Amid the slew of carbon and climate news in recent weeks, one development in China was potentially overlooked in the financial sector. Last month, China released its China Green Bond Principles, its first unified criteria for green bonds, which are in line with the Green Bond Principles released by the International Capital Markets Association.
These new criteria could play a crucial role in promoting further use of green bonds in China, which are slated to be a key component of China’s progress towards its targets of peak carbon emissions by 2030 and carbon neutrality by 2060.
It’s not hard to find sources of disruption in global energy markets, with the Russia-Ukraine war and the quirks of post-pandemic demand creating inflationary pressures. These pressures, in turn, could give rise to temptations to dig back into previous generation energy sources like coal and other fuels incompatible with the climate agenda.
The volatility within the global energy supply in recent months underscores the urgent need to ramp up investments in low-carbon energy infrastructure within Asia.
In China, mobilizing the trillions of yuan needed to meet these goals will require financial institutions and corporates alike to tap into all available sources of funding – both at home and overseas. The China Green Bond Principles are one steppingstone on a much longer journey.
To unlock the full potential of the global markets, China will need the right regulatory frameworks and financing tools, as well as clear and reliable data that give international investors the confidence they need.
The People’s Bank of China estimates that the country’s dual decarbonization targets will require 2.2 trillion yuan (US$327 billion) of annual investment through 2030, then 3.9 trillion yuan (US$579 billion) for the following three decades to 2060.
China’s central bank is encouraging banks to lend to emissions reduction projects, and has the tools to mobilize hundreds of billions of yuan a year. But the amount of funding required for China’s decarbonization is too great to be met by any single source. The private sector and the capital markets will need to play their part.
This mass mobilization of capital is already well underway. China ranks as the second largest country for total green bond issuance with US$85 billion raised last year. About a third of the issuance last year, or US$27 billion, was sold in offshore markets.
Maintaining that volume this year will be difficult because international green bond investors are being sidelined by rising interest rates, volatile markets and mounting scepticism over investments that claim to factor in ESG considerations.
That makes it all the more important that China builds trust in the instruments that will be key to its transition.
As sustainable investing becomes embedded in the financial sector and increasingly sought after by investors, the backlash against mislabelled ESG funds will only increase the levels of scrutiny. China has a unique challenge in this regard in that foreign investors are still relative newcomers to Chinese domestic markets. Foreign participation in China’s domestic bond market hovers around 3% today.
An additional nuance specific to China is a rule that allows as much as 50% of onshore green financings to be used to repay bank loans and replenish working capital. That contrasts with the global standards put forward by the Climate Bonds Initiative and other industry associations, which require green funds to be used exclusively for green projects.
That rule may soon change with the implementation of the China Green Bond Principles. Use of proceeds is highlighted as the first one core component defined in the principles. It requires that issuers of green bonds should invest 100% of the proceeds in green projects or green economy activities, as specified in the Green Bond Endorsed Projects Catalogue (2021 Edition) for domestic issuers, or Common Ground Taxonomy: Climate Change Mitigation or EU Taxonomy Climate Delegated Acts for oversea green bonds.
China is also developing new instruments to support the energy transition of its most carbon-intensive industries.
The country’s interbank bond market regulator in June unveiled plans to introduce low-carbon transition bonds to help eight so-called “dirty industries” meet their carbon reduction targets. China can also benefit from sustainability-linked financings, which provide incentives for companies that commit to specific performance targets – such as lowering emissions or reducing water consumption. These are proving popular with international investors who are seeking to make a positive, tangible impact with their capital.
Data as driver
Encouraging as these developments are, the sort of frameworks and instruments that will give investors the confidence need to be supported by data. This means companies must be open and transparent about their sustainability targets and their performance against them.
In many sectors, Chinese companies still lag behind other markets on environmental, social and governance disclosure. That will need to change if China is to mobilize the capital it needs to reach net zero.
Regulators can boost the level of confidence in the system by requiring mandatory disclosure of climate data, such as absolute emissions or carbon intensity metrics. Hong Kong is already moving in this direction.
Any disclosures must also be accurate, consistent and open to third-party review. The onus is on information providers to stay focused on quality and ensure their products are clearly understood by the investors and companies that use them.
More granular data, for example, will help fund managers select opportunities that are aligned with their own ESG objectives. We have seen globally that broad ESG scores cause confusion and can lead to accusations of greenwashing – especially where environmental and governance scores are combined.
With the right frameworks in place and the data needed to uphold trust and transparency, financing China’s shift towards net-zero emissions will be a historic opportunity for investors everywhere.
Bing Li is the head of Asia-Pacific at Bloomberg.