China plans to tighten rules to regulate environmentally friendly, or so-called green funds, as part of its efforts to rein in ‘greenwashing’ in the world’s second-largest climate fund market, sources with direct knowledge of the matter said. The new rules, which could be in place in the first half of 2023, will mark a major change in a rapidly growing corner of the funds industry in China, where asset managers currently have the leeway to determine the scope of green investments on their own. The regulations could impact some or most of the green funds that make up the bulk of the 160 sustainable products now in China, forcing them to back up their green claims or drop the popular label, potentially curbing strong flows in a sector that has raised tens of billions of dollars in the last few years. At present, China’s green funds only operate within broad investment guidelines that came into effect in 2018 and do not have a mandatory labelling regime. Such funds had US$34 billion in assets as of end-September, according to Morningstar data. The country’s funds regulator, Asset Management Association of China (AMAC), has drafted regulations that will require mutual funds or exchange-traded funds to have at least 60 per cent of their assets in the defined green investments category to be eligible to be sold as green products, the sources said. Under so-called ‘greenwashing’ funds make sustainability claims which are exaggerated or unverified. AMAC’s rules will be subject to final approval of the China Securities Regulatory Commission (CSRC), said the sources, who did not wish to be named as they were not authorised to talk about the matter. AMAC and CSRC did not respond to Reuters’ requests for comments. Hong Kong firm to produce ‘clean coal’ from Myanmar plant in green revolution China’s plans come as regulators in the European Union, United States and Britain are also stepping up scrutiny of asset managers cashing in on booming demand for funds based on environmental, social and governance (ESG) credentials. Climate transition has become a pressing issue for China, the world’s biggest greenhouse gas emitter, which has also seen its climate fund assets soar in 2020 and 2021 from a small base as President Xi Jinping said China would reach “carbon neutrality” by 2060. China overtook the United States last year to become the second largest climate fund market globally after the European market, according to Morningstar , which compiles global ESG fund data. In the first nine months of this year, 43 climate-themed funds debuted in China, a 30 per cent rise in total number of products from end-2020. Lack of reporting standards, data hindering sustainable investments: Morningstar, FTSE Russell More than a handful of international asset managers such as BlackRock and Fidelity International, whose funds overseas are already compliant with green standards, have entered China in the last two years. AMAC’s draft rules borrow from the 2021 version of China’s green bond catalogue, a quasi scheme of classification, to define green assets. The catalogue is currently only applied to debt financing. Under the new proposals, investments in programmes listed in the catalogue, such as energy saving and sustainable infrastructure projects, will be considered green investments.