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04 Aug INSIGHTS | China Green Bond Principles: Unified Criteria for the Domestic Market
The China Green Bond Principles (the Principles) is a framework for Chinese green bond issuers to follow best practices in the domestic market. Since 2015, China’s green bond market has expanded rapidly. In 1H22 alone, China issued RMB400.6bn (USD59.4bn) of green bonds and green asset-backed securities, with a growth rate of 64% YoY. This pushed the total balance to RMB1.42tr (USD210.6bn), making China the second largest green bond market globally. Yet, the market’s strong momentum also revealed problems such as a lack of information disclosure and suspicion of greenwashing.
To develop a high-quality and unified market, the Principles were published to clarify core components of green bonds based on international practices and domestic conditions, and outline detailed requirements for issuers and related parties. The Principles were issued by the China Green Bond Standard Committee (CGBSC) on July 29. Development of the Principles referenced the International Capital Market Association’s (ICMA) principles and other globally-accepted regulations.
Overview of the Principles
The Principles defined four core components of green bonds: use of proceeds, project evaluation and selection, management of proceeds, and information disclosure.
- Use of Proceeds: issuers of green bonds should invest 100% of the proceeds in green projects or green economy activities, as specified in the Green Bond Endorsed Projects Catalogue (2021 Edition) for domestic issuers, or Common Ground Taxonomy: Climate Change Mitigation or EU Taxonomy Climate Delegated Acts for oversea green bonds.
- Projects Evaluation and Selection: this requirement calls for transparency in the decision-making and selection process from both legal and technical perspectives. The issuers are expected to present all the information involved in the pre-issuance process on industry policies and technical standards followed, as well as methods and essential prerequisites for the environmental impact calculation in a true-and-fair manner. Independent third-party evaluation and verification are encouraged during the life cycle of the green bond.
- Management of Proceeds: this requirement determines the utilization of idle proceeds and changes in the use of proceeds. For idle proceeds, the issuer can invest in low-risk products such as treasury bonds with an investment period of no more than 12 months if the company’s board of directors approves the re-investment scheme. Investors should be informed of any changes in the use of proceeds in time. The new project should also align with the green project catalog mentioned above.
- Information Disclosure: issuers must disclose information annually regarding the bond’s overall use of the proceeds, the progress of green projects, and expected or actual environmental impact. Issuers are encouraged to publish semi-annual or quarterly reports, with an analysis of the proceeds and environmental impacts of financed projects.
Impact of the Principles on China’s Green Bond Market
1. 100% green use of proceeds to mitigate greenwashing
Previously, policies on green bond identification vary. The Guidelines on Green Bond Issuance (2016 Edition) issued by the National Development and Reform Commission (NDRC) stated that entities can label their bonds as green bonds if they use at least 50% of the proceeds as the operational cash flow or repayment of bank debts for green projects. If the bond is supervised by the China Securities Regulatory Commission (CSRC), then 70% of the green bond proceeds should be invested in green economy activities. As for green bonds issued by the National Association of Financial Market Institutional Investors (NAFMII) and any bond labeled as carbon neutral, all proceeds should be allocated to green projects.
The discrepancy of previous policies leaves room for greenwashing, as bonds with green labels may have various degrees of involvement in green activities. The Principles now call for 100% of proceeds to be invested in green projects, putting tighter restrictions on issuers and enhancing investors’ confidence as all their funds contribute to green development.
2. Enhanced Information Disclosure & External Assurance to gain higher credibility
China’s green bond market still faces the challenge of insufficient information disclosure and credibility. For example, the GD Power Development Co. Ltd. [600975:CN] issued a blue bond last year, disclosing the basic financial information of the bond, the fundamental information of the issuer, as well as a brief third-party report on green project evaluation and an annual report. This was already regarded as good practice in the Chinese green bond market. However, compared to global expectations, such disclosure still lacks important information. Research from the Climate Bonds Initiatives has shown that in addition to fundamental information, green bond investors care more about ongoing transparency within the bond duration and external evaluation and assurance of the bond.
The Principles plan to improve green bond information disclosure from three aspects: content, frequency, and external assurance. It requires issuers to disclose all the green considerations in the decision-making and selection process and more details in the post-issuance phase. The reporting frequency is increased and more environmental assessments are needed in mid-term reports. Moreover, the Principles encourage issuers to involve third parties to assess the reports within the bonds’ duration. Finally, according to an officer from NAFMII, regulators plan to publish stricter standards on information disclosure in the future.
3. Alignment with global standards to increase liquidity
According to the Climate Bonds Initiative’s China Green Bond Market Report 2021, Chinese green bonds raised USD12.7bn (RMB 82bn) in the overseas market in 2021, representing a growth rate of 80% YoY. While Chinese green bonds are expanding globally, overseas investors maintain a low acceptance of China’s green bonds and carbon-neutral bonds. To enhance liquidity beyond the Chinese market, the Principles require that overseas bonds comply with the Common Ground Taxonomy or EU Taxonomy Climate Delegated Acts for overseas green bonds. Alignment with more unified and internationally recognized standards can boost the confidence of overseas green bond investors. In general, the introduction of the Green Bond Principles shows the ambition and government’s effort to bring China’s green bond market further in line with international standards and Chinese green bonds more tradeable in both domestic and oversea market.