China’s green bond market too big to ignore

Law firm says Chinese green bonds are not always what they say on the tin, with 'clean-coal' projects allowed under the initiative.

China’s green bonds are “an opportunity too big for the international business community to ignore”, said California-based law firm Latham & Watkins in a byline article.

The country has become the world’s largest green bond market, with $11 billion worth of the security, or 33 percent of the global total, issued in the first half of 2016. With environmental protection now higher on Beijing's agenda, Bloomberg Business estimates that China’s green bond market could grow to $230 billion over the next five years. 

There is a caveat, however. Not every Chinese 'green bond' complies with commonly accepted green standards around the world, with the country's regulator, for instance, allowing for 'clean coal' projects to be financed by local green bonds. Such projects do not qualify as green under international guidelines such as the Green Bond Principles and the Climate Bonds Initiative. 

Domestic groups have been making good use of the resulting leeway. China’s Industrial Bank, for instance, has deployed 26 percent of the proceeds from its January inaugural green bond into so-called 'clean coal' plants. 

“While [authorities] have done a fantastic job pushing the green agenda in China,” said Sean Kidney, chief executive of Climate Bonds Initiative, “it’s likely that this bond won’t be included in our overall numbers.”

One solution for issuers could be to commit a given portion of the bond sale proceeds – dubbed the “green stripe” – to purposes that conform to international green bond standards, Latham suggests. Moving away from an all-or-nothing approach, the bond could then be labelled as “green striped”, fitting with existing methodologies that rank bonds as light, medium or dark green. 

“Using green stripping would enhance the ability of international investors to participate in Chinese bonds by providing a way to invest without modifying their overall green investment criteria,” Latham added. 

Major issuers of Chinese green bonds include governments, banks and companies, with domestic lenders the largest buyers. “However, the investor base is broadening,” noted Paul Davies and Aaron Franklin, partners from Latham & Watkins. “Foreign investors own less than two percent of all onshore bonds but we expected that the figure will grow.” 

“Chinese green bonds may become more attractive than traditional financing options for environmentally-friendly initiatives, particularly as the People’s Bank of China is considering offering interest rate subsidies for green bond issuers to keep borrowing costs low and still attract investors to the growing market,” they added.