China has rapidly become the most active green bond issuer in the world. Total issuance of green bonds globally in 2016 was more than US$90 billion, with China being the top issuer raising US$30 billion from fixed-income investors.

Speaking at The Asset 11th Asian Bond Markets Summit, panellists shared their views on the green bond market in China. For Shi Yingzhe, head of the green bond lab at the International Institute of Green Finance, China’s green bond growth is the result of the overall development of the country. “China is a huge country going through an urbanization process. We have a lot of infrastructure projects,” he notes.

 

 

In 2017, China is looking to repeat history riding on the government’s mandate to support renewable energy. Not bad for a market that started 10 years ago on the back of the European Investment Bank’s (EIB) climate awareness bond. “Back then there was no blueprint on how to do it and build the investor confidence,” explains Virgil Nae, head of representation office to China and Mongolia at the EIB. “We had to look internally at how we could build that confidence by creating some guidelines that the proceeds would be invested in certain projects.”

 

In the view of the International Finance Corporation (IFC), green bonds play a role in curbing the effects of climate change. The World Bank estimates that 37 million people are taken out of middle income situations annually and put into poverty because of extreme weather events.

 

“Helping the financial markets to come up with solutions to this is absolutely key,” says William Beloe, principal financial officer, climate finance lead, Asia. “One of the ways we are going to get there is by leveraging the financial sector. Working with financial institutions to help them to grow their own green portfolios.” The IFC during the fiscal year of 2016 issued 23 different green bonds across seven currencies totaling US$1.5 billion.

 

Looking to support green bonds in China, the Shanghai Stock Exchange (SSE) last year started a pilot programme for corporate green bonds to be traded on the exchange to help encourage transparency in green financing.

 

The SSE has stated that it has received green bond listing applications from 32 issuers, totaling 70 billion yuan. Among them are 14 green corporate bonds and four green asset backed securities (ABS).

 

“We require the funds raised from those green bonds to be exclusively applied to the green industry. Moreover, issuers also have to track the fund usage and monitor the environmental projects process throughout the tenor of the bond,” says Wei Liu, deputy director of bond markets at the SSE. “Since the launch of the pilot program, SSE green bonds have raised funds for projects in all six fields defined by the Green Finance Committee of the China Society of Finance and Banking (GFC) catalogue. The environmental benefits from the project, if quantified, include reductions of 106 million tonnes of CO2.”

 

The real impact of green project financing is something that should be frequently monitored to support the rational for more green bonds. It is something that Qi Jiuhong, director of the R&D department of China Beijing Environment Exchange believes. “The challenge is on green issues and how to measure that. How can the market help us to deal with climate change? This is very imminent and a challenge to all of us,” he says.   

 

There are several guidelines on the definition of green assets from ICMA’s green bond principals to the People’s Bank of China green bond catalogue. While definitions are mostly aligned with one another, there are differences in areas such as clean coal projects. “We need to have the common language set and people should reach a consensus,” emphathises Shi. It’s something that EIB hopes to establish soon. “One of the hot topics nowadays is how to build a common lexicon for the green bond market,” says Nae.

 

Bank of America Merrill Lynch said the green bond market has the potential to grow US$90-130 billion by the end of 2017. The market raised US$44.7 billion globally in the first seven months this year.