On 2 April, China’s Ministry of Finance debuted its first ever green sovereign bonds on the London Stock Exchange. The money raised will go towards projects in China in sectors such as clean transportation, marine conservation and recycling.

The event makes China the latest of more than 50 jurisdictions to issue green sovereign bonds, Xie Wenhong, head of the China Programme at the Climate Bonds Initiative (CBI), told Dialogue Earth. The industry had long been looking forward to China following suit, he said.

Dialogue Earth consulted several experts regarding the launch. Broadly, they welcomed it as a move that would help spur international investment in green projects in China, and offer the country an opportunity to deepen climate cooperation with the UK and EU. China could also include green investment plans in its new climate action plan under the Paris Agreement, they said.

How significant was the bond issuance?

Governments issue green sovereign bonds to raise funds for environmental protection and green development. The money is often invested in areas such as renewable energy, low-carbon transport, green buildings and conservation. It supports national green-development strategies and attracts international investment to projects related to sustainability.

China’s green sovereign bonds issue in London was worth RMB 6 billion (GBP 624.38 million). Of this, half have a 3-year maturity at 1.88% interest, and the other half a 5-year maturity at 1.93%.

For comparison, in 2016 China issued RMB 3 billion of ordinary sovereign bonds in London. Xie explained that it is normal for green sovereign bonds issues to be comparatively large. Germany, for example, issued USD 7.7 billion of green bonds in 2020, alongside ordinary sovereign bonds to the same value.

However, Xie notes that consideration needs to be given to the demand for green funds, and whether it will be possible to use all the money raised. The first ever green sovereign bond was a USD 800 million 5-year bond issued by Poland in 2016, according to a report by the CBI. EU nations, including France, Germany and Hungary, followed suit, along with emerging economies such as Chile, Indonesia and Thailand. In 2017, France issued USD 7.5 billion worth of 22-year green sovereign bonds and has since “tapped”, or increased, the size of the issue to USD 29.5 billion. In 2020, Egypt issued USD 750 million of 5-year green sovereign bonds, the report notes.

China’s debut of RMB 6 billion (USD 824 million) is not particularly large. Mao Xuxin, head of the Bank of China’s London Research Centre, told Dialogue Earth it was understandable for China to keep its first green sovereign bond issue relatively small as it would lead to a higher ratio of bids to sales. According to Xinhua News Agency, the London bonds “spurred strong demand” from international investors. This was despite the interest rates being lower than those of regular government bonds issued in Hong Kong at a similar time, with a similar maturity length. In the end, the bids were 6.9 times greater than the bonds available, Xinhua reported.

Issuing an RMB-denominated bond in London has another advantage for China: it helps internationalise the currency, says Zhang Chuanjie, an environmental, social and governance (ESG) senior researcher at the Bank of China’s London branch. Growth in green finance, Zhang explained, is seen as a way to drive that process, within which the UK is a key location.

“Globally, the UK has always been an important site for the RMB foreign exchange spot market. After Hong Kong, London and Singapore are the two most important international centres of RMB business,” he said.

A focus on climate adaptation in the use of funds

In February, the Ministry of Finance published a framework for issuing green sovereign bonds. It specified possible uses of the funds, including direct investments in projects, contributions to project running costs, support for local governments, and tax rebates. The catalogue of eligible projects refers to an existing list for green bonds, with six major categories:

• Clean transportation
• Sustainable water resources and wastewater management
• Sustainable management and restoration of biological and land resources
• Restoration of marine environments
• Prevention of pollution
• Resource recycling and reuse

“At present, renewable-energy projects – wind and solar power – are not on the list,” Xie observed. “In contrast, a large number of sectors related to ecological conservation and restoration have been incorporated into the framework.” He believes this may signal the emergence of a new trend: using fiscal tools and the bond market to finance projects focused on climate adaptation and resilience.

Sean Kidney, CEO of the CBI, told Dialogue Earth: “The framework is meeting the requirements of China’s national ‘taxonomy’, the Green [Bond Endorsed] Projects Catalogue. That is perfect for sending the right signals to the market.”

Making national climate plans investable

The green transition is a vast project, and the most important aspects of it – climate actions and the energy transition – are facing huge funding gaps. A recent report from the World Economic Forum puts demand for climate finance up to 2030 at USD 9 trillion a year, increasing to USD 10 trillion a year from 2031 to 2050.

A report from the consultancy Oliver Wyman found that China will need RMB 3.5 trillion a year in green finance from 2020 to 2060. Current policy would see an estimated RMB 2.4 trillion of that come from government, leaving a RMB 1.1 trillion gap to fill, the reports states. Market reports have shown that the lack of private investment has consistently been a problem.

Sovereign debt is backed by the state. This means lower risk, making it more attractive for some investors. Green sovereign bonds are, therefore, a good way to leverage private investment in national or regional green transitions. In 2019, the CBI’s Green Bond European Investor Survey found an appetite for more green bonds from sovereign issuers.

Sovereign bonds can also catalyse the corporate bond market. A working paper from the International Monetary Fund found that “the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut”.

The same research found the effect was strongest in countries with stronger climate policies. That is, alignment between green sovereign bonds and national policies is more likely to drive green investment by the private sector.

Sovereign bonds aligned with national strategies are generally more attractive, said Thomas Dillon, head of sovereign ESG at Aviva Investors, the UK’s biggest investment firm, in a seminar.

Antonina Scheer agrees. She is a policy fellow at the London School of Economics (LSE)’s Transition Pathway Initiative Centre (TPI Centre). The LSE is the academic partner of the investor-led TPI, which aims to support companies and investors in aligning with the low-carbon transition. Scheer told Dialogue Earth that, to encourage private investors to participate in climate finance and investment actions, it is worth considering how investment frameworks and standards can align with national strategies.

Scheer noted that incorporating investment plans into the updated Nationally Determined Contributions (NDCs) “could also boost investor confidence and drive more private climate investment”. Under the Paris Agreement, signatories should have submitted updated NDCs in February – but most countries, including China, have not. Countries that haven’t yet finalised their NDCs could still include investment needs and plans in those documents.

International cooperation

In theory, it doesn’t matter where you issue sovereign debt – international investors will always be able to buy it. But, says Mao, launching in London draws more attention. “Issuing bonds in London helps China attract international investors, and offers the City a chance to diversify its offering of green financial products and distinguish itself from Wall Street,” Mao added. The Bank of China’s London branch also plans to issue new sustainability bonds this year, in both RMB and GBP, Zhang noted.

Kidney told Dialogue Earth that usually, countries tend to issue their green sovereign bonds at home, and this is the first time another country has done so in London. “China is doing it specifically to underline the green underpinnings of the UK-China climate dialogue, i.e. for political purposes,” he said, welcoming the move. The UK government recently announced that China and the UK are set to restart formal climate talks, with China’s environment minister to visit London and the talks to become institutionalised for the first time.

According to a Bloomberg report, China’s choice of London to issue green sovereign bonds “will test appetite among international investors to shift climate bets to the world’s top polluter” and is aimed at “showcasing the nation’s green leadership credentials as the US retreats under President Donald Trump”.

Experts who spoke with Dialogue Earth all mentioned the effect of the change in administration at the White House and agreed this could be an opportunity for better climate cooperation between China and the UK, and China and the EU. Speaking to the Financial Times, Adair Turner, chair of the Energy Transitions Commission, said that China, the EU and the UK should form a climate coalition of “the world apart from the US” in response to the US retreat under President Trump. If China’s first green sovereign bonds are successful, there are hopes they will result in more climate investment both in the country and internationally.

This article was originally published by Dialogue Earth

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The news that the UK saw its warmest year on record in 2022 – and the prediction that this year could be even hotter – is yet another reminder of the urgent need to enable a low-carbon future. One of the many ways that this can be achieved is by pushing green finance into the mainstream.

2021 saw China become the world’s second-largest green bond market according to HSBC (issuing over RMB 600 billion of green bonds, a 180% increase on 2020), as the country rolled out funding to support the vast array of clean and renewable infrastructural projects that will be required to meet its ambitious net zero targets. The UK financial sector, for its part, has played a world-leading role in developing such instruments from their inception, and is well-placed to work together with Chinese partners in pursuing common goals.

Green finance can be defined as financial regulations, standards, products or investments that pursue environmental goals, including climate change adaptation and mitigation, and biodiversity. Over the past decade, the UK and China have established strong partnerships in the field of green finance, becoming world leaders in responding to the transition to a green economy. In a speech in London at City Week 2022 last April, Chinese Ambassador Zheng Zeguang spoke of the “broad space for China-UK cooperation on green development” and noted that a March 2022 conversation between President Xi Jinping and then Prime Minister Boris Johnson had highlighted cooperation in green financial services and the digital economy.

The UK-China Green Finance Centre, co-established by the City of London and the Green Finance Committee of the China Society for Finance and Banking, has spearheaded UK-China collaboration in green finance, and continues to serve as a key platform for leading industry and policy experts to develop market-led solutions to help scale up green finance in both countries – as well as globally.

At the Second Belt and Road Forum for International Cooperation held in Beijing in 2019, the UK-China Green Finance Taskforce (UKCGFC) announced the formation of the Secretariat for the Green Investment Principles for the Belt and Road (GIP), and the first list of signatories, including HSBC. The goal of the GIP is to encourage and assist signatories to better integrate environmental considerations into the decision-making and implementation processes of their investments in the region. Today, the number of GIP signatories stands at 40, with overall assets amounting to over $48 trillion worldwide.

The UKCGFC is supported by the UK Government through the China-UK PACT (Partnering for Accelerated Climate Transitions) programme. Since it launched in 2018, UK PACT has funded eight projects in China with the aim of helping the country reach its goal of reaching carbon neutrality by 2060. The newest round of projects, which started in 2021, includes a project to help financial institutions make greener decisions through climate-related disclosure and transparency, and “a project to improve the uptake of Environmental, Social and Corporate Governance (ESG) measures by the Chinese investment community, as well as to accelerate finance transition through the creation of a China-UK leadership forum, jointly led by the City of London Corporation and the Beijing Institute of Green Finance and Sustainability (BIFS).”

In terms of specific financial support, the London Stock Exchange’s Green Economy Mark identifies listed companies and funds contributing to the global green economy by addressing key environmental objectives such as climate mitigation and adaptation, waste and pollution reduction and transitioning to a circular economy. More than 100 companies and funds with a combined market cap of $140 billion have received the Mark since its launch in 2019. In 2020, Yangtze Power became the first Chinese issuer to receive the London Stock Exchange’s Green Economy Mark, certifying that the company generates more than 50% of its revenues from green products or services, according to FTSE Russell’s Green Revenues Data Model.

In November 2021, the Bank of China listed $2.2 billion in sustainable bonds on the London Stock Exchange. The bonds include the Sustainability Re-Linked Bond (SRLB), which will fund loan projects linked to sustainable development in industries such as tourism, trade, manufacturing and warehousing.

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Green finance has been a major investment trend in China since 2016, which saw the first major wave of green bonds issued. These amounted to US$ 36.2 billion, or 39 percent of the global total.

While some of these initial bonds were accused of simply using ‘greenwash’ to get low-cost funding, the market is now maturing into being much more diverse and genuinely environmentally-led, both in mainland China and for investment in the UK and Belt and Road markets.

China’s commitment to addressing its long-term environmental problems, including chronic air pollution, a coal-based power sector and low energy-efficiency, stepped up a gear under the new administration in 2012.

In tandem with the well-known capacity cuts for heavily-polluting industries, such as steel, coal and cement, and stricter waste treatment standards, in December 2015 the People’s Bank of China issued new regulations to encourage green investment through the bond markets.

Perks of these included lower Central Bank borrowing costs for banks and subsidised interest payments on green bonds. For the most environmentally friendly loans, the government subsidised up to 12 percent of the interest rate.

At the start, however, this simply led to a whole raft of green bond issuance from Chinese banks and local government investment vehicles, rather than from individual companies or projects; issuance from banks and local government investment vehicles accounted over two-thirds of the total in 2017.

Given the lack of transparency on the eventual end-use of proceeds by these financial institutions, critics raised questions about whether these funds were going to genuine environmental projects or just being issued to take advantage of the lower financing costs and higher asset allocations.

Greenwash accusations grew stronger, particularly as up until December 2018 clean coal technologies qualified as ‘green’ investments, despite being excluded under international standards.

The market is changing significantly, however, both in China and the UK. Last year, out of a total of US$ 44 billion of green bonds issued (up 35 percent from 2018), issuance from banks and other financials was just 36 percent of the total. Utilities accounted for 23 percent, transportation for 17 percent and other industrials/services companies accounted for the remainder.

This implies more funding is going straight to environmentally-friendly projects, such as rail construction and renewable energy, rather than being put in a general, but not necessarily transparent, ‘green’ investment pot.

This shift is in response to much tighter regulation on issuance from the People’s Bank of China on what actually qualifies as a green bond. From 2020, these requirements will be further strengthened with mandatory disclosures for all listed companies on environmental factors. As a result, greenwash should be much harder to slap on top of a plain vanilla issue and standards will be raised across the board.

Crucially for international markets and UK companies, this also applies to the small, but growing, issuance of green bonds for Belt and Road initiatives and investment in overseas assets.

In November 2018, the China Green Finance Committee and the City of London’s Green Finance Institute launched the green investment principles for the Belt and Road, which aim to establish clear low carbon and sustainability standards for infrastructure and related projects along the route. A total of 30 financial institutions have signed up.

In addition, the London Stock Exchange, which has a total of 200 green bonds, tightened up its green bond reporting requirements last year. Bonds issued by companies with revenues dominated by green activities will now have to submit annual, verified reports about how they actually use the proceeds.

We are still in early stages, however. There was much fanfare in 2018 about the Industrial and Commercial Bank of China’s issuance of US$ 1.6 billion of green bonds on the London Stock Exchange’s International Securities Market. It will invest in renewable energy, energy efficiency, low-carbon transportation, sustainable water and wastewater management.

An ideal project outlined in its prospectus was an investment in the 588 Megawatts Beatrice offshore wind farm in the Outer Moray Firth, which raised £2.6 billion of financing in total. In 2019 the Shanghai Pudong Development Bank issued US$ 300 million in green bonds.

There is a growing demand from European and Chinese investors for green assets to fulfil their Environmental, Social, and Governance (ESG) investment obligations. This, in combination with an improved regulation and reporting for green bonds, should result in preventing accusations of flagrant ‘greenwashing’. In turns, this should lead to another record year for green bond issuance.

With improved China-UK securities market co-operation, this puts new issuance for the Belt and Road and other infrastructure projects onto a stronger, and cleaner, footing.

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