China leads in green bonds, but money may be going elsewhere
Only 39% of its first-quarter issuance met the international standard
JOYCE HO, Nikkei staff writer
HONG KONG -- With the U.S. abandoning the Paris climate agreement, China is well-positioned to take the lead in the world's fight against global warming. But its loose standards for green financing might be undercutting much hoped-for environmental efforts.
China, the world's top emitter of carbon dioxide, is also the No. 1 issuer of green bonds meant to finance environmental projects. Of the $2.47 billion in green bonds issued by China in the first quarter of this year, however, nearly 61% failed to meet the international definition of such instruments, according to Climate Bonds Initiative, a London-based organization that promotes the market that emerged only a decade ago.
The figure is a jump from the last quarter of 2016, when 38% of China's green offerings failed to meet the standard. The ratio was 34% for all of 2016, when the country printed a total of $36.2 billion worth of green bonds, and contributed 39% to the global supply.
Such debt securities are issued to finance projects that supposedly bring positive environmental benefits, mainly through ring-fencing the use of proceeds, or in the form of covered bonds backed by assets such as renewable energy and low-carbon transport assets.
Departing from global norms
China's green bonds deviate from international practices in a number of ways. First, the country's National Development and Reform Commission, responsible for formulating economic policies, allows issuers to use up to 50% of bond proceeds for repaying bank loans and replenishing general working capital, while international standards require at least 95% of the proceeds to be linked to green assets or projects.
Second, the country's guidelines accept projects that are not considered "green" internationally. These include retrofitting fossil-fuel power stations, building infrastructure that uses mixed energy sources, financing massive hydropower electricity generation, and supporting the use of so-called "clean" coal -- which helps lessen air pollution yet fails to shift reliance away from coal use.
Third, external reviews are not necessary for green bonds in China. In the first quarter, about 30% of such issues were not assessed by a second party, not to mention third-party verification -- which is common among issuers tapping the international market.
"We won't invest in those ones," said Bertrand Gacon, head of the impact office at Lombard Odier Investment Management, which is running a global climate bond fund with $247.24 million of assets under management as of May 31. Gacon was referring to projects such as "clean" coal production, whose environmental benefits are questionable. "There is a much bigger risk of green washing than actual fraud," said Gacon, noting that the Swiss private bank relied on its internal impact-verification process.
With investment 43 positions, Lombard Odier's green portfolio allocated less than 10% of its assets to the Asia-Pacific, but over 50% to North America, and roughly 40% to Western Europe. Gacon explained that the allocation has to do with the relatively thin supply in Asia.
"It's by way of papers available, it's not by choice," said Gacon, noting that a lot of the issues in the region -- pushed up by China -- did not make their way into the portfolio by virtue of not carrying an internationally-verified green label.
The Swiss lender has less than 10% of its green-bond funds invested in "pure play" green companies.
China taking lead on world stage
That said, Gacon said that China will continue to lead the green-bond market due to strong political will and serious environmental degradation at home. He believed that President Donald Trump's announcement of pulling the U.S. out of the 2015 Paris accord struck among nearly 200 countries in 2015 to prevent the earth's temperature from rising 2 C above pre-industrial levels by the end of this century would create even more opportunities for the country to cement its global leadership.
"It seems to us that [China is] willing to play an active leadership [role], not just regional, but worldwide leadership," said Gacon.
India, the world's fourth-biggest generator of greenhouse gases, however, will not be as active since it is still trying to expand access to energy for its people, said Gacon.
Of the top five green bonds issued in Asia outside Japan so far this year, four came from China, according to financial data provider Dealogic. That includes the $2.18 million issue by the Bank of Beijing, followed by floats from the Bank of Nanjing and Harbin Bank. India took one spot in the top five with Neerg Energy's $475 million offering of green paper.
China's green-bond market's bias toward financial issuers is more prominent onshore, with five out of eight issuers financial institutions such as the leasing arm of distressed asset manager Huarong, policy lender China Development Bank, and the Agricultural Development Bank. Their use of proceeds, according to the Climate Bonds Initiative, has been "mixed" and not mostly devoted to green use.
Last year, 82% of all Chinese green issuances came from commercial banks, according to the Climate Bonds Initiative, with 72% targeting onshore investors last year. Industrial Bank, based in southern Fujian Province, was the largest onshore green-bond issuer, printing 53 billion yuan ($7.8 billion) from eight deals, followed by Shanghai Pudong Development Bank at 50 billion yuan from three transactions. Bank of Communications and Bank of China came in third and fourth, printing 30 billion yuan and 25.3 billion yuan, respectively.
Bank of America Merrill Lynch forecasts that green-bond offerings will reach $90 billion to $130 billion globally this year in its base case scenario, assuming those from China grow by 30-50%, and the rest of the world 15-30%.