China is now the world’s largest emitter of greenhouse gases, accounting for nearly one-third of the world’s total. Beijing is fully aware of the impact of its emissions on climate change and has committed to peak emissions in 2030 and become carbon neutral by 2060.
As part of its emissions reduction plan, China is introducing greener practices in its financial services sector, but the learning curve is steep as loans to high-carbon industries represent a sizable proportion of financial institutions’ assets. is. Country. An accelerated or delayed exit from high-carbon sectors could lead to increased financial risks.
That said, given its ambitious emission reduction targets, China has a huge opportunity for sustainable financing. According to UBS, China’s green financial market, the world’s largest emitter, has already reached $2.3 trillion.
green bond boom
According to investment bank China International Capital, China needs RMB 140 trillion (US$21.3 trillion) in debt financing over the next 40 years to reach its net zero emissions target. Green bonds are an important part of the big picture. China will issue the world’s highest number of green bonds in her 2022, reaching US$76.25 billion, according to data from the Climate Bonds Initiative, according to S&P Global Market Intelligence. This year, China plans to issue her $90 billion to her $100 billion green bonds.
Other Asian countries are much smaller players in this market. Japan and India ranked 7th and 10th respectively in the global league table for green bond issuance in 2022. Overall, Asia-Pacific countries will issue green bonds worth US$120.83 billion in 2022, with China accounting for nearly two-thirds.total amount of issuance
As of late 2022, China’s green bond market was worth US$300 billion, according to data compiled by Bloomberg. There were his 1,029 entities made up of 1,029 bonds. About 70% of that market consists of local banknotes denominated in renminbi. The remainder is mostly dollar denominated to improve access to global investors.
Renewable energy attracts the most funding, with about 46% of projects citing that purpose as at least part of the funding raised.
China has built an impressive green bond market, but the market is experiencing some growing pains. Transparency is often lacking, raising greenwashing concerns among international investors.
Their fears are not unfounded.
According to a Wall Street Journal report, in the first five months of 2021, 33 out of 127 green bonds issued in China failed to meet the standards set by the Climate Bonds Initiative (CBI). bottom. The CBI said proceeds from the green bonds sold by Zijin Mining Group and China Petrochemical Corp in April 2021 will be used to manufacture solar panels, although the panels will remain in the companies’ respective traditional businesses. It could support mining and oil drilling, which is
Part of the problem is regulation. Several agencies regulate the market and apply different rules on how cash and disclosures are used. In China, up to 50% of the proceeds from onshore green bonds may be used to finance the day-to-day cash needs of businesses rather than climate-related projects. The equivalent international maximum is only 5%.
In June 2022, People’s Bank of China Governor Yi Gang said “greenwashing, low-cost fund arbitrage and green project fraud” will rise as borrowers scramble to comply with Beijing’s top-down environmental directives. I warned you.
Meanwhile, many Chinese companies remain cautious about green bonds. Because they don’t see any cost advantage and many green projects are too risky given uncertain market support.
Despite regulatory issues and greenwashing concerns, China’s green bond market continues to grow steadily. In fact, the Chinese market was an outlier last year. China’s green bond market saw his 30% growth while the US and European markets were hit by high interest rates and geopolitical turmoil.
In August 2022, China took an important step towards combating greenwashing. The Shanghai Stock Exchange has started requiring 100% of the proceeds from green bond issuance to be invested in green projects such as clean energy. Previously it was 70%.
In addition, the China Securities Regulatory Commission (CSRC) has instructed both the Shanghai and Shenzhen exchanges to revise their rules to align bond issuances with the country’s new “China Green Bond Principles.” These guidelines are issued by the International Capital Market Association (ICMA.
These regulatory changes are an important step in the right direction, but in the future, the prevalence of state-owned enterprises (SOEs) in green bond issuance will hamper Beijing’s attempts to align its markets with global standards. There is a possibility. Excluding financial institutions, SOEs accounted for 52% of China’s green bond issuers from 2019 to 2022, according to the Institute for Energy Economics & Financial Analysis.
State-owned enterprises have not yet adopted the China Green Bond Principles. The National Development and Reform Commission (NDRC), which is responsible for overseeing corporate bonds, has yet to require SOEs to adopt these guidelines. coal.
In fact, as noted by the Institute for Energy Economics & Financial Analysis, coal-dependent power companies China Huaneng Group, China Huadian Corporation and State Power Investment Corporation regularly issue green bonds.
Without NDRC action to ensure that state-owned enterprises comply with China’s green bond principles, the risk of continued greenwashing remains high.