Green and Transition Finance on the Municipal Level: Case of Huzhou City

The escalating impacts of climate change have made achieving net-zero emissions a top global priority. This goal hinges on two critical pillars: advancing green industries and decarbonizing traditional, carbon-intensive sectors. The rapid growth of green industries demonstrates that economic growth and environmental sustainability can coexist, offering a path to reduce emissions while creating new economic models and job opportunities.  Transitioning traditional sectors, however, requires structural shifts supported by green and transition finance, stringent policies, robust target setting, advanced technologies, and collaboration among stakeholders.

“Green and Transition Finance on the Municipal Level: Case of Huzhou City” explores the green finance journey of the city of Huzhou, a medium-sized city in China that has historically relied on heavy industry for development. Huzhou has pioneered green finance and is now transitioning toward carbon-intensive sector decarbonization through innovative transition finance mechanisms. Coauthored by Dr. Ma Jun and Yunhan Chen, this paper analyzes Huzhou City’s approach to green finance to help green and transitioning corporations across emerging markets and developing economies tap into local liquidity.

According to the authors, Huzhou’s success is driven by an enabling environment shaped by the city’s local government, including clear regulatory frameworks and policy incentives that essentially reduce transaction costs. Digital platforms that integrate environmental, social, and governance (ESG) assessments and green certifications have further supported the market. Huzhou has also introduced a comprehensive taxonomy covering nine carbon-intensive sectors and guidelines for carbon accounting and just transition.

Huzhou’s Approach to Transition Finance

In January 2022, Huzhou introduced China’s first municipal-level roadmap for transition finance, which identified primary requisite tasks that include developing taxonomies, policy incentives, transition finance services, and digital platforms (see Exhibit 1).

Economic and Environmental Context

Huzhou’s rapid industrial growth led to severe environmental degradation, prompting public demand for sustainable economic pathways. As the economic inefficiencies and environmental costs of polluting industries became evident, Huzhou was motivated to explore green development. Its early initiatives focused on reducing pollution and improving urban infrastructure, setting the stage for its green finance innovations.

Since becoming one of China’s inaugural “green finance pilot zones” in 2017, Huzhou has seen its green loan balance grow eightfold, to CNY338.8 billion (approximately USD46.76 billion), by the end of 2023, representing 32% of its total loan balance and 20 percentage points higher than China’s national average. The city has tailored green finance to meet the unique contexts of medium-sized cities, aiming to build a robust ecosystem characterized by rapid green financing growth, reduced funding for polluting sectors, and low nonperforming loan ratios.

Financial institutions in Huzhou have developed more than 180 green financial products, including loans, bonds, and insurance tailored to areas such as carbon efficiency and electric vehicles (EVs). This progress has been supported by digital platforms, such as the Green Loan Express, which has facilitated CNY510 billion (approximately USD70.45 billion) in credit for more than 43,000 enterprises.

Transition Finance Innovations

Huzhou introduced China’s first municipal transition finance taxonomy in 2022, outlining 106 decarbonization pathways for key carbon-intensive industries. These pathways focus on clustering industries, decarbonizing production processes, upgrading infrastructure, and engaging third-party consulting services. The taxonomy’s baseline and target values are aligned with local conditions and global frameworks, ensuring credibility, and preventing “transition washing.”

The paper explains that to facilitate transition planning, Huzhou has provided templates and guidelines for enterprises to set decarbonization targets and financing strategies. These tools help businesses align with international frameworks while remaining practical for local contexts. Initial pilots in the chemical fiber sector have shown promising results, with projected carbon intensity reductions of nearly 40% by 2025.

Just Transition

Huzhou emphasizes the importance of “just transition”—the concept of meeting climate goals by ensuring all communities, workers, and social groups are included in the pivot to a net-zero future. The city has introduced assessment methodologies with quantitative and qualitative indicators for transitioning corporations to evaluate their impact on employment stability, income distribution, and supply chain resilience. These measures aim to maintain social equity during the transition process.

Huzhou’s Green Finance Journey 

Key Achievements: 

• Rapid growth of green finance: From 2017 to 2023, Huzhou’s green loan balance increased by 45.8% annually, with nonperforming loan ratios remaining exceptionally low (0.002%). 

• Innovative ecosystems: Financial institutions in Huzhou now offer more than 180 varieties of green and transition finance products, ranging from loans and bonds to insurance and guarantees, to support green objectives, such as carbon efficiency, carbon pricing, EVs, and green buildings.  

• Digital infrastructure: The municipal online service platform for green finance has cumulatively served more than 43,000 enterprises and facilitated more than CNY510 billion in credit, while reducing matchmaking time to 1.4 days from 2.7 days originally.  

• Decarbonization progress: Carbon emissions per unit of economic output decreased by 12% in one year, driven by the launch of the carbon efficiency code. 

Factors for Success: 

• Substantial reduction of transaction costs: The provision of digital platforms, localized standards, and policy incentives has lowered costs for corporations, particularly SMEs, creating a replicable model for other municipalities. 

• Strong political will: The Huzhou government’s commitment to green development has enabled cross-agency coordination and long-term policy alignment. 

• Pragmatic approaches: The “create first, improve later” mindset has allowed for iterative improvements in green finance initiatives. 

• Capacity building: Partnerships with international organizations have enhanced local expertise and informed best practices. 

Challenges and Future Directions 

Transition finance involves shifting carbon-intensive industries toward sustainability while addressing local contexts and long-term dynamics. Unlike green finance, which focuses on inherently sustainable activities, transition finance requires ongoing evaluation of entities’ progress toward decarbonization.  

Huzhou has used its green finance infrastructure to develop a municipal-level roadmap for transition finance, creating frameworks for taxonomy, disclosure, and financial products. By leveraging digital innovation, localized policies, and strong governance, the city has created a robust model for sustainable finance. Its journey offers valuable lessons for other cities seeking to transition toward net-zero emissions. Future efforts should focus on creating a self-sustaining ecosystem, diversifying financial products, and ensuring long-term regulatory consistency to maintain momentum and scalability. 

Key Takeaways: 

• Dual pillars of net zero: Green industries and decarbonization of carbon-intensive sectors are essential for achieving net-zero emissions, supported by green and transition finance.  

• Huzhou’s leadership: The city pioneered green finance, achieving rapid growth in green loans (31.3% of total loans) and developing China’s first municipal transition finance taxonomy. 

• Policy and digital innovations: Comprehensive incentives and digital platforms, such as the Green Finance Service Platform and carbon account system, reduced costs, streamlined processes, and increased access for SMEs. 

• Just transition framework: Huzhou prioritized equity by addressing potential negative impacts on employment and supply chains, with methodologies to ensure socially responsible decarbonization. 

• Key success factors: Substantial reduction of transaction costs, strong political will, cross-agency coordination, iterative improvements, and international partnerships enabled scalable and effective green finance models. 

• Challenges and future needs: Sustaining progress requires reducing dependence on fiscal subsidies, diversifying financial products, and adapting to evolving global standards.  

Authors 

Ma Jun 
President, Institute of Finance and Sustainability, Beijing 

Yunhan Chen 
Research Associate, Institute of Finance and Sustainability, Beijing