New Chinese green bond standards backed by the industry

New national green bond standards rolled out by the Chinese government in December gained industry endorsement and analysts say they will drive forward the harmonization of green bond standards globally.

The global green bonds market, which started in 2008 with bonds issued by the World Bank, boomed in recent years but its fast growth is being hampered due to the lack of universal standards globally.

Central to the issue is a lack of commonly agreed definition of what projects are considered to be green, and the procedure of certifying that money raised from bond issuances is indeed used to fund the projects they've promised to fund.

"The Chinese standards are very useful to drive forward China's green bond market because it identifies areas where investments would lead to improvement of environment, setting up a detailed and clear direction to channel funds into," says Christopher Flensborg, head of sustainable products and product development at the Stockholm based SEB.

Flensborg says he expects other national governments to follow China's lead in issuing national standards unique to their country specific situations, which will efficiently channel funds into each country for green industries that most need financial support in order to grow.

Internationally, two sets of standards already exist. The Green Bond Principles (GBP), led by the International Capital Market Association (ICMA), is a more broad-based set that suggests the procedures for designating, disclosing, managing and reporting on the proceeds of a green bond. ICMA is a Zurich based self-governing organization, representing capital market companies across 15 regions.

As the GBP is less specific about what industries are acceptable for green investments, London-based non-government organization Climate Bond Initiative (CBI) has initiated its own set of standards, which are more specific in defining projects that it considers to be green. Examples of eligible categories include solar, geothermal, low carbon transport, water, bio-energy, amongst others.

Wang Yao, deputy secretary general of China's Green Finance Committee, which is under the leadership of PBoC, says the newly released Chinese standards are coherent with GBP and has great similarities with CBI. Uniquely, it also takes into account China's industrial structure and specific clean energy market situations, making it practical and handy to use by Chinese green bond issuers.

As well, the Chinese standards could prove useful for international organizations issuing onshore renminbi green bonds in China (known as panda bonds), which is expected to be a trend as China further liberalizes its capital markets, says Wang, who is also director of the Research Center for Climate and Energy Finance at the Central University of Finance and Economics, a think tank.

"The Chinese green bond market has great policy support and huge potential, and has attracted wide global investor attention. Currently many international organizations expressed great interest in issuing green panda bonds in China, so it would prove useful for them to follow the Chinese standards in their use of proceeds, due diligence, information disclosure and certification," Wang says.

The Chinese green bond standards have a catalogue which classifies projects into 31 types under six categories: energy conservation, pollution control, resource conservation and recycling, clean transport, clean energy, and ecological conservation and adaptation.

Essentially it is a comprehensive definition of which green bonds investments are acceptable, and the standards can be used by authorized third party certifying organizations to check if the bond proceeds are invested in acceptable green projects.

"What the Chinese government has provided is one set of criteria which is simple, understandable and specific, especially with its six main endorsed green bond project categories," says Huo Rongrong, Global Head of China and RMB Business for Capital Financing at HSBC.

In April 2015, HSBC hosted a one-day forum in Beijing on sustainable financing, which was the first of its kind and well attended by Chinese policy makers, banks, insurance firms, corporate and public sector clients, and greatly contributed towards the dialogue of China's policy drive on green finance.

In particular, the six categories identified by the Chinese government would efficiently help drive investment into broad areas in China's green transition that are most urgently in need of money, by signaling to investors the key promising areas in China's green transitioning, Huo ways.

Huo says that regardless of where a specific green bond is issued, many of the projects to be funded with the bond proceeds will physically be based in China, so using the Chinese standards to certify them would make sense. More frequent use of the Chinese standards would increase its prominence internationally in the future, driving forward the standards harmonization trend.

Sean Kidney, CEO and Co-founder of the Climate Bond Initiative, said the Chinese standards greatly overlap with the CBI standards. He said some items in the Chinese catalogue will be useful for international use, and his team will consider these items when updating CBI standards. These will include criteria around flood protection measures, waste recycling and fish farms.

Kidney says China's inclusion of coal and gas in its catalogue is understandable with its energy transition, but these are not included in international standards as international priorities differ. "In China, reducing air pollution with a shift to lower-pollutant coal power remains part of energy mix transition-planning. The international discussion is more focused on the need to phase out greenhouse gas emissions from coal power."

Currently one key controversy regarding the Chinese standards is the inclusion of clean coal, which the international community believes should be excluded. China argues that the financing of clean coal is important for the country to shift its heavy reliance away from traditional coal sources, which account for about two thirds of China's energy consumption.

"Fundamentally China's energy mix is in transition, and as we cannot move to large scale consumption of renewable energy at once, to make a shift to clean coal will help with the transition. This would probably be the same situation faced by many other emerging economies as well," says Wang.

Kidney says China's inclusion of coal and gas in its catalogue is understandable with its energy transition, but these are not included in international standards as international priorities differ. "In China, reducing air pollution with a shift to lower-pollutant coal power remains part of energy mix transition planning. The international discussion is more focused on the need to phase out greenhouse gas emissions from coal power."

But some industry analysts disagree. Nick Mabey, chief executive and a founder of Third Generation Environmentalism, believes that China should exclude clean coal from its catalogue for its green bond market to attract investment from international investors.

"The question is not a scientific argument of whether clean coal is green. Rather, China needs to recognize that international investors do not accept that coal as green, so this will limit international investors' appetite. China should make its standards easy to understand and acceptable by investors internationally and fund clean coal through other means," Mabey says.

Mabey says he believes convergence of green bond standards internationally is very important because projects funded by international financial institutions like the Asian Infrastructure Investment Bank would be funded by a global investor base, and coherent standards for these projects would help investors accept green bonds' as an asset class faster.

"As the green bond community is still so young globally, there are still many debates within the industry concerning whether coherent standards are required. The world is looking to China's presidency of the G20 to take this discussion forward and hopefully reach a viable solution," he says.

To contact the reporter: cecily.liu@mail.chinadailyuk.com