By Paul Davies and Andrew Westgate
China has launched a green bond pilot initiative via the Shanghai Stock Exchange, encouraging further foreign investment in a rapidly growing asset class and paving the way for issuances by non-financial institutions.
This initiative closely follows the publication of green bond guidelines in December 2015 by the National Association of Financial Market Institutional Investors (NAFMII). The Shanghai green bond stock exchange initiative and the guidelines go hand-in-hand with China’s efforts to transition towards a green and low carbon economy.
The initiative will require independent professional certification of proposed investments, and issuers must commit to annual reporting and certain accounting practices (for example, separate accounts to receive bond proceeds). The separate guidelines issued are similar to the voluntary Green Bond Principles issued by the International Capital Market Association. These guidelines:
- emphasise that proceeds can only be used for green assets and projects;
- provide regulations on the allocation of proceeds, including ring-fencing procedures;
- require robust environmental information disclosure regarding decision-making processes and performance targets in the bond prospectus; and
- encourage issuers to arrange a third-party review of the bond in advance of issuance.
Green Bonds Gaining Momentum
Two Chinese banks successfully issued green bonds in January – Shanghai Pudong Development Bank Co. raised 20 billion yuan in China’s first domestic-only green bond launch, and Industrial Bank Co. issued green bonds worth 10 billion yuan. Shanghai Pudong had offers to buy twice the value of securities it sold and has since returned to the green bond market to raise another 15 billion yuan.
In addition to financial institutions paving the way in this market, corporates have turned to green bonds to finance future growth. In July 2015, the first green bond denominated in US dollars was issued by renewables company Xinjiang Goldwind Science & Technology Co and was nearly five times oversubscribed.
Looking Ahead – A Green Future
It is anticipated that Chinese green bonds may become more attractive than traditional financing options for environmentally-friendly initiatives, particularly as the PBoC is considering offering interest rate subsidies for green bond issuers to keep borrowing costs low and still attract investors to the growing market. For example, Shanghai Pudong and Industrial Bank will pay 2.95 percent interest annually on their three year green bonds. A rate for traditional finance bonds from commercial banks for the same duration is typically above 3 percent, resulting in savings of at least 10 million yuan per year for the bank.
Ma Jun, chief economist of the Research Bureau at the PBoC estimates that China will need to invest at least US$320 billion per year in green initiatives and projects over the next five years to meet its sustainability goals. Traditional financing options have historically been able to cover only 15 percent of this requirement. The guidelines and initiative assist in standardising green finance and encourage further international investment. The chief economist at Industrial Bank added that international investment in Chinese green bonds “means that China’s efforts to protect the environment and cut emissions are put under international supervision”.
China’s progress is, however, not without its challenges and a number of legislative details still need to be ironed out. The December 2015 guidelines are not mandatory and standards to quantify uniform benefit to the environment (for example, emissions savings per bond US$/yuan) are not fully developed. However, the market is alive to these issues.
For example, a proposed issue by renewables company BJ Jingneng Clean Energy was rejected by the market because the prospectus lacked key information regarding the “greenness” of the bonds. Environmental protection remains high on China’s political and business agenda, not least because of China’s G20 presidency. The initiative provides further access to an ever-growing and important market to corporate issuers and international investors. Bloomberg Business estimates that China’s green bond market may be worth US$230 billion in the next five years. Like the country itself, the Chinese green bond market is too big for the international business community to ignore.
This post was prepared with the assistance of Glen Jeffries in the London office of Latham & Watkins.
Read more on China’s environmental policy and green bonds:
- China’s NDRC Issues New Carbon Trading Guidance
- China Progresses with Increased Environmental Accountability for Industry and Government Authorities
- What Multinationals Need to Know About China’s Amended Environmental Protection Law
- How Environmental Lawyers Can Drive the Development of Green Bonds
- What is the Future of High-Yield Green Bonds?
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