Green Bonds, Green Boundaries: Building China’s green financial system on a solid foundation
At the end of 2015, the People’s Bank of China (PBoC) released its Green Financial Bond Guidelines—making China the first country in the world to publish official rules for the issuance of green bonds.
Linked to the guidelines is an Endorsed Project Catalogue providing detailed definitions of the types of projects that might be funded through green bonds in areas such as energy and resource conservation, pollution reduction, clean transportation, clean energy and ecological protection.
This move takes place in a context in which the world's second largest economy urgently needs both to stimulate green investment and curb investment in pollution-intensive industries. China's government has seen a critical need to tackle environmental pollution and shift the economy onto a pathway of green growth. The Development Research Center of China’s State Council, responsible for research on China's long-term economic and social development, estimates that China needs around RMB 2.9 trillion (USD 460 billion) per year of investment in green sectors over the next five years. Moreover, the government wants 70 per cent of that investment to come from the private sector. As such, greening the financial system is an integral part of the agenda for broader financial reform spearheaded by the PBoC, and a component of China's Five-Year-Plan (2016–2020).
Supporting China’s Green Bond Market Development
Green bonds are one promising element of green finance. They were developed as a new investment channel in 2007, with the first few issuances by multilateral development banks, and are growing rapidly in the global market. The global green bonds market amounted to over USD 40 billion in 2015, with issuers including the World Bank, commercial banks, corporations and municipalities from all over the world. Chinese banks and companies are already issuing green bonds: Xinjiang Goldwind and Agricultural Bank of China have debuted green bond sales in London, and others have introduced domestic issuances. However, these moves remain tentative and experimental without an officially endorsed set of criteria for "green bonds."
It is clear that the PBoC’s Green Financial Bond Guidelines have filled a need in the domestic market by setting out procedures and requirements for financial bond issuers, encouraging second opinions report and bond rating schemes. The Green Bond Endorsed Project Catalogue developed by the Green Finance Committee of the China Society of Finance and Banking is an important supplement to the guidelines, setting out the boundaries of what is and is not considered "green." Potential green bond issuers and buyers say these definitions have been keenly awaited. Shortly after the new rules were announced, the Industrial Bank of China launched the first Chinese green credit asset-backed securitization on January 5, 2016, in line with PBoC Guidelines, with a value of approximately USD 401.6 million. It was oversubscribed by 2.5 times. Half a dozen Chinese banks have already submitted applications to PBoC to issue green financial bonds according to the new guidelines. While market forecasts vary, it seems likely that 2016 will see a big leap in issuance of green bonds in China, marking the country’s entry as a big player into this market.
An Evolving Set of Guidelines
Those keeping a close eye on China and green finance dynamics will also have noticed that the National Development and Reform Commission (NDRC) has simultaneously issued guidelines on green bonds, linked to fiscal support for infrastructure investment. The NDRC guidelines include a list of 12 priority areas in energy conservation and emission reductions, climate change and green industries. Regulation of China's bond market is therefore split: the PBoC and the industry's self-regulatory organization—the National Association of Financial Market Institutional Investors (NAFMII)—are in charge of bonds issued by financial institutions and corporations; NDRC directs enterprise and municipality bonds; and the China Securities Regulatory Commission (CSRC) covers bond issuance by listed companies. With guidelines developed by PBoC and NDRC, and in development by NAFMII, standards and definitions will be available to cover 90 per cent of the bond issuers.
The Chinese-Global Nexus
The development of China's diverse green bond guidelines raises a number of questions. Who has the final say on what is "green"? And how do Chinese standards compare to international standards? The evolving set of guidelines are broadly complementary and target different types of bond issuers; however, they do have some different and conflicting definitions and criteria. And while there are large areas of overlap between Chinese and international standards, there are some differences. For example the PBoC catalogue and NDRC guidelines both include "clean coal utilization," whereas the international voluntary Climate Bonds Initiative taxonomy excludes energy-efficiency measures in relation to fossil fuel use (all coal and oil power). Such differences, in part, reflect different priorities and needs of emerging and developed economies, but also point to an ongoing evolution in the needs and definition of green investment. For this reason the PBoC catalogue recognizes that standard-setting is an ongoing process and includes a principle of regular updating "according to technological advancement, policy adjustment, updated standards and changes in resource and environmental conditions." It is sensible to call for "clean coal utilization" to be questioned in the catalogue's first revision.
China-specific guidelines may be sufficient for domestic issuance, but are also intended to enable foreign investors to confidently participate in the domestic market and for Chinese issuers to gain trust and legitimacy in overseas markets. This suggests the need for some harmonization with international standards.
China has rarely been seen as a major player in initiating global negotiations or standard setting. However, as China's economy has become more closely intertwined with the world's, its domestic policies have gained international attention, and the country has begun to take a more ambitious role in cooperating internationally. Green finance is a key example of China becoming actively involved and cooperating extensively to align the financial system with sustainable development.
Harmonization and Coordination of Standards in Green Finance: Cooperation through the G20
China maintains the presidency of the G20 in 2016, and it has established an international Green Finance Study Group (GFSG) to share learning and best practice and explore options for international cooperation. The group will focus on identifying specific barriers in the financial system that prevent private capital from responding adequately to environmental risks and meeting the needs for global green investment. China calls for international cooperation involving governments and international organizations, regulators and key market players to tackle these obstacles. Harmonization and coordination of standards in green finance could be one of the areas for G20 countries' cooperation.
There is no doubt China's green bond market will continue to grow in 2016 and beyond, but unless there is orderly development of this market, the potential for realizing its full possibilities for effectively mobilizing large-scale funds into green development may not be reached. This is also true for many countries, particularly emerging economies where massive investment in low-carbon and climate-resilient infrastructure and industry is needed. Establishing clear boundaries of "what is green" is increasingly crucial to provide confidence and integrity to the market.
In order for a full-scale market to develop, solid foundations need to be in place, including a framework of definitions and standards, institutions and capacity for assessment, and networks and platforms for trading. This is true for green bonds and for other areas of green finance. International collaboration, through China's G20 presidency and beyond will be crucial to developing common understanding and achieving success.