Earth Summit 2021: China excludes fossil fuel projects from green bonds, taking a step towards global standards on the path to 2060

Eric Ng
·4-min read

China’s announcement that fossil fuel projects will be excluded from those eligible for green bonds financing is a major step forward for the world’s biggest emitter of carbon dioxide.

Still, until further reform, Chinese green bond products will remain off limits to many international investors, analysts said.

“China’s plan to remove fossil fuel projects from green bonds’ use of proceeds will bring its burgeoning green bond market closer to aligning with more stringent global issuance standards,” said Chen Weiheng, a global market strategist at JP Morgan Private Bank Asia.

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“[But] until China implements further steps to align closely with [those] standards, international investors are limited in their ability to invest in China’s green bonds.”

An updated list of eligible projects, which will come into effect on July 1, together with Beijing’s target of rolling out the China-EU green finance classification system later this year, should help China converge with global green standards, he added.

Green bonds are issued by financial institutions, companies and governments to fund projects that have environmental benefits.

So-called clean coal and secondary oil and gas extraction projects will no longer qualify for support from fundraising via green bonds issuance, according to a joint circular put out by the People’s Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission on Wednesday.

“[The revision will] further regulate China’s green bond market, so that green finance can be fully utilised to better adjust industry structure, promote sustainable economic development and help reach the carbon peaking and carbon neutral goals,” it said.

The announcement of the revision - officially proposed in May last year - came a day ahead of the opening of the Earth Day virtual climate change summit on Thursday, and is the latest display of China’s willingness to cooperate with the US on climate issues.

Central bank governor Yi Gang had already announced on Tuesday a limit on investment of China’s foreign exchange reserves in assets prone to carbon emission, an increased allocation to green bonds, and the inclusion of climate change impact in stress tests for financial institutions.

The summit, to be attended by about 40 world leaders including President Xi Jinping later today, will be hosted by US President Joe Biden.

Biden is widely expected to unveil ambitious targets to drastically slash emissions, including a 50 per cent cut from 2005 levels by 2030, nearly double the reduction pledged by the Obama administration.

Xi surprised the world last September when he pledged at the United Nations General Assembly that China would cap emissions by 2030, before the country becomes carbon neutral by 2060.

Under the Chinese rules, up to half of the proceeds raised by green bonds can be used to repay bank loans or bolster general working capital, compared with no more than 5 per cent of those governed by international standards.

Environmental campaign group Greenpeace said this less stringent stipulation would only muddy the waters.

“More lax requirements on funds going to general working capital make it much harder to evaluate bond performance and the real-world impact of these initiatives,” said Liu Junyan, a senior climate and energy campaigner at Greenpeace in Beijing.

Green bonds that only comply with Chinese standards amounted to around US$23 billion in 2019, while those that also met international standards totaled US$31.3 billion, Climate Bonds Initiative data showed. China was the world’s second-largest issuer of globally-aligned green bonds after the US.

Fossil fuel projects will be removed from the 2021 green bond projects catalogue that replaces the one published in 2015.

Inclusion of clean coal applications in the current catalog - such as coal-washing plants and technology for raising coal combustion efficiency at power plants - is at odds with international green bond guidelines.

This has prevented some global institutional investors bound by international standards from investing in certain Chinese green bonds.

“Green is defined differently in China, not just in the case of green bonds but also for different financial products, confusing market participants,” Liu Shuang, senior associate and China finance lead with the World Resources Institute, wrote last July.

The revision of the projects catalogue and rising demand for green investment products should boost international investment flowing into China, said HSBC Asset Management’s head of Asian fixed income, Elizabeth Allen.

“Over the past 12 months, we have seen more foreign inflows to China’s onshore bond market,” she said. “With an increasing focus on environment, social and governance or green bonds by investors globally, we expect this [catalogue revision] will continue to attract foreign investments into the Chinese market.”

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