Green Bonds Take Root in China

(Beijing) — Green bonds are starting to look like an increasingly attractive investment prospect in China as the estimated costs to clean up the environment and cut emissions mount, increasing the need for environmentally friendly financing plans.

Liang Chao, a manager of the investment department of JC Bank, began to take an interest in green bonds in October. Like other commercial lenders, JC Bank, which is based in Shanxi, China’s largest coal-mining province, is considering using green bonds to help companies fund and develop sustainable projects that benefit the environment.

In China, “green bonds” refer to debt instruments that allow investors to support environmentally friendly projects that save energy, reduce carbon emissions and cut pollution. Both companies and financial institutions can issue green bonds.

“We have been actively gearing up for green bonds due to favorable government policies, and we have in hand some projects that qualify,” Liang said. He added that selling green bonds is more appealing than selling other bonds because of a fast-track approval procedure and relatively low financing costs.

Green bonds have largely been issued in Beijing and some coastal provinces, which tend to be more developed than China’s inland regions. If everything goes well, the green bonds sold by JC Bank will fill a gap in the green debt market in heavily polluted Shanxi.

There is considerable demand in China for funds to fight pollution. The annual cost of cleaning up China's environment and cutting carbon emissions is estimated at over 3 trillion yuan ($436 billion), said Ma Jun, chief research economist at the People’s Bank of China (PBOC), the nation’s central bank.

China’s green bond market did not start to take shape until 2016, but it has burgeoned rapidly. Last year, 29 Chinese companies and financial institutions raised more than 201 billion yuan through the sale of 66 green debt instruments, including medium-term notes and asset-backed securities, according to a recent report jointly issued by the China Central Depository & Clearing Co. Ltd. and the Climate Bonds Initiative, a London-based nonprofit that aims to mobilize debt markets to address climate change.

“China has become the world’s largest green bond market. Within one year, it has caught up with what other markets achieved over five years,” Climate Bond Initiative CEO Sean Kidney told Caixin. In 2016, the amount of green bonds issued by Chinese entities accounted for 39% of the global market, up from 3% one year earlier, the report said.

Unlike overseas green bond markets that grew quickly mainly due to momentum from investors, China’s green bonds would not have grown so rapidly without policy support from central government departments, including the central bank.

In December 2015, the PBOC published regulations for green bond issuance in China’s largest bond market, the interbank market. A few weeks later, the National Development and Reform Commission, the country’s top economic planner, published directives for state-owned enterprises on selling green bonds. Since then, the market has grown fast, led by large issuers such as Shanghai Pudong Development Bank, Industrial Bank and the Bank of Communications.

A clear signal was sent out at the G-20 summit in September that China was putting its full weight behind building a green financing mechanism, when the central bank and six other central authorities jointly laid out general green financing guidelines.

The guidelines, mapping out the future path of China’s green financing system, defined the standards for green bonds, pledged support for qualified green firms to get listed and refinanced, and put in place a compulsory information-disclosure system regarding environmental issues.

Despite the clamor, Chinese investors appear not to have a clear sense of what green bonds are. Many investors purchase green bonds while focusing on the general credibility of the bond issuers while overlooking the environmental impact of the investment, said Zhang Qing, deputy director of the bonds department of China Securities Regulatory Commission.

Several fund managers told Caixin that they did not use a clearly defined standard to assess the “green elements” of the bonds they purchased.

In an effort to encourage investors to place more weight on what benefits may be brought to the environment after buying a green bond, the Ministry of Environmental Protection and some financial associations should take the initiative to develop some environmental assessment methods and tools that should be easily accessible to investors, said Ma of the PBOC.

While China is encouraging domestic green investors, some foreign investors are also showing an interest in China’s burgeoning green bond market.

“The green bond market in China is growing too fast to be ignored by international investors,” but many have noticed the variation in definition of what constitutes “green,” Kidney said.

While the Green Bond Principles, governed by the International Capital Market Association, do not explicitly ban clean fossil fuels, Barclays MSCI Green Bond Index, an internationally adopted benchmark index, gives a categorical “no” to all fossil fuels, which is different from the Chinese policy.

At least 20% of green bond investments in China meet the most stringent international principles, Kidney said.

But there is no need to settle on a single green bond standard, according to Marilyn Ceci, managing director and head of green bonds at J.P. Morgan’s corporate and investment bank department. “It’s possible to make a regional standard to define ‘greenness’, as one country’s rule may not necessarily be put into practice in another.”

Contact reporter Dong Tongjian (tongjiandong@caixin.com)