beginning of this year, which is expected to create new opportunities and investment space for the development of carbon finance and even the whole green derivatives in China.

1. Stock investment: the new energy industry, which benefits from the demand, and the technological innovation leader of the traditional industry, which benefits from the supply contraction.

The promotion of carbon peak and carbon neutralization will directly benefit the equity market investment opportunities of two types of industries, one is the new energy-related industries represented by photovoltaic, wind power and UHV, and the other is the investment opportunities of enterprises with strong capacity for environmental protection and technological transformation in traditional industries. the former benefits from demand-driven, while the latter benefits from supply contraction.

1.1. New energy industry benefiting from demand pull

From a demand-driven perspective, investment opportunities are concentrated in new energy areas where demand surges. The development of new energy is the core starting point to reduce carbon emissions and promote carbon neutralization. from upstream to downstream, the new energy industry can be divided into three stages: energy production, energy transportation, and energy consumption. the energy production end is mainly the gradual substitution of wind power and photoelectricity for traditional energy generation. The energy transport end is mainly the laying of UHV transport and Electroweb, while the energy consumer focuses on the related industry chain of new energy vehicles.

1.1.1. New energy production end: photovoltaic and wind power

At the production end of new energy, the main substitutes for traditional energy generation are wind power and photovoltaics, and the investment focuses on photovoltaic, wind power equipment manufacturing and other fields. The photovoltaic industry has developed rapidly in recent years. According to the forecast of the China Photovoltaic Industry Association, the average annual installed capacity of photovoltaic in China during the 14th five-year Plan period is generally expected to be 70 million kilowatts, while it is optimistically estimated to be 90 million kilowatts. In 2020, the new installed capacity of photovoltaic in China is 48.2 million kilowatts, and the new incremental growth rate is about 45 to 86 percent. According to the Tsinghua Energy Transformation Center, to achieve "carbon neutralization" in China, the per capita photovoltaic capacity is about 5 to 10 kilowatts, which requires about 8.58 billion kilowatts of photovoltaic resources. By the second quarter of 2020, the installed capacity of photovoltaic in China is 210 million kilowatts, and the supply needs to increase by at least 40 times in order to meet the demand of photovoltaic installed capacity in 2060.

Wind power investment is expected to usher in a more efficient and large-scale investment on the basis of eliminating disorderly production capacity and solving the problem of abandoning wind in the early stage. According to the data of the National Energy Administration, the capacity of full-caliber wind power generation equipment in 2020 was 281.53 million kilowatts, an increase of 34.6 percent over the same period last year, accounting for 12.8 percent of the total capacity of full-caliber power generation equipment, and the new equipment capacity was 71.67 million kilowatts, an increase of 178.7 percent over the same At present, the problem of abandoning wind in the field of wind power is gradually solved. With the gradual growth of wind power investment and the improvement of wind power utilization, the field of wind power is expected to achieve higher-scale growth in the future, and there will be more investment opportunities in the field of wind power manufacturing. The huge installed demand of photovoltaic and wind power will drive the development of upstream and downstream photovoltaic industry chain. From the perspective of photovoltaic and wind power industry chain, silicon materials, single crystal polycrystal battery related components, wind power blades, wind turbines, control systems and other production links will drive the development of related raw materials and special equipment industries.

1.1.2. New energy transport: UHV Electroweb

The new energy transport side should focus on the layout and construction of UHV Electroweb. The reverse distribution of energy resources and demand in China shows a regional imbalance. More than 80% of energy resources are distributed in the western and northern regions of our country, and more than 70% of energy consumption is concentrated in the eastern and central regions. promoting the long-distance transportation and national allocation of energy resources is the key to speed up the construction of energy Internet, in which the layout and construction of UHV Electroweb is the final solution for long-distance transportation of resources. UHV Electroweb ensures the large-scale development and utilization of clean energy, and provides a strategic guarantee for China to accelerate energy transformation, optimize resource allocation, and achieve energy conservation and emission reduction.

At present, China is in the peak period of a new round of UHV investment development. The course of UHV transmission line construction in China, it can be divided into four stages: the experimental stage (2006-2008), the first round development peak (2011-2013), the second round development peak (2014-2016) and the third round development peak (2018). In 2018, China approved and started five UHV key projects with an investment of 65.8 billion yuan. In 2019, China approved and started two UHV key projects with an investment of 55.3 billion yuan.

The progress of investment in UHV projects in China has accelerated since 2020. According to the White Paper on UHV Industry Development and Investment opportunities for New Infrastructure, China plans to approve and start seven UHV key projects in 2020, with an investment of 91.9 billion yuan, an increase of 66.18% over the same period last year. According to a spokesman for the country's Electroweb, the country's Electroweb has a clear investment of 181.1 billion yuan in UHV construction projects for the whole year, a sharp increase from 2021.

1.1.3. New energy consumption end: new energy vehicle industry chain

The consumer side of new energy focuses on the related industries in the new energy vehicle industry chain. Specifically, it includes upstream aluminum, lithium, cobalt, nickel and other non-ferrous metals and graphite; the production of four kinds of battery materials such as positive electrode, negative electrode, diaphragm and electrolyte in the middle reaches, as well as the production of power lithium batteries; downstream new energy vehicle manufacturing, charging pile charging station operation support and industrial interaction Networking, 5G vehicle networking communications industry.

In terms of non-ferrous metals: in the downstream demand distribution of copper in China, the proportion of new energy power generation and new energy vehicle transportation industry is about 40% and 10%, and the amount of copper used by new energy vehicles is much larger than that of traditional fuel vehicles. With the large-scale popularization of new energy vehicles in the future, the demand for upstream copper mines and refined copper processing will increase greatly. Lithium battery is the main force of terminal demand of lithium mine, which is used in electric vehicles, energy storage and other fields. With the increase of demand for new energy vehicles, the demand for lithium is expected to further increase. Nickel is also used in the new energy battery industry, mainly from the demand for nickel sulfate of ternary batteries in the new energy vehicle industry chain. it is expected that in the future, with the popularity and rapid development of new energy vehicles, the proportion of battery consumption will increase greatly, leading to a substantial increase in the demand for nickel.

Battery material production and battery production: the upstream material end of new energy vehicle can be divided into four parts: positive material, negative electrode material, electrolyte and diaphragm. the core device components in the middle reaches are mainly composed of battery, electric control, motor, electronics and electrical appliances and conventional components, among which the power battery accounts for the highest proportion of the whole vehicle cost, and it is also a new energy vehicle. Key components that are different from traditional cars. At present, with the upsurge in downstream demand for new energy vehicles, the power lithium battery industry has shown a sustained high boom. In the future, the field of power battery production will further expand the market scale, and large enterprises will give full play to technological advantages, scale effect and brand effect to occupy a favorable position in the market competition.

New energy vehicle charging pile construction: new energy vehicle market demand and charging pile construction demand promote each other, charging pile construction is the key to restrict the demand of new energy vehicles, and the surge of new energy vehicle demand will in turn accelerate the charging pile construction. In the past few years, the construction of charging piles in China mainly depends on government policy support and subsidies, among which bus charging is the most important. Large market segments. With the improvement of the degree of marketization and production in the field of new energy vehicles, the increase in sales of new energy private cars and the gradual decline of government subsidies, there will be more private enterprises in the new energy vehicle industry layout charging pile operation. such as charging pile manufacturers, power battery manufacturers, downstream vehicle enterprises may also distribute public piles on their own. It can be predicted that there will be more investment opportunities in this field in the future.

In terms of 5G vehicle networking communication: the role played by the new energy vehicle industry is not only energy saving and emission reduction, but also an important starting point for the realization of vehicle networking, intelligent transportation and smart city in the future, and an important part of new infrastructure construction. It is also an important part of the industrial Internet. The outline of the 14th five-year Plan emphasizes: "it is necessary to actively and steadily develop industrial Internet and vehicle networking." We will create a global coverage and efficient communications, navigation and remote sensing space infrastructure system, and speed up the digital transformation of transportation, energy, municipal and other traditional infrastructure. " At present, Tesla has laid out the field of remote control and self-driving on a large scale, and the main factors restricting the development of various automobile manufacturers in the digital field are the level of technology and the level of research and development. in the future, 5G, vehicle networking, communications and other areas are expected to continue to invest opportunities.

1.2. The leader of technological reform in traditional industries benefiting from the contraction of supply.

From the perspective of supply contraction, investment opportunities will also appear in the traditional energy sectors such as electric power, coal and natural gas, as well as technological renovation leaders in the high energy-consuming steel, chemical and building materials industries.

We believe that this round of carbon neutralization will put an end to the clearing process of industry supply since the epidemic, and it is expected that the concentration of building materials (cement, glass), steel, chemical industry and upstream fuel coal with high carbon emissions will remain relatively high. Under the impact of the epidemic in 2020, the aggregation effect of leaders in all industries is relatively significant, and there is a general increase in industry concentration. This round of carbon neutralization environmental protection governance is conducive to the existing leading enterprises to continue to promote environmental protection technological transformation and capacity upgrading, and with the end of supply clearance and the subsequent change of supply and demand relationship, good profit repair of leading enterprises.

The process of promoting carbon neutralization is also a process for traditional industries to accelerate merger and integration and improve concentration. Matthew effect is obvious, and the leading industries with large scale and high technical level take the lead in realizing transformation and upgrading. On the one hand, the scale effect of the industry will be more significant in the future: small and medium-sized enterprises in traditional industries are restricted by carbon emissions, production is limited, and profitability is poor. In the future, it will face the situation of gradually shutting down and being merged and acquired; while the leading enterprises benefit from the advantage of scale, they can further carry out merger and integration, continue to expand market share, and present the situation of "leftovers are king". On the other hand, the transformation and upgrading of the traditional iron and steel industry in the future will depend more on technological progress and R & D level, and the deep decarbonization of the iron and steel industry needs hydrogen energy and biological energy steelmaking technology progress; cement production decarburization needs the substitution of limestone clinker and technological breakthrough innovation; the transformation of the construction industry needs the help of heat pump, electrification, geothermal energy and other fields of technology; In addition, various traditional industries are also able to achieve carbon emission reduction with the help of ICT and industrial Internet technology. The above technical means, for the head enterprises, have obvious transformation advantages, but for small and medium-sized enterprises, it is a distant "cost peak". Therefore, the head technological reform leaders of various industries will occupy more development advantages in the future. take the lead to achieve transformation and upgrading, seize more market share.

From the perspective of carbon rights, quotas will also become value-added assets for enterprises in traditional industries after completing the technological transformation of environmental protection. As more and more industries are brought into carbon emission control, the competitive advantages of enterprises with strong ability of environmental protection and technological transformation are becoming more and more prominent. Enterprises after environmental protection technological transformation will generate relatively less carbon dioxide emissions in the early stage when producing the same amount of output, and the free initial distribution of carbon emission quotas is highly related to the historical emission data of the enterprises. therefore, after the enterprises that carry out environmental protection technological transformation independently are brought into the scope of carbon emission control, they will have excess carbon emission quotas for sale and act as sellers in the carbon trading market to obtain certain economic benefits.

two。 Bond investment: "carbon neutralization" helps green bonds usher in new opportunities

2.1. It is expected that the short-term impact of carbon neutralization on the credit debt of traditional industries is limited, but it is good for the technological reform leaders of traditional industries in the long run.

It is expected that the short-term impact of carbon neutralization on the credit debt of traditional industries is limited, and it is still necessary to select high-quality individual coupons, but it is good for the technological reform leaders of traditional industries in the long run The short-term logic comes from many aspects, and the negative factors are capacity shutdown and production reduction. The favorable factors are the concentration of financial resources to the leader of technological transformation, and the increase of industry concentration is good for the traditional electric power, coal, iron and steel, chemical industry and construction. The performance of the leading credit debt in the technical reform of the timber industry. In addition to the carbon-neutral logic, in the credit contraction environment for the whole year of 2021, we need to pay attention to the credit default of individual high-quality private enterprises and state-owned enterprises, in which the risk of traditional industries is relatively greater. Overall, carbon neutralization has relatively little impact on the credit debt of traditional industries.

For example, take the short-term disturbance of carbon neutralization. On March 19, the Tangshan Air pollution Prevention and Control leading Group issued a notice on submitting production and emission reduction measures to iron and steel enterprises, which will be implemented from March 20 to December 31. The proportion of emission reduction is 30%, 50%, and the policy is strong. After the release of the document, the iron and steel industry credit spreads fluctuated little, maintaining high shocks. We believe that market sentiment has not completely calmed down after the Yongmei incident last year, the uncertainty of output contraction under the carbon-neutral environment is superimposed, the market risk sentiment towards traditional industries is still relatively conservative, and the probability of narrowing credit spreads is small.

In the long run, similar to the investment logic of the equity market, in the process of technological transformation, carbon quota will become its value-added assets, improve its fundamentals and debt solvency, and benefit the credit debt of leading enterprises in traditional industries. This is also the market core expectation gap that we suggest. Compared with the new energy industry, the carbon right advantage of the technological innovation leader in the traditional industry makes its credit debt possible. With both configuration and transaction value, the general trend is that in the process of industry clearing and concentration improvement, the concentration of various resources to the leader will enable it to give play to its scale advantage more effectively.

2.2. Green bonds usher in new opportunities

According to the definition of the Circular on the issuance of the catalogue of Green Bond support projects (2020 Edition) issued by the people's Bank of China, the Development and Reform Commission and the Securities Regulatory Commission on July 8, 2020, green bonds refer to the provision of partial or full financing or refinancing for new or existing green industries, green projects or green economy activities that meet the prescribed conditions. Marketable securities issued in accordance with legal procedures and repaid principal and interest in accordance with the agreement.

In 2007, the European Investment Bank issued the world's first green bond. In May 2014, Zhongguang Nuclear Wind Power Co., Ltd. issued "carbon bonds" similar to green bonds. In July 2015, Xinjiang Jinfeng Technology issued a $300 million green bond on the Hong Kong Stock Exchange, the first green bond issued by a Chinese company, and the Agricultural Bank of China issued its first green financial bond on the London Stock Exchange in October 2015. The green bond market in China started a little late, but at present, the institutional framework of green bond has been initially established. In September 2015, the overall plan for the reform of the ecological civilization system clearly put forward for the first time that "research banks and enterprises issue green bonds". On December 22 of that year, the central bank issued notice No. 39 of 2015, clarifying the definition criteria and issuance process of green financial bonds, and issued the "Catalog of Green Bond support projects", which was widely concerned and recognized by international organizations. Further, on December 31, 2015, the National Development and Reform Commission issued guidelines for the issuance of green corporate bonds. Since then, the relevant system has continued to improve. In July 2020, the China Securities Regulatory Commission of the National Development and Reform Commission of the people's Bank of China jointly issued the catalogue of Green Bond support projects (2020 version) (draft for soliciting opinions). Compared with the 2015 version, the biggest change is the deletion of fossil energy clean use projects to be closer to international standards, which is also a landmark event for the further standardization of the domestic green bond system.

In recent years, China's green bond market has developed rapidly under the environment of accelerating the construction of ecological civilization. First, the issuance scale is relatively large. By the end of 2020, China has issued a total of about 1.2 trillion yuan of green bonds, second only to the United States and ranking second in the world. Second, the issuance period is long, about 90% of the issuance period is more than 3 years. Third, the effect of supporting environmental improvement is remarkable. According to the preliminary calculation of the central bank, the projects raised by green bonds each year can save about 50 million tons of standard coal, equivalent to reducing carbon dioxide emissions by more than 100 million tons. China's green bond products have covered many kinds of financial bonds, debt financing instruments, corporate bonds, corporate bonds and so on. Issuers have covered all kinds of banking institutions and entity departments, and have initially formed a diversified investment group with the concept of ESG.

Structurally, at the initial stage of green bond issuance, financial institutions used their influence to actively play a leading role. Since then, as more and more enterprises strengthen green manufacturing, clean energy and sewage treatment, the scale of green bonds issued by enterprises has gradually increased. Specifically, when green bonds were first launched in 2016, green financial bonds accounted for a high proportion of the total. 74.8%, occupying the absolute dominant share, but the proportion of financial bond issuance has dropped sharply to 11.4% in 2020. Corporate bonds and corporate bonds have become the main types of green bond issuance, accounting for 33.3% and 21.7%, respectively. The proportion of medium-term bills and asset-backed securities has also gradually increased. From the perspective of the main industry of issuers, from 2016 to 2020, the share of the financial sector fell from 77.6 per cent to 19 per cent, that of industrial enterprises increased from 8.1 per cent to 53.4 per cent, and that of public utilities increased from 12.8 per cent to 23.7 per cent.

Carbon neutral bonds kick off a new round of green bond product innovation. On February 7 this year, the country's first batch of six carbon neutral bonds were successfully issued in the inter-bank bond market, with a total issue size of 6.4 billion yuan. the issuers are Southern Electroweb, State Power Investment Group, three Gorges Group, Sichuan Airport Group, Huaneng International and Yalong River Hydropower. A labelled green bond product named "carbon neutralization". Compared with ordinary green bonds, carbon neutral bonds pay more attention to the low-carbon emission reduction benefits of funds invested in projects. According to the notice of the Dealers' Association on clarifying the relevant mechanisms of carbon-neutral debt, all the funds raised by carbon-neutral debt should be dedicated to green projects such as clean energy, clean transportation, sustainable construction, and industrial low-carbon transformation. The introduction of carbon-neutral bonds has further enriched the green bond product system.

As an important tool of green financing, green bonds can not only provide more stable financing for the transformation of enterprises to environment-friendly, but also provide investors who pay attention to ESG standards more in line with the investment concept. On the one hand, green bonds generally have a high rating, and there is no lack of local governments' financial support policies such as interest discount, issuance subsidies, green business incentives and so on. It helps to improve the credit level and investment return of green bonds.

On the other hand, at present, the central bank has incorporated the allocation of green bonds into the relevant assessment of financial institutions, bringing green bonds into the scope of qualified collateral, which has further enhanced its attractiveness as an investment product. On July 21, 2020, the people's Bank of China issued the Circular on issuing the Green Financial performance Evaluation Plan for Banking Deposit Financial institutions (draft for soliciting opinions). The biggest change is to incorporate "green bond holdings" into the quantitative indicators of green financial business evaluation, with the right equal to the previous "green loan balance", and the results of green financial performance evaluation will be incorporated into the performance evaluation of financial institutions. In addition, at present, China's central bank has included green bonds whose credit rating is not lower than AA into the scope of qualified collateral of monetary policy instruments, which helps to enhance the investment and holding demand of financial institutions for green bonds.

In addition, China is gradually improving the construction of the basic system of green bonds. At present, one of the main problems of green bonds in China is that the identification standard of green industry is not unified with the international standard. In this regard, the catalogue of Green Bond support projects (2020 Edition) (draft for soliciting opinions) jointly issued by the Securities Regulatory Commission of the National Development and Reform Commission of the people's Bank of China in July 2020 deletes the clean utilization of fossil energy projects and actively aligns them with international standards. it can be seen that the policy strives to gradually and effectively solve the obstacles to the development of green bonds in China. In addition, China is working with the European Union to formulate a common standard for China-EU green finance, which will further promote the unification of green bond standards at home and abroad and attract foreign ESG investors to lay out China's green bonds.

3. There is a large market space for green derivatives in the future.

3.1. There is a large market space for green derivatives in the future.

The guidance on Building a Green Financial system issued by the people's Bank of China and other ministries in 2016 proposed the orderly development of carbon financial products and derivatives such as carbon forwards, carbon swaps, carbon options, carbon leases, carbon bonds, carbon asset securitization and carbon funds, to explore and study the futures trading of carbon emissions rights. Green derivatives help to activate trading, promote the price discovery of environmental rights and interests such as carbon emission rights, provide enterprises with the means of environmental equity risk management, and provide more financial products for investment institutions.

However, at present, China's carbon market is mainly spot trading, the degree of financialization is still not high, and the development of derivatives market is not standardized. At present, China's carbon financial derivatives are mainly based on various carbon emissions exchanges, including carbon forwards, carbon options, carbon swaps, etc., but the trading scale is still small and the system is still not standardized, compared with the more mature carbon markets overseas. Based on the trading situation of derivatives trading, there is still much room for improvement in the development of green derivatives in China. On the one hand, various local exchanges in China are also experimenting with all kinds of green derivatives. Take Shanghai as an example, since 2014, Shanghai has launched carbon quotas and CCER carbon borrowing, repurchase, pledge, trust and other innovative services. In January 2017, Shanghai launched carbon quota forward products. Shanghai has become one of the largest carbon emissions trading markets in the country. But on the other hand, there is a regional division among the regional exchanges in China, which limits the scale of carbon financial products. At present, the regulatory system of the carbon trading market is still not perfect, so the development is relatively slow. The common problems in various exchanges are the lack of trading varieties, small scale, lack of trading system, and incomplete disclosure of relevant trading data. As carbon finance is still in a sporadic pilot state, regional development is uneven, lack of systematic and sound carbon financial market, so it can not effectively meet the carbon asset management needs of emission control enterprises. In addition, the group of specialized investors is underdeveloped, and the development of carbon finance is also lack of professional long-term financial support.

From an international point of view, the EU carbon market (EU ETS) established in 2005 is the largest carbon market in the world, and its spot trading mainly includes EU emission quota (EUA) and certified emission reduction (CER). The most worthwhile thing to learn from the EU carbon market is the development of the carbon derivatives market and the carbon spot market, Synchronize, which complement each other. Since the launch of the carbon market in 2005, the European Climate Exchange (ECX) and the European Energy Exchange (EEX) have been trading futures and options for EUA and CER at the same time to provide hedging and risk management tools. The coordinated development of futures and spot not only provides risk control tools for emission control enterprises and financial institutions involved in carbon trading, but also provides clear and effective price expectations for the market and improves market liquidity. we believe that this can provide a useful reference for the development of China's carbon financial market.

However, recently, there has also been a new breakthrough in the construction of China's carbon financial market. In 2019, the outline of Guangdong-Hong Kong-Macau Greater Bay Area's Development Plan proposed to "study the establishment of an innovative futures exchange with carbon emissions as the first variety". On May 14, 2020, the people's Bank of China and other four ministries and commissions issued the opinions on Financial support for Guangdong-Hong Kong-Macau Greater Bay Area's Construction, which mentioned "studying the establishment of Guangzhou Futures Exchange" in "promoting Guangdong-Hong Kong-Macau Greater Bay Area's Green Financial Cooperation". The preparatory group of Guangzhou Futures Exchange was established on October 9, 2020. On January 22 this year, with the consent of the State Council, the China Securities Regulatory Commission formally approved the establishment of the Guangzhou Futures Exchange. We expect that the national carbon financial derivatives market will start from a wide range of times, and a unified trading venue and standardized contracts will create new opportunities and investment space for the development of carbon finance and even the whole green derivatives in China.

3.2. Other products of the green financial system will also have more room for development.

In addition to green derivatives, China's green financial system also has other related areas worthy of attention. In August 2016, the guidance on Building a Green Financial system jointly issued by seven ministries, including the people's Bank of China, has set up an institutional framework for the development of China's green financial system. It is clear that green finance refers to economic activities to support environmental improvement, climate change and efficient use of resources, that is, financial services provided by project investment and financing, project operation and risk management in the fields of environmental protection, energy conservation, clean energy, green transportation, green building and so on. Green financial system refers to the institutional arrangements to support the transformation of the economy to green through green credit, green bonds, green stock index and related products, green development funds, green insurance, carbon finance and other financial instruments and related policies.

Green credit is the earliest and fastest growing variety of green finance in China. As early as 1995, the people's Bank of China issued the Circular on issues related to implementing the Credit Policy and strengthening Environmental Protection, requiring support for the protection of ecological resources and the prevention and control of pollution as one of the factors to be considered in bank loans. In 2012, the former CBRC issued the Green Credit guidelines, which made detailed provisions on the construction of bank green credit system, process management and information disclosure. In 2013, the former CBRC formulated the "Green Credit Statistical system"; in 2018, the people's Bank of China issued the "Circular of the people's Bank of China on the Establishment of a Special Statistical system for Green loans" and established a statistical system related to green credit. In July 2020, the Bancassurance Regulatory Commission issued the "Special Statistical system for Green financing", which further expanded the statistical scope from green credit to green financing.

The people's Bank of China has disclosed the data of green loans on a quarterly basis since 2018. According to the statistics of the central bank, the balance of green loans in China increased from 8.23 trillion yuan to 11.95 trillion yuan from 2018 to 2020, ranking first in the world at the end of 2020. In 2018, the balance of green loans for transportation, warehousing and post, electricity, heat, gas and water production and supply was 3.66 and 2.61 trillion respectively, and the balance at the end of 2020 was 3.62 trillion yuan and 3.51 trillion yuan respectively.

Green funds will be set up step by step. On July 15, 2020, the National Green Development Fund was established, which is China's first national green investment fund, funded by the Ministry of Finance, local finance of provinces and cities along the Yangtze River Economic Belt, some financial institutions and related enterprises, with a total scale of 88.5 billion yuan. As a national government investment fund, it focuses on investing in atmosphere, water and soil. Soil, solid waste pollution control and other areas of the ecological environment with strong externalities. In addition, relevant provinces and cities have also established local green industry funds, and private capital and international organizations have also participated in the establishment of green development funds. Green funds with market-oriented operation, such as Green Silk Road Fund and Sino-US Green Fund, have also invested in more green industry projects; there are also more securities investment funds aimed at green investment in the secondary market.

Green trust, green insurance and green leasing are still in the early stages of development. In terms of green trust, data from the China Trust Association show that at the end of 2019, the existing asset management scale of green trust was 335.46 billion yuan, and the number of existing projects was 832, an increase of more than 7 times and 3 times respectively compared with 2013. China's "Green Trust guidelines" was issued at the end of 2019, standardizing the business implementation and internal control management of green trust. In terms of green insurance, environmental pollution liability insurance is the main type of green insurance in China. At present, 31 provinces, autonomous regions and cities have carried out the pilot project of environmental pollution compulsory liability insurance. In May 2018, the Ministry of Ecology and Environment examined and adopted in principle the measures for the Administration of compulsory liability Insurance for Environmental pollution (draft), and the 14th five-year Plan also proposed the implementation of compulsory liability insurance for environmental pollution in high-risk areas. In addition, some insurance companies have also developed forest insurance, solar photovoltaic module long-term quality insurance, green building performance liability insurance and other new types of insurance. However, on the whole, China's green insurance is still faced with problems such as low enthusiasm of the main body and disunity of premium rates, which will also be an important policy reform direction for the development of green insurance in the future, in order to make it better play the role of premium rate adjustment mechanism.

The trading of environmental rights and interests, such as carbon emissions rights, water rights, emission rights and energy use rights, has been gradually developed and improved. Energy use rights and carbon emission rights correspond to the goals of "energy conservation" and "emission reduction" respectively. Since 2011, China has piloted the carbon emissions trading system (ETS), in seven provinces and cities, including Beijing and Shenzhen, using market mechanisms to control and reduce greenhouse gas emissions. Subsequently, the National Development and Reform Commission issued the National carbon emissions Trading Market Construction Plan (Power Generation Industry) in December 2017, which is a milestone in the development of China's carbon market. In February 2021, the measures for the Administration of carbon emissions Trading (for trial implementation) were formally implemented. at present, the structure of the national carbon trading market has been clearly defined, and the national carbon emissions trading market will be launched before the end of June. The Ministry of Ecology and Environment is responsible for the construction of the national carbon emissions trading market and formulating national policies and technical norms for carbon emissions trading and related activities. And to manage, supervise and guide the national carbon emissions trading and related activities. In terms of energy use rights, Zhejiang, Fujian, Henan and Sichuan began to carry out pilot projects on paid use and trading of energy rights in 2016, and the corresponding trading platforms in the four places began to operate in 2019.

Although on the whole, other products of China's green financial system, such as green insurance and green trust, are still in the early stages of development, with the promotion of carbon neutralization, the relevant market will have more market space. In February this year, the State Council issued the guidance on speeding up the establishment and improvement of a green and low-carbon circular development economic system, which mentioned the vigorous development of green finance. In order to achieve the goal of carbon peak and carbon neutralization, the people's Bank of China has initially established the green financial development policy of "three functions" and "five pillars". The "three major functions" mainly refer to giving full play to the three major functions of financial support for green development, namely, resource allocation, risk management and market pricing. In order to give full play to these "three functions", it is necessary to further improve the "five pillars" of the green financial system. First, improve the system of green financial standards. The second is to strengthen the supervision of financial institutions and information disclosure requirements. The third is to gradually improve the incentive and restraint mechanism. Fourth, constantly enrich green financial products and market systems. Fifth, actively expand the space for international cooperation in green finance.

We believe that with the gradual improvement of China's green financial system, it will provide investors with a more international trading system, richer trading products and more transparent trading data, so as to improve the breadth and depth of the green financial market.