The People’s Bank of China announced a collaboration with the European Union to adopt a common taxonomy for green investments.

By Paul A. Davies, Nicola Higgs, and Edward R. Kempson

On 21 March 2021, the People’s Bank of China (PBC) announced that China is working with the European Union to adopt a common green taxonomy across the two markets later this year. PBC Governor Yi Gang, speaking at the China Development Forum, said strengthening the nation’s green finance system was the central bank’s priority for the next five years.[1] He emphasised that, in order for China to meet its 30/60 goal of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060, China needs to engage in collaboration with global partners.

The EU Taxonomy Regulation,[2] which entered into force in July 2020 and will take effect on a phased basis from 1 January 2022, is one of the most significant developments in sustainable finance to date. It creates a classification system for environmentally sustainable economic activities and aims to provide clarity as to what should be considered “green”. The EU Taxonomy Regulation is intended to avoid issues of greenwashing and is considered to be an important tool in implementing the Paris Agreement climate goals. For more details on the EU Taxonomy Regulation, please refer to our blog post on the topic.

The PBC’s announcement followed a related milestone: the EU’s Sustainable Finance Disclosure Regulation[3] (SFDR) took effect on 10 March 2021. The SFDR rules require financial market participants and financial advisors to disclose any negative environmental and social impacts of their investments, and categorise their products accordingly. The SFDR will likely have important implications for Chinese financial entities, as those that market products in the EU or have some other EU nexus may be caught within the regulation’s remit. Many managers and experts in Asia are currently unsure over the extent to which they need to comply with the SFDR, and a letter from the European regulators to the European Commission asking for clarification for non-EU alternative investment funds has so far been unanswered.[4] Although the SFDR rules can prove challenging to non-EU financial entities due to the need to navigate both local environmental, social, and governance (ESG) scoring systems and the EU regulations, this presents an incentive for the Chinese government to develop a standardised framework for ESG investing.

Chinese Initiatives on Green Investment to Date

The foundation for sustainable investments in China was laid in 2016, when several government bodies issued the Guidelines on Establishing the Green Financial System, which promote investment in a wide range of assets, including clean energy projects, green transportation, and green buildings.[5] China subsequently launched the Green Bond Endorsed Project Catalogue in June 2020 which contains PBC-led policies promoting sustainable finance, standards for China’s green bond market, and evaluation of banks’ performance in the green finance sector.

In 2019, the Asset Management Association of China (AMAC), a self-regulating body, asked its members to carry out a self-assessment on their green investing practices.[6] According to AMAC’s report, which was released in February 2021, only 40% of 37 sampled retail fund companies reported that green investing had been incorporated into their strategic planning. Further, just one-third of the sampled group had set up green investing targets, and only 38.5% disclosed whether they had fulfilled their internal goals.[7]

Nevertheless, ESG investing is gaining momentum in China — at the end of 2020, outstanding green loans were at about 12 trillion RMB (US$2 trillion), putting the country at the top of the ranks. Meanwhile, outstanding green bonds registered at about 800 billion RMB (US$120 billion), ranking the second largest in the world.[8]

The PBC’s Plan for Supporting the Green Transition

The PBC recognises that the Chinese financial system can play a key role in supporting the nation’s green transition and managing climate-related risks to meet President Xi Jinping’s carbon neutral pledge. Estimated hundreds of trillions of RMB will be needed to achieve the 30/60 goal, and the PBC acknowledges that incentives via regulation for market players in the private sector are necessary.[9]

In particular, PBC Governor Yi specified the following five action points to support the green transition:

  1. Improving the taxonomy of green finance as it is a basis for identifying green economic activities and channelling funds to green projects
  2. Strengthening information disclosure by developing a mandatory disclosure system
  3. Incorporating climate change into the policy framework by possibly including climate change factors in the stress test of financial institutions, and incorporating climate change into the monetary policy
  4. Encouraging financial institutions to proactively deal with climate risk by measuring the carbon emissions and climate risks of their projects and introducing a quarterly green credit assessment
  5. Deepening international cooperation with all G20 members when discussing the roadmap for promoting sustainable finance, information disclosure, and the taxonomy of green finance


It is becoming clear that the EU Taxonomy Regulation has the potential to form the basis of the global standard for ESG investing due to its international reach and the huge size of the asset pool it encompasses.

In addition to collaborating with the EU, China is planning to engage in wider discussions on the development of a globally recognised green taxonomy at the upcoming G20 summit, which is scheduled to take place in Rome this October. The PBC is hoping to set up a sustainable finance study group, with the US Treasury Department as a co-chair, to design an overall roadmap of sustainable finance.

Furthermore, there are other signs of an increasing willingness for cross-border convergence. During recent talks with US climate envoy John Kerry, French Finance Minister Bruno Le Maire called for Europe and the United States to agree on common rules to determine how “green” a financial investment is.[10]

We will be following the developments closely, in particular to see how China (with its 30/60 goal) and the EU Taxonomy (with 50% net reduction by 2030 and net carbon neutrality by 2050) are anticipating to align –is the intention to reach a common taxonomy, or will there be a more flexible taxonomy for China, and if so, what does this mean for the global climate targets?

Arguably, only with close collaboration can China, the EU, and the US reach their full potential as climate leaders. Without establishing common standards and aligned regulations to guide the private sector and making it possible to collect measurable and comparable data, the development of sustainable finance will be much slower.

Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of Aleksandra Dulska in the London office of Latham & Watkins.


[1] For the text of the full speech, see 

[2] EU Regulation 2020/852 dated 18 June 2020.

[3] EU Regulation 2019/2088 dated 27 November 2019.