Pioneering path

Climate-related physical risks, compounded by biodiversity loss and natural capital degradation, have evolved into systemic challenges that traditional financial risk frameworks have struggled to adequately capture.

China has maintained a relatively consistent and strategic approach to climate change mitigation. The policy directives of the 2025 Central Economic Work Conference mark a substantive shift in the underlying logic of green finance in China, emphasizing the guiding role of the dual carbon targets — peaking carbon emissions before 2030 and achieving carbon neutrality before 2060.

Three notable characteristics emerge from this policy orientation. First, a move from “point-specific breakthroughs” toward “systemic integration”, whereby green transition, cultivation of new quality productive forces and risk prevention are coordinated within a unified framework. Green finance is thus no longer merely a financing instrument for environmental governance, but increasingly serves as a strategic lever for fostering new quality productive forces and reinforcing economic resilience.

Second, a shift from “scale-oriented” to “quality- and efficiency-oriented” development, implying that supply-side innovation in financial instruments must be closely aligned with the demands of a comprehensive green transition across the economy and society. This entails targeting funding gaps for energy-saving and carbon-reduction upgrades in key industries, accommodating the long-cycle financing characteristics of new energy system development, and proactively responding to emerging needs in climate physical risk management.

Third, a transition from “reactive response” to “proactive shaping”, elevating climate adaptation capacity-building to a strategic priority and shifting the financial system’s orientation from ex-post risk mitigation toward ex-ante resilience construction. This policy evolution stands in contrast to the recent volatility observed in climate policies among certain advanced economies. As pullbacks from climate action and climate deregulation have entered the policy mix in some countries, China has maintained its commitment to its dual carbon targets, providing market participants with a relatively stable and predictable pathway for transition through institutional continuity.

Institutional arrangements have translated into a substantial expansion in the scale of sustainable finance. In the green credit sector, outstanding balances increased from 7.3 trillion yuan ($1.04 trillion) by the end of June 2016 to 43.5 trillion yuan by the end of the third quarter of 2025, positioning China as the largest green credit market globally. In green bond markets, issuance volume rose from 201.8 billion yuan in 2016 to 683.3 billion yuan in 2024, representing the highest issuance volume worldwide. This scale has generated observable international spillover effects.

China has actively participated in global green finance governance, serving as a co-founder of the Network for Greening the Financial System in 2017, and collaborating with the European Union to develop the Common Ground Taxonomy to facilitate cross-jurisdictional standards harmonization. Within the Belt and Road Initiative framework, China and the City of London jointly launched the Green Investment Principles, which have attracted 52 signatory institutions covering 19 jurisdictions. Prospective developments may include the acceleration of multitiered market structures integrating bank credit, bond markets and equity investment, alongside the cultivation of patient capital to support early-stage investment in sectors such as clean energy and biodiversity conservation.

Carbon market development exemplifies the integration of institutional innovation with market-based mechanisms. In 2024, the national carbon market recorded allowance transactions of 189 million metric tons, with the aggregate transaction value reaching 18.114 billion yuan. Carbon prices rose gradually from 48 yuan per ton at market inception in 2021 to approximately 72 yuan per ton by mid-2025, indicating strengthened price-discovery functions. The voluntary emissions reduction trading market was officially reinstated in January 2024, establishing a complementary mechanism alongside the compliance market. In March 2025, regulatory coverage was extended to encompass the steel, cement and aluminum smelting sectors, incorporating approximately 3 billion additional tons of emissions. This incremental approach represents an ongoing exploration of methodologies for the recognition, circulation, pricing and capitalization of ecological value. Future developments may involve the expansion of carbon asset financing pilots and the establishment of mechanisms linking financing costs with emissions reduction performance.

Effective green finance development requires fiscal-financial policy coordination. Fiscal instruments including interest subsidies, guarantees and risk compensation help reduce financing costs for green projects, while policy incentives accelerate private capital flows into green sectors, creating leverage effects from public investment. This public-private collaboration provides an institutional foundation for achieving climate, biodiversity and growth objectives simultaneously.

Digital technology is reshaping both the service boundaries and efficiency frontiers of green finance. Progress in cross-departmental green data integration and the construction of a unified national green finance information infrastructure have helped address the information asymmetry that long constrained green finance development. The establishment of carbon accounting methodologies and databases for financial institutions is eliminating information friction caused by inconsistent standards. Moving forward, technology empowerment should continue, promoting coordinated development across the green finance value chain, ultimately forming a green finance ecosystem with government guidance, market leadership and broad social participation.

Sustainable investment principles are gaining traction in capital markets. The focus is shifting from shareholder primacy to stakeholder value creation, with investors paying increasing attention to corporate performance on environmental, social and governance (ESG) matters. As of the end of June 2025, ESG-themed public funds totaled approximately 268.3 billion yuan. Expanding and improving impact investing to better align economic incentives with sustainable development goals is becoming the new consensus in capital markets.

Future priorities may include stronger disclosure regulations, establishment of standardized rating methodologies and greenwashing prevention. At the same time, China should actively participate in setting international green finance standards, deepen standards alignment building on the China-EU Common Ground Taxonomy, share green finance practices suited to developing countries’ stages of development, and build an international green finance standards network with China as a key node.

The upgraded policy framework offers clearer strategic guidance for corporate transition. In this new phase characterized by the deep integration of new quality productive forces and green transformation, enterprises should develop adaptive strategies: transforming carbon management capabilities into core competitiveness by leveraging carbon market expansion and carbon asset financialization to optimize resource allocation; capitalizing on the innovation window presented by sustainability-linked loans, transition bonds and other emerging instruments to dynamically link financing costs with emissions reduction performance, thereby creating endogenous incentives; and proactively developing climate risk management capacities by incorporating extreme-weather response into supply chain resilience planning, shifting from passive defense to active adaptation.

At this critical juncture of global green competition restructuring, enterprises that successfully convert policy opportunities into strategic advantages will be better positioned to navigate both high-quality development and sustainable development trajectories.

The underlying significance of green finance resides in its capacity to embed climate-risk resilience within economic systems. Through its resource allocation function, it facilitates reduced dependence on fossil fuels; through its risk management function, it enables the identification of climate-related financial risks while preserving natural capital.

From a long-term perspective, green finance may serve as a catalyst for productivity enhancement, a stabilizing mechanism for economic resilience and a foundation for international engagement.

The author is the Wu Yuzhang distinguished professor at the School of Finance and a research fellow at Changjiang River Economic Belt Institute at Renmin University of China. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.