China has emerged as a key player in boosting the fledgling “green bonds” market which promotes investment in environmentally friendly projects that address climate change.
Chinese officials and their counterparts from the European Union, as well as Canada, Japan and India, will meet in Brussels this month to consider how to streamline standards in this growing finance sector.
Green bonds are issued by governments, banks, local authorities or corporations and the proceeds raised can be spent in areas ranging from energy and transport to land use and waste disposal.
To qualify internationally as “green”, projects funded by the bonds have to fulfil strict scientific criteria linked to the 2015 Paris Agreement under which governments pledged to limit rising global temperatures.
In China, the green bonds revolution is part of the project to turn the country from the world’s biggest source of environmental pollution to the leader in global warming mitigation.
One scientific report last year suggested that China had already hit its peak emissions target under the Paris accord 12 years ahead of a 2030 deadline.
In 2018, Chinese entities issued more than $30 billion worth of bonds that met international “green” definitions, maintaining its second place position just behind the United States and ahead of France.
China’s Industrial Bank Co Ltd was the second-largest green bond issuer in the same year, just behind US-based Fannie Mae.
At the same time, there has been a drop in the proportion of bonds considered “green” in the local market but not regarded as such by foreign investors. China has allowed green bonds to be used to finance clean coal projects, which are excluded in other markets.
The latest improvement in the ratio has been linked to growing transparency in the Chinese market. Future reforms will focus on increasing local issuance of green bonds and opening up the market.
China offers incentives to banks and businesses in the form of lower central bank borrowing costs and subsidised interest payments on green bonds. For the most environmentally friendly loans, the government subsidise up to 12 percent of the interest rate.
Another regulatory reform to make the sector more attractive to companies that issue green bonds is to allow them to use these assets as collateral.
Chinese authorities are also working with industry to verify that green bond issuers fulfil their environmental pledges, particularly on reducing carbon emissions and pollution.
A third of the funds raised in 2018 went on transport projects, including the Wuhan and Nanjing metros. In the energy sector, most investment went into solar and wind projects.
At the launch of a 2018 China green bond market report in February, Sean Kidney, CEO of the non-government Climate Bonds Initiative, an international NGO, said: “China has been the global leader in regulatory measures to support green finance. The rest of the word has a lot to learn.”
“The nations that are leading on green finance now have an opportunity to work together to drive capital on a global basis to achieve Paris climate goals and other urgent environmental objectives.”
He said: “China, with its green finance leadership, has created an enormous opportunity for investment both domestically and along the Belt and Road.”
Liu Fan, vice-president of the State-owned security depository CCDC, speaking in the same forum, meanwhile pledged continued implementation of the green development concept and “to safeguard the development of the China green bond market through the enhancement of financial infrastructure services.”
The operators of the Hong Kong Stock Exchange noted recently that, while green bonds remain a small part of the global bond market, issuance is growing rapidly. Hong Kong sees an increasing role for itself on behalf of mainland bond issuers.
The Climate Bonds Initiative, meeting in London last week for an annual conference attended by delegates from 60 countries, says massive investment is needed urgently to support a low carbon and climate-resilient economy.
Predicting green bond issuance will rise to $200 billion this year, it said trillions in green investment was needed through the 2020s to make a real difference.
China’s emergence as a key player in the sector in a relatively short space of time has attracted the attention of financial centres seeking to tap a growing market.
In Luxembourg, for example, China Construction Bank has become the first Chinese institution to list a green bond on the newly formed Luxembourg Green Exchange, a 500 million euros ($561 million) fixed-income security.
Until now, the US, the Chinese mainland, Paris and London have been the main issuers of green bonds.
According to CCDC’s Liu Fan, steps taken so far to reinforce the sector have played a positive role in improving the transparency of the China green bond market and promoting the development of the green economy.
“We will continue to implement the green development concept, and to safeguard the development of the China green bond market through the enhancement of financial infrastructure services,” he said.