Earth Summit 2021: China excludes fossil fuel projects from green bonds, taking a step towards global standards on the path to 2060
- The announcement is a big step forward, but until further reform Chinese green bonds will remain off bounds to many international investors, analysts said
- So-called clean coal and secondary oil and gas extraction projects will no longer qualify for fundraising via green bonds, under updated rules
Still, until further reform, Chinese green bond products will remain off limits to many international investors, analysts said.
“[But] until China implements further steps to align closely with [those] standards, international investors are limited in their ability to invest in China’s green bonds.”
Green bonds are issued by financial institutions, companies and governments to fund projects that have environmental benefits.
So-called clean coal and secondary oil and gas extraction projects will no longer qualify for support from fundraising via green bonds issuance, according to a joint circular put out by the People’s Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission on Wednesday.
“[The revision will] further regulate China’s green bond market, so that green finance can be fully utilised to better adjust industry structure, promote sustainable economic development and help reach the carbon peaking and carbon neutral goals,” it said.
Biden is widely expected to unveil ambitious targets to drastically slash emissions, including a 50 per cent cut from 2005 levels by 2030, nearly double the reduction pledged by the Obama administration.
Xi surprised the world last September when he pledged at the United Nations General Assembly that China would cap emissions by 2030, before the country becomes carbon neutral by 2060.
Under the Chinese rules, up to half of the proceeds raised by green bonds can be used to repay bank loans or bolster general working capital, compared with no more than 5 per cent of those governed by international standards.
Environmental campaign group Greenpeace said this less stringent stipulation would only muddy the waters.
“More lax requirements on funds going to general working capital make it much harder to evaluate bond performance and the real-world impact of these initiatives,” said Liu Junyan, a senior climate and energy campaigner at Greenpeace in Beijing.
Green bonds that only comply with Chinese standards amounted to around US$23 billion in 2019, while those that also met international standards totaled US$31.3 billion, Climate Bonds Initiative data showed. China was the world’s second-largest issuer of globally-aligned green bonds after the US.
Fossil fuel projects will be removed from the 2021 green bond projects catalogue that replaces the one published in 2015.
Inclusion of clean coal applications in the current catalog - such as coal-washing plants and technology for raising coal combustion efficiency at power plants - is at odds with international green bond guidelines.
This has prevented some global institutional investors bound by international standards from investing in certain Chinese green bonds.
“Green is defined differently in China, not just in the case of green bonds but also for different financial products, confusing market participants,” Liu Shuang, senior associate and China finance lead with the World Resources Institute, wrote last July.
The revision of the projects catalogue and rising demand for green investment products should boost international investment flowing into China, said HSBC Asset Management’s head of Asian fixed income, Elizabeth Allen.
“Over the past 12 months, we have seen more foreign inflows to China’s onshore bond market,” she said. “With an increasing focus on environment, social and governance or green bonds by investors globally, we expect this [catalogue revision] will continue to attract foreign investments into the Chinese market.”