Sustainable finance: Why China is tapping into foreign banks’ expertise to aid decarbonisation push
- Beijing is for the first time allowing foreign banks to access a central government facility for green finance
- The move will help Chinese companies tap into overseas funds that are contingent on adherence to ESG norms, a senior banker says
A recent move by Beijing that for the first time allows foreign banks to tap into a central government facility for green finance will lift the standards of Chinese sustainable finance and broaden funding channels, according to a senior banker.
The inclusion of foreign banks in China’s efforts to expand green financing is important because it bridges gaps between Chinese green finance standards and global ESG (environmental, social and governance) norms, said Kamran Khan, head of ESG for Asia-Pacific at Deutsche Bank.
“Currently, the domestic banks are familiar with the Chinese standards, but they are not as well versed on the standards in the EU and elsewhere,” Khan said. “We are in an ideal position to advise Chinese clients on how to prepare ESG transactions that meet global standards.”
Meeting international standards will allow Chinese companies to tap into overseas funds that are contingent on adherence to ESG norms.
China’s green credit balance had tripled to 15.9 trillion yuan (US$2.3 trillion) as of the end of last year compared with eight years ago, making it the largest in the world, according to the People’s Bank of China (PBOC).
The PBOC announced late last month that Deutsche Bank and Societe Generale would be the first foreign banks allowed to tap into the green finance scheme, which was first rolled out to domestic commercial banks in November.
“In the next step, the PBOC will consider including other qualified foreign financial institutions that wish to put their green finance expertise to use and help China transition to a low-carbon economy,” the bank said.
The scheme offers subsidised loans at an interest rate of 1.75 per cent, equivalent to an interest rate discount of 72 basis points in the funding cost of green loans, according to a China International Capital Corporation report.
It allows major banks to first lend to qualified carbon-reduction projects at the prime lending rate. The banks can then borrow up to 60 per cent of the project loan principal from the PBOC at a cheaper interest rate, said Jia Jingwei, associate director of ESG research at Sustainable Fitch.
“It is a specific approach of using monetary policy to promote lending to decarbonisation projects,” she said.
“This is about improving the quality of local market standards for ESG transactions,” said Deutsche Bank’s Khan. “It will also have a significant impact on external fundraising by Chinese companies.”
However, the minimum requirement on green bonds issued by state-owned enterprise bonds remains at 50 per cent.
While a number of mainland Chinese companies have raised green financing in offshore markets such as Hong Kong, Singapore and London, most of the transactions have so far involved financing of renewable energy projects, which are relatively straightforward, Khan said.
Foreign banks’ expertise will be more crucial in transactions that involve transitioning companies to sustainable practices, he said. These require borrowers to commit to setting, measuring and reporting on performance benchmarks that track their progress, including carbon reduction targets.
“For example, it might be necessary for a company to establish the credibility of its transition plan by obtaining board approval to channel a specific amount of cash flows from an existing business that relies upon fossil fuels to other assets which are not fossil fuel-based,” he said.
“That’s the kind of detail that is required to drive real transition and establish credible, evidence-based accountability for the borrower.”