The ‘Green Bond Guidelines’ and the ‘Green Bond Endorsed Project Catalogue’ were published by the People’s Bank of China and the Green Finance Committee of China Society of Finance and Banking on 22 December 2015. These government-backed documents set out important requirements on disclosure and use of proceeds to ensure a transparent and robust green bond market. They also set out six major themes for green bond financing in China: energy saving, pollution prevention and control, resource conservation and recycling, clean transportation, clean energy and ecological protection and climate change adaptation.
According to the Green Finance Committee, China needs a minimum injection of RMB 2 trillion ($330 billion) capital per year to finance climate solutions and to address environmental problems such as air pollution. Some 85% of this investment must come from the private sector, both at home and abroad. With the global debt market amounting to roughly $100 trillion in 2014, much of the necessary investment could come from bonds.
The global green bond market has increased rapidly from $11 billion in 2011 to almost $42 billion in 2015 according to Climate Bond Initiative, with most of the participation being dominated by players from Europe and US. All this is expected to change, however, as the launch of China’s new rules signal the entry of an important new player into the market.
The Chinese shade of green
The current version of the Guidelines is very much focused on the environmental challenges in China and offers a ‘localized’ definition of green to the market. It emphasizes pollution prevention and ecological protection in response to the country’s environmental challenges, while setting out projects to deal with these issues in the upstream supply chain, such as cleaning up coal processing and mining.
There are notable differences between the Green Bond Guidelines and international standards. The most of obvious one is eligibility of clean coal in China. In contrast, the Climate Bonds Initiative has excluded all fossil fuel related projects from the green bond universe. This is an important difference for foreign institutional investors who have environmental mandates in their investment strategies, and in the light of support for coal divestment and carbon reduction pledges made at the COP21 climate conference.
Such differences over what is green are not unprecedented. One example is the green bond eligibility criteria set by the Multilateral Development Banks which try to strike a balance between the need for economic growth and environmental integrity in developing countries where they finance projects. For example, Brazilian landfill projects financed by World Bank green bonds are in a grey area between ‘green’ and ‘dirty’, despite achieving carbon emissions reductions.
Both international investors and potential Chinese issuers in the international market should be aware of the implications of such differences. For international investors, it is necessary to engage with issuers and obtain better information in order to avoid infringing sustainable investment mandates. For potential Chinese issuers who are targeting international market, such differences would result in different investor appetite in the foreign market.
A good call on disclosure
The disclosure and use of proceeds requirements in the Guidelines are important features for both domestic and foreign investors. Integrity and transparency are fundamental to ensuring that the environmental and social benefits financed by green bonds are delivered. This is especially important to address possible investor concerns over the Chinese bond market. Unlike the developed market where voluntary reporting is often adopted, Chinese issuers have yet to incorporate robust measures to demonstrate that finance will flow into eligible green projects. The periodic disclosure requirement and clear allocation of proceeds in the Guidelines are aimed to clear doubts that some may have.
Expected participation of all
Before the Guidelines and Catalogue were published, green bond issuance had been tested by a handful of trailblazers from China in the international market. In July 2015, Xinjiang Goldwind issued a three-year, $300 million green bond and received orders of $1.4 billion. Hong Kong’s CLP Holdings issued the first corporate green bond through its subsidiary in India in September last year, securing $90.3 million for capital expenditure and refinancing of wind power assets. In October, Agricultural Bank of China issued the first Renminbi and US Dollar denominated green bonds, plugging a total of $994.5m into the Chinese green bond market.
Now China has made it clear which sectors and projects are allowed to be labelled as green, as well as establishing rules around issuing green bonds, China could rapidly become one of the biggest players in the green bond market. Indeed, shortly after the People’s Bank of China and the Green Finance Committee announced the new rules, Industrial Bank of China launched the first Chinese green credit asset-backed securitization on 6 January 2016 in line with the green bond guidelines. Its value was approximately $401.6 million and it was 2.5 times oversubscribed.
Institutional investors in China, such as pension funds, insurance companies, non-bank institutional investors, have been taking a more important role in financing the private sector as a result of the recent changes that allowed entry into stock market. It is reasonable to expect to see such investors in China becoming domestic green bond buyers in future. Indeed, these investors have long been active players in the traditional Chinese bond market.
The Green Bond Guidelines will also help Chinese issuers reach out to a more diversified group of international institutional investors that provide low-cost, long-term capital. Not only would Chinese overseas issuances matter for international investors, but China’s domestic issuances will become relevant to international investors. The fact that the Green Bond Guidelines will be implemented in the interbank bond market, which was made easier for international buyers to access earlier this year, represents an opportunity for international investors to fulfil their fiduciary duty while exploring investment opportunities in China.
Alongside commitments to cap the country’s coal consumption and carbon emissions from around 2030, China has put an ambitious goal of becoming an ‘ecological civilization’ on the table. Prior to the Green Bond Guidelines and Catalogue, the Chinese financial community has already started the search for green investment options in the equity market. The creation of the SSE 180 Carbon Efficient Index, launched in October 2015 by Shanghai Stock Exchange and China Securities Index, is a good example of how regulators and market participants are recognizing climate change and environmental risks embedded in the financial market.
However, this alone is far from enough to entertain all investment strategies, nor to help minimize climate change and environmental risks for investors. The concept of sustainable investment can only be fully realized with a wide range of green investment options that match the different needs of investors.
The launch of the China’s Green Bond Guidelines and Project Catalogue is an exciting development that will help unlock much needed capital to finance the country’s transition towards sustainable economic growth. It is a call to action by the Chinese government for issuers to take advantage of the surge in interest in green bonds to gain access to new sources of capital, and for financiers to benefit from new investment opportunities in one of the world’s biggest economies.