Analysts urge China to close loophole for green bond issuance by state-owned enterprises to prevent green washing
- Enterprise green bonds – those issued by state-owned enterprises (SOEs) – have yet to apply China’s new Green Bond Principles
- SOEs are still permitted to allocate up to 50 per cent of their green bond proceeds to non-green projects
China needs to close a regulatory loophole for state-owned enterprises issuing green bonds to end fragmentation of the market and ensure all proceeds are used for green projects that support the country’s climate goals, analysts have warned.
Despite “significant progress” by China to green its financial markets, investors should remain cautious about investing in Chinese onshore green bonds as not all of them “play by the same rules”, said Christina Ng, debt markets research and stakeholder engagement leader at the Institute for Energy Economics and Financial Analysis (IEEFA) last week.
China published its Green Bond Principles in July, which are closely aligned with international green bond standards and are aimed at unifying the formerly fragmented domestic market. One key improvement includes requiring that all of the proceeds from green bonds fund green projects, instead of the previous 50-70 per cent.
In addition, green bond issuers are required to track and report the flow of funds to green projects and their respective environmental impact, verified by a certified third party.
“This is a big step for foreign investors eager to invest in China’s domestic green bond market but who have concerns about greenwashing – inadvertently buying ‘green’ bonds that, in fact, support non-green projects,” said Ng.
However, despite the improvements, a “compliance gap” remains in China’s green bond market as enterprise green bonds – those issued by state-owned enterprises (SOEs) – have yet to apply the new Green Bond Principles, Ng warned.