China shows the way in green standards

Potential for market is enormous, say experts, who urge global convergence

Finance industry insiders and analysts have backed China's national green bond standards to help drive forward harmonization of international standards.

The global market has grown fast since the World Bank issued the first green bonds in 2008. Yet their development has been hampered by a lack of universal standards.

A major problem is that a commonly accepted definition of "green projects" is yet to be established, while another is that procedures still need to be worked out to ensure the funds raised through bonds are used for the intended objective.

China's standards, which were rolled out in December, "are very, very useful because they identify areas where investment would lead to environmental improvement, setting up a detailed and clear direction to channel funds", says Christopher Flensborg, head of sustainable products and product development for SEB, the Swedish financial services group.

Green bonds are issued to finance environmentally friendly projects and play a crucial role in realigning investor risk-return expectations with green goals.

The Chinese domestic market took off in December, when Shanghai Pudong Development Bank Co raised 20 billion yuan ($3 billion; 2.7 billion euros) through green bonds. In fact, investor demand was so strong the company received offers to buy twice the value of the securities on sale. This was shortly followed by Industrial Bank's issuance of 10 billion yuan of green bonds in January.

Shanghai Clearing House has also announced it plans to issue a green bonds index and other derivatives, which are expected to lay a foundation for innovation and development of the market.

The potential for China's green bond market is enormous, say experts, who estimate China could raise 1.5 trillion yuan for renewable energy and environmental projects within the next five years. By contrast, the global market was worth $46 million last year.

China has put green finance high on the agenda for its G20 presidency and has created a study group, co-chaired by the People's Bank of China and the Bank of England, to make recommendations on green finance at a G20 meeting in September.

Internationally, two sets of standards already exist. The Green Bond Principles map out procedures for designating, disclosing, managing and reporting the proceeds from green bonds. They were established by the International Capital Market Association, a self-governing organization in Zurich that represents capital market companies in 15 regions.

The principles are not specific on what industries are acceptable for green investment, yet the standards put forward by Climate Bond Initiative, a London-based NGO, define projects that should be considered "green", such as those in the solar, geothermal, water and bioenergy sectors, as well as low-carbon transport.

China's standards, which classify projects into 31 types under six categories, are coherent with both the Green Bond Principles and the Climate Bond Initiative's guidelines, experts say.

Sean Kidney, CEO and co-founder of the initiative, says the Chinese standards greatly overlap with his organization's standards and could be helpful for international use.

Huo Rongrong, global head of China and RMB business for capital financing at HSBC, agrees and adds: "What the Chinese government has provided is a set of criteria that is simple, understandable and specific, especially with its six main endorsed green bond project categories."

Wang Yao, deputy secretary-general of the Green Finance Committee, which is led by China's central bank, says the standards issued in December would be useful to international organizations issuing onshore renminbi green bonds in China, also known as panda bonds, which is expected to be a trend as the country further liberalizes its capital market.

"The Chinese green bond market has great policy support and huge potential, and has attracted wide global investor attention," says Wang, who is also director of the Central University of Finance and Economics' Research Center for Climate and Energy Finance. "Many international organizations have expressed great interest in issuing green panda bonds in China, so it would prove useful for them to follow the Chinese standards in their use of proceeds, due diligence, information disclosure and certification."

One controversy regarding the Chinese standards is their inclusion of so-called clean coal, which many in the global community believe should be excluded.

China argues that the financing of cleaner coal projects is important to shift the country's reliance away from traditional coal sources, which account for about two-thirds of China's energy consumption. Yet analysts disagree.

Nick Mabey, chief executive and a founder of Third Generation Environmentalism, says China should exclude coal from its green bond market to attract foreign investors. "The question is not a scientific argument of whether 'clean coal' is green. Rather, China needs to recognize that international investors do not accept coal as green, so this will limit investors' appetite," he says.

He says the convergence of green bond standards internationally is important because projects funded by international financial institutions like the Asian Infrastructure Investment Bank would be funded by a global investor base, and coherent standards for these projects would help investors accept green bonds as an asset class faster.

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