Why some Chinese green bonds are ‘not so green’ in the eyes of international investors
Chinese issuers are now complying with domestic and global requirements
Green bonds are no different from regular bonds with one exception: proceeds are earmarked for projects with environment benefits, primarily, climate change mitigation.
However, independent reviewers which give second opinion on an issuer’s internal green bond framework, and certification issuer such as the Climate Bonds Initiative (CBI), use different shades of green to express their concerns on the bonds’ overall environmental impact. These shading also indicate the extent to which the bonds align with global standards or investors’ expectations.
Currently, the CBI is the only organisation certifying green bonds. On its website, green bonds are categorised into three shades of green.
The light green colour represents green bonds that are not aligned with its definitions, but are aligned with China’s definitions. CBI does not include ‘light green’ bonds into its analysis and market statistics.
The CBI uses a library of sector-specific criteria to determine eligibility of projects and assets for certification. Currently, certifications are available for solar, water, low carbon building and transport, wind, geothermal, and marine renewable energy.
But before Chinese companies’ recent move to raise more foreign-currency green bonds and get their bond certified by CBI, many in the past had been predominantly following domestic Chinese standards.
Chinese banks issuing green bonds domestically have been following the People’s Bank of China’s (PBOC) guidelines, while corporate issuers have been following regulations issued by the National Development and Reform Commission (NRDC).
The differences between the Chinese definitions and other global standards means that often, projects that are considered green within China may become “not-so-green” in the eyes of some international investors.
A main difference lies in the use of proceeds. The NDRC regulation allows issuers to use up to 50 per cent of the funds to repay bank loans, or invest in general working capital; whereas for institutional investors outside China, they accept only issuers that use 95 per cent of the proceeds for green assets or projects, according to the CBI.
Also, the PBOC and NDRC green definitions include project types that will not be considered green by institutional investors outside China. “Clean” coal and electricity power grid are examples.
With the recent moves by mainland companies to apply for CBI certification, while at the same time also satisfying their domestic Chinese standards, they have taken a first step in showing that more Chinese green bonds are of a common shade.