Climate change: China’s green bonds lose premium over standard bonds as push to achieve environmental goals boosts supply

Name: China, climate change and El Nino: an emerging food, water and power crisis
Uploaded: 2023-07-06T06:59:26.000Z
Duration: 28 min 58 s
Description: China, climate change and El Nino: an emerging food, water and power crisis

‘The supply of onshore green bonds has risen rapidly, driven by China’s carbon neutrality targets,’ says Sustainable Fitch in a report

The absence in China of ‘greenium’ – the premium investors pay for green bonds over conventional bonds – contrasts with developed markets, the report says

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‘The supply of onshore green bonds has risen rapidly, driven by China’s carbon neutrality targets,’ says Sustainable Fitch. Photo: Getty Images

Martin Choi

Published: 2:59pm, 6 Jul 2023Updated: 3:01pm, 6 Jul 2023

China’s domestic green bonds fell back to being cheaper than their conventional counterparts in the first half of the year, after briefly showing a premium in 2022 as a result of volatility in the wider bond market, according to a Sustainable Fitch report released on Wednesday.

An increase in the supply of green bonds as China pursues its environmental goals, and a lack of incentives for domestic investors other than state banks and insurers to hold them, may explain the disappearance of the spread between the two types of debt, the report said.

“We have observed pricing discounts and increased yields of green bonds against non-green bonds in the onshore market, indicating lower investor demand for holding onshore green bonds,” said Jia Jingwei, an analyst at Sustainable Fitch in the report.

The absence in China of so-called greenium – the price premium investors pay for green bonds over conventional bonds – contrasts with developed markets, where investors need to pay higher prices and accept lower yields in exchange for the sustainability benefits of green projects, according to the report.

The FTSE Russell Chinese onshore yuan green bond index showed one- to 10-year yields were 2.94 per cent at the end of May, some 39 basis points higher than the broad onshore bond index, according to Sustainable Fitch. The yield on a bond moves inversely to its price.

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China, climate change and El Nino: an emerging food, water and power crisis

Some market estimates suggest the price premium investors pay globally for green bonds over standard bonds issued by reputable companies ranged from low single-digit to high single-digit basis points in the last two years, according to a report by Moody’s Investors Service in May.