The proposal signals continued convergence of international standards as the green bond market further matures.

By Paul Davies, Michael Green, and Aaron Franklin

On 29 May 2020, Chinese regulators published a draft of their 2020 revision to the Green Bond-supported Project Catalogue (Green Project Catalogue) for comments. The Green Project Catalogue comprises a list of projects that are eligible to be included as green projects in a green bond framework approved by Chinese regulators — with the 2020 version marking the first revision to the list since 2015. Perhaps the most eye-catching development in the new Green Project Catalogue is the exclusion of “clean fossil fuels”, a previously included project category that had led to a notable divergence between the projects that are eligible for green financing in China, and those that meet generally accepted market standards in other parts of the world.

The Green Project Catalogue is a crucial document in the context of green bond issuances in China. Unlike in other jurisdictions, China requires regulatory approval in order to label an issuance “green”. That approval has previously come from the regulator directly responsible for the issuer. For example, the People’s Bank of China had provided approval for financial entities, the National Development and Reform Commission had provided approval for non-listed companies, and the China Securities Regulatory Commission had provided approval for listed entities — with each of these regulators setting their own standards for green projects (as discussed in a previous Latham blog). However, the 2020 Green Project Catalogue will apply to issuers in each of the sectors the three regulators oversee — meaning it will, for the first time, represent a comprehensive guide as to what can constitute a green project in China.

Until now, China’s standards for green bond issuances have significantly diverged from other generally accepted market standards in other jurisdictions. For example, according to the Climate Bonds Initiative, Chinese green bond issuances that met international standards raised US$31.3 billion in 2019. Yet also in 2019, Chinese green bond issuances that did not meet such standards raised US$24.2 billion.

Such a divergence has led to some apprehension about Chinese green bonds among investors outside of mainland China, which may be partly responsible for the limited overseas investment in such products. The regulators behind the Green Project Catalogue may hope that, by removing clean coal, and thereby aligning themselves more closely with international standards such as the Green Bonds Principles and Climate Bonds Initiative, Chinese green bonds will become more attractive to the international investment community.

Whilst the exclusion of clean coal from the Green Project Catalogue will now be subject to a consultation process, the proposal does further demonstrate that demands among global investors for the convergence of international green financing standards are having an impact. This demand, coupled with the significant growth that the green bond market has seen in recent years, is likely to result in the continued convergence of standards as the market further matures. (Further analysis is available in Latham’s “10 things to look out for in ESG in 2020” blog post.)

However, despite the reforms of the Green Project Catalogue, the regulatory system applicable to green bonds in China still diverges from global market standards in fundamental ways. Most notably, Chinese regulators permit the application of the green label to issuances for working capital purposes, whereas international standards (such as the EU Taxonomy and Green Bond Principles) traditionally seek to limit green issuances to those with a clearly earmarked use of proceeds.

However, in this instance, non-Chinese markets are showing signs that they may be moving in China’s direction, as the necessity for green bonds to be wedded to particular projects appears to be changing. The International Capital Markets Association (ICMA), which administers the Green Bond Principles, has created a working group to consider key performance indicator linked bonds. Further, 2020 has seen the issuance of “pure play” green bonds (for which the proceeds are not tied to specific projects), that have received positive second-party opinions.

The proposals in the Green Project Catalogue will certainly help shape the green market if they come through the consultation process in substantively the same form. Not only would the proposals constitute a notable change from project categories that were previously deemed green in China, but they would also benefit the international green bond market by providing a more unified, global acceptance of what constitutes an eligible project for the purposes of green financing.

The consultation process on the Green Project Catalogue is open to public comments until 12 June, with the final announcement of the Green Project Catalogue set to be made later in 2020.

Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of James Bee in the London office of Latham & Watkins.