On November 6, 2023, the Sustainable Investment Committee of Silk Road Fund (SRF) held a seminar on new international trends and market practices in the field of sustainable investment. Mr. YI Gang, former Governor of the People's Bank of China, attended the seminar and delivered a keynote speech on establishing the system of green and transition finance. Ms. ZHU Jun, Chairwoman of SRF and its Sustainable Investment Committee, introduced the fund’s track record of and future plan on sustainable investment. Speakers from regulatory authorities, international standard-setting bodies, as well as domestic and international financial institutions shared their insights on sustainability reporting standards, climate policies and incentives, transition pathways to net-zero in emerging markets, blended finance and international cooperation on sustainable finance. President CAI Xuejun and other senior executives also attended the seminar.

Moderator: Different countries and organizations have different views on ESG investment. You have done a lot of research and must have a good understanding on international ESG investment and sustainable finance. Could please share with us your views?

ZHU Jun: Supporting ESG investment has become consensus for the international community. In practice, countries mainly adopt two approaches. One is the top-down approach. Such approach attracts sustainable investment via industrial policies such as industrial subsidies and tax credit, as well as monetary and financial policy supports on the one hand, and enhances the cost of ESG violation via rule-making and disclosure requirements on the other hand. Generally speaking, a “carrot and stick” incentive mechanism is put in place to influence market competition. China and Europe are two major economies that adopt the top-down approach. While the Inflation Reduction Act launched by the US has also provided strong policy support to its renewable energy industries such as photovoltaic solar energy and hydrogen, indicating a convergence of policy guidance on a wider scale.

The other is the "bottom-up" approach, which is mainly dominated by the market. In this approach, investors invest in ESG projects voluntarily based on price signals, and in line with sustainable development goals, with less policy guidance from the government. We notice that the United States has mainly adopted this approach most of the time, and Chairman Powell said on many occasions that the Fed would not get involved in issues like climate change. But pure reliance on this approach has its own issues. For example, ESG investment may be featured by long cycle, heightened risks, unstable returns and immature technologies, which undermines the motivation for enterprises to make sustained ESG investments. Besides, there is an uneven distribution of ESG investments in different sectors. Currently, most ESG investments concentrate in sectors such as renewable energy infrastructure and transportation, while themes like carbon reduction and green solution for the industrial and construction sectors are underinvested.

Therefore, it’s necessary to integrate the top-down and bottom-up approaches. One the one hand, governments should put in place taxonomies and information disclosure requirements for ESG investments, and provide efficient supervision. On the other hand, firms, financial institutions and other interested market participants should actively promote ESG investment by utilizing all available resources, including social resources.

Moderator: Silk Road Fund has a lot of investment projects in Asia, Africa, Europe and other countries along the Belt and Road, so what are the challenges and difficulties that you have encountered with ESG investment in different markets?

ZHU Jun: Silk Road Fund mainly invests in the energy, infrastructure, manufacturing and financial sectors of Belt and Road countries and regions, with much heavy-asset allocation in the energy and infrastructure sectors. Since our inception nine years ago, Silk Road Fund has indeed gone through some challenges and difficulties, and we have tailored our solutions based on country specifities and in line with evolving environments. I would like to share three observations.

Firstly, emission reduction from 1 to 0 is great, but a cut from 1 to 0.5 or even 0.7 also counts. In short, ESG transition happens gradually. Most countries along the Belt and Road are emerging or low-income economies, which are still in the early stage of development. With inadequate infrastructure, sometimes acute socio-political tensions and different resource endowment, they could not accomplish the ESG transition overnight. After the outbreak of the Russia-Ukraine conflict, the shortage of energy supply was severe. Some countries resorted again to fossil fuels, some stakeholders quit net zero initiatives and anti-ESG movements gained strength. In this process, Silk Road Fund comes to realize the significance of transition investment, and the necessity of taking energy conservation and emission reduction as a key link in the transition.

In the Net Zero Emissions by 2050 Scenario as estimated by IEA, fossil fuels will still account for more than 20 percent of total energy supply. For many developing countries, fossil fuels still constitute the foundation in their energy structure, making it difficult to jump to pure green or new energies. In practice, the current rate of convergence between taxonomies of China and EU is 80 percent, with 20 percent still in divergence. In our Belt and Road investments, our bottom line is to meet taxonomy of China and the host countries, namely the investee countries. For example, Silk Road Fund joined hands with international partners in the investment of a gas power station in Uzbekistan in 2022. Gas is defined as clean energy in China and Uzbekistan though it is not the case in some other countries. Compared with traditional coal power projects, this gas station could help reduce carbon by 2.6 million tons per year, which better fits resource endowment of Uzbekistan. Therefore, this is a fairly good case of transition investment for us.

Secondly, we should both “substitute fossil fuels at source” and “reduce emission by end users”. On the one hand, through various financial instruments, we can attract more commercial investment into new technologies including new energy, hydrogen energy and biofuels etc. to partly substitute fossil fuels. On the other hand, as our technologies cannot achieve complete carbon reduction, we need to invest in technologies such as carbon capture, utilization and storage (CCUS), desulphurization and denitration to help reduce emission. SRF has invested in multiple projects that could partly substitute traditional energy at source. Meanwhile, in some of our energy projects, we’ve asked invested traditional energy firms to provide us with new energy and CCUS investment opportunities. For example, in an ongoing project, we are negotiating equal-weighted allocation in a company’s fossil fuel asset as well as new energy and emission reduction asset, thus cutting the carbon emission of the portfolio as a whole.

Thirdly, it is generally believed that energy equity, energy security and environmental sustainability could hardly be achieved at the same time, constituting an energy trilemma. Renewable energy such as solar and wind power are relatively mature technologies which are environmentally sustainable. In some countries, they could be afforded by users without government subsidies. However, they have some deficiencies in terms of energy security. Fossil fuels have advantages in terms of energy equity and security, but is not environmentally sustainable in the absence of well-developed supporting technologies. Therefore, investors could take the bottom-up approach, regarding traditional energy and new energy as integral components of our portfolio, in order to seek a balance among the trilemma. Policy makers could take the top-down approach, making emission reduction targets in a scientific and prudent manner, and putting in place a market mechanism incorporating emission and pollution costs into price signals, so as to promote environmental sustainability by leveraging market forces.

Moderator: Could you please share with us some best practices in ESG investment by Silk Road Fund?

ZHU Jun: As an institution which mainly invests via equity, Silk Road Fund helps enhance ESG governance of portfolio firms by due diligence and shareholder engagement. We’ve made some exploration in this field, which may not count as best practice.

Last year, SRF set up a Sustainable Investment Committee, published the company's Sustainable Investment Policy and Investment Exclusion List. We are also working on a sustainable data system and estimating our carbon footprints.

Meanwhile, we’ve been making active attempts in helping portfolio companies enhance their ESG governance and accelerate green transition. For example, in the above-mentioned investment aiming to integrate source substitution and endpoint management, we are negotiating ESG-linked carry clauses, providing that the investee firm compensate the shareholders if it fails to meet our ESG requirements. This could be viewed as some mandatory carbon reduction obligations proposed by shareholders for the investee companies. Besides, when investing in an Asian state-owned enterprise, we’ve helped the investee company establish its Board of Directors, form professional committees, make compliance rules, monitor information disclosure, and integrate its upstream and downstream resources to empower the company in a comprehensive manner.

This year, we’ve sent ESG questionnaires to key partners to gather information on their ESG investment practices and disclosure requirements. On the one hand, this could help improve our own ESG investment database and establish an information disclosure framework; on the other hand, this promotes closer communication, mutual learning and cross check between Silk Road Fund and our international peers, so as to facilitate further development of ESG investment in a joint effort.

Looking ahead, SRF will continue to draw on advanced international experiences, to better incorporate ESG principles into our investment practices.

On September 5, 2023, Silk Road Fund (SRF), along with other two international signatory institutions, received the Outstanding Services Award from the Steering Committee of Green Investment Principles for the Belt and Road (GIP) at the Fifth Plenary Meeting of GIP. The Award represents high recognition of SRF’s efforts in sharing knowledge and technology of sustainable investment, optimizing resource integration and allocation, and promoting international cooperation on sustainable finance.

Going forward, SRF will deepen collaboration with its partners in transition finance, sustainable infrastructure, climate change, and other key relevant areas.

As a medium to long-term development and investment fund established to support the Belt and Road Initiative, Silk Road Fund honors sustainable investment philosophy, and is one of the initial financial institutions signing up to the Green Investment Principles (GIP).

In 2020, the Fund’s ACWA Renewable Energy Platform won the GIP Best Green Finance Transaction Award. In 2022, the Fund received the GIP Best Progress Award.

GIP is a set of principles for greening investment under the Belt and Road initiative. It was co-initiated by the Green Finance Committee of China Society for Finance and Banking and the City of London Corporation’s Green Finance Initiative. The GIP includes seven principles at three levels, i.e. strategy, operations, and innovation:

Principle 1: Embedding sustainability into corporate governance

Principle 2: Understanding environmental, social and governance risks

Principle 3: Disclosing environmental information

Principle 4: Enhancing communication with stakeholders

Principle 5: Utilizing green financial instruments

Principle 6: Adopting green supply chain management

Principle 7: Building capacity through collective action