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China embarks on regulatory reforms for international green bond investors

05 October 2021 Max Tingyao Lin

China has initiated a series of reforms for green bonds in the country in recent months that could eventually help domestic issuers become more attractive to foreign investors.

While China's green bond market is one of the world's largest, finance experts said Chinese issuance lacked consistent definitions and adequate information disclosure, aside from not always being properly evaluated.

"China's green bonds used to be shunned by many foreign investors on the basis that use of proceeds could be carbon intensive, or for general corporate purposes," IHS Markit Senior Economic and Financial Consultant Brian Lawson told Net-Zero Business Daily.

In an effort to boost investor confidence, Chinese authorities have published draft regulations for third-party certifiers, guidelines on listed companies' environment risk disclosures, while also pushing for harmonization of green taxonomy at home and abroad.

The Green Bond Standards Committee, overseen by China's National Association of Financial Market Institutional Investors, issued trial rules 24 September on how green bond certification agencies should operate. "This is to enhance the quality of green bond evaluation and certification, and to promote the development of green bond instruments in a regulated manner," the committee said in an announcement.

The Operational Rules for Market Evaluation of Green Bond Evaluation and Certification Institutions cover certification agencies' workflows, qualifications, manpower, and credibility. The committee believes they can lead to more specialized services and help limit "greenwashing"—a term referring to creating misleading information on a product's green benefits.

Multinational certifiers like Viego Eiris, Cicero, and Trucost have emerged over the past decade as more international investors seek trusted agencies to evaluate the environmental credentials of the bonds they purchase.

In China, nearly 20 players have been active in the space. Notable certifiers include Zongcai Green Financing and China Quality Certification Centre.

"Certifiers have the reputation of being the 'gatekeeper' of green bonds. Internationally, there are many verification service providers that are relatively mature, and their evaluation is trusted by investors," the committee said.

"In China, there are some critical issues that need to be solved as soon as possible," it admitted. "There are numerous types of certifiers offering services with uneven qualities. There is the lack of economies of scale in the fragmented competitive landscape. The market is not really regulated, and the certifiers do not know their responsibilities and what they should do."

Golden Credit Rating International, a Beijing-based agency, welcomed the new regulations and said it expects certifiers would need to provide better evaluations.

"The survival of certifiers will depend on their expertise and how well they are recognized by investors and bond issuers," the agency said in a statement 29 September. "This will promote healthy competition within the industry."

Ongoing reforms

The Green Bond Standards Committee's trial rules complement other activity this year.

On 28 June, the China Securities Regulatory Commission (CSRC) issued new guidelines for listed companies to disclose risks related to environmental, social, and governance (ESG) factors. However, the regulator fell short of mandating the firms report their GHG emissions.

The People's Bank of China (PBOC) 1 July brought into force an updated catalogue of projects eligible for green bond issuance, providing a uniform framework for all Chinese firms interested in the financial instrument.

In the past, financial institutions needed to follow PBOC standards; listed firms comply with the CSRC's rules, and non-listed companies adhere to the National Development and Reform Commission's guidelines.

The Chinese central bank has also excluded "clean" fossil fuel projects in the latest catalogue, such as supercritical coal-fired power plants, in a bid to align with international standards. Outside China, the owners of such projects generally cannot sell green bonds.

The move came as Beijing seeks to develop a common green taxonomy with the EU to facilitate fund flows between the two economies.

"China's pronounced goal of carbon emissions peaking by 2030 and achieving carbon neutrality by 2060, also known as the 30/60 goal, sets a higher bar for all of us," PBOC Governor Yi Gang said in a speech earlier this year.

"To be carbon neutral … we must mobilize massive green investment in line with market principles. According to various estimates, hundreds of trillions of RMB [renminbi, also known as yuan] is needed to achieve the 30/60 goal. Public finance, however, could cover only a tiny fraction," he added.

Local media group Caixin Global reported China and the EU could publish the first set of the common classification standards this year. Further announcements could be made at the G20 summit on 30-31 October.

International alignment

More Chinese green bond issuers are following international standards this year amid the government's harmonization efforts, according to Climate Bonds Initiative (CBI), which sets voluntary standards for $28.1 billion green bonds globally.

The London-based nonprofit estimated that in the first half of 2021, 58% of the $37.6 billion of green bonds issued by Chinese companies at home and abroad were aligned with its criteria, which require all proceeds to be used for green purposes.

In 2020, 54% of the $44 billion raised was in line with CBI standards. Total issuance in 2020 fell 21% from $55.8 billion in 2019 due to disruptions during the COVID-19 pandemic, the CBI said in its annual market report on Chinese bonds.

"The market had seen the close-up of the gaps between China's local green definitions and the international ones," the nonprofit said. "Nonetheless, the gaps that remain between Chinese and international green bond standards have the potential to dent foreign investors' enthusiasm."

On 24 September, Industrial and Commercial Bank of China raised ¥10 billion ($1.55 billion) in what was claimed to be the first green bond meeting CBI standards issued by a major state-run lender in mainland China.

The money issued in the inter-bank market will be used to fund clean energy and green transportation, according to domestic media.

Lead underwriter and bookrunner China International Capital said the three-year bonds were 2.83 times oversubscribed and fetched a 2.8% interest rate, the lowest among bonds issued by commercial banks worldwide this year.

Big money

A record amount of funds has flowed into the green bond market in recent quarters amid growing action on climate change. CBI data shows total green bond issuance totaled $348 billion globally year-to-date, already exceeding $297 billion for the whole of 2020—which itself was a record year.

From March through August, banks and companies managed to raise $175 billion from selling green bonds whose proceeds are being deployed to reduce climate risks and for clean technology, according to an IHS Markit analysis, which also showed the borrowers were able to achieve low interest rates.

Lawson said major Chinese international issuers have been increasingly aligned with the International Capital Market Association's Green Bond Principles in efforts to gain access to European ESG funds and save money on financing costs. Compared with the CBI criteria, these principles focus more on the use of proceeds rather than detailed, sector-specific green definitions.

"Chinese green bonds will have to adjust to keep pace with tighter international standards, or will lose potential cost benefits," he added.

Beijing has granted unlimited access to the Chinese securities market to qualified foreign institutional investors since June 2020, positioning the country's green bond market for further expansion. The CBI foresees "huge" growth potential as green bonds only accounted for less than 1% of China's overall bond market last year.

Separately, Chinese companies have also been keen to sell offshore green bonds denominated in US dollars. Among the active players in the bond market is China Merchants Bank, part of the state-owned China Merchants Group.

ING suggested Chinese lenders contributed to the strong expansion of global corporate sustainable bond issuance to more than $180 billion this year. This estimate took into account green, social and other sustainability-linked bonds.

"The big expansion in the global corporate bond issuance has in fact been from non-US and non-Eurozone corporates," the Dutch financier said in a research report. "Notable jumps in sustainable bond issuance from China-domiciled corporates drove this."

Posted 05 October 2021 by Max Tingyao Lin, Principal Journalist, Climate & Sustainability, IHS Markit

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