The following article is written by Euromoney and sponsored by HSBC.

    China has become a leader in the green bond market, ranking second for green issuance last year— only behind the US. Despite its dominance, many investors still have questions about just how green China really is. As its market continues to boom, China is ready to forgo the stereotypes of its smog-filled cities and show that its sustainability initiatives are on par with the west.

    Last year Chinese green bond issuance surpassed USD30 billion, according to the Climate Bonds Initiative (CBI). China's Industrial Bank is the one of the largest global green bond issuer, selling nearly USD10 billion worth of notes in 2018 both onshore and offshore. As the size of the market has surged over the last three years, so too has the quality of the green bond offerings.

    Sustainable financing experts are ambitious about the potential for further growth and international appeal. "We really feel the engagement," said Luying Gan, Head of Sustainable Bonds, Debt Capital Markets, Asia-Pacific, Global Banking at HSBC. "Pushing is coming from all directions."

    But there is some debate about the appeal of China's greenness, revolving around the country's standards for green financing. Since China published its green bond guidelines at the end of 2015, it has been criticised by some western investors for including "clean coal" and other less-than-true-green industries. But Asian bankers have countered that despite these standards, the vast majority of China's green bonds do fall in line with international expectations. And, there has been some recent reports that China is considering moving its guidelines to cut out clean coal.

    "A lot of the European audience may think that China is in the high pollution phase, but I think that has passed," said Gan. The country has been making a concerted effort to cut back on its carbon footprint across the board, leading in areas like electric vehicle use. For debt issuers, part of the attraction of selling green bond is to introduce Chinese companies to international investors, and gain a bit of diversity in a borrower's investor base. To do that, companies are aware that they need to structure their transactions to align with international green expectations.

    Last year, a higher proportion of Chinese green bonds aligned with international definitions, despite the differences in the country's domestic guidelines. Chinese issued internationally-aligned green bonds accounted for 18 per cent of the global market in 2018. It's a notable increase from 2017, when 38 per cent of Chinese issuers failed to meet international standards. If bonds that aligned with China's local definitions are counted in the country's green bond total last year, issuance surpassed USD42 billion, according to CBI.

    Realistically, said Gan, China's differing green guidelines aren't a bad thing. Many countries, businesses and institutions cite the United Nation's Sustainable Development Goals as a motivation for environmentally and socially responsible practices. Those goals are wide catching and allows for different approaches for achievement.

    "It is common to have different standards," said Gan. Different countries and regions have developed the green market at their own paces and to meet their local needs. For many developing countries, like China, that means accepting fossil fuels to some extent and ensuring a cleaner usage of them. Transitioning these industries to cleaner standards is a critical step, many people agree.

    "Investors have different approaches and analytical frameworks towards green financing," added Gan. Green investors are increasingly focused on the environmental impact of their investments. Rather than draw a hard line about the greenness of projects, investors are looking into the substance of the projects and applying case by case consideration. For investors with more flexibility, "light green" notes, such as energy transition bonds from emerging markets, can offer some benefits of green financing, alongside diversity for a portfolio. The beauty of green investments, added Gan, is that they have the transparency to allow investors to decide what they are comfortable with.

    While "dark green" investors can garner a lot of attention as they lead the charge in pushing for green financing, some investors are actually "light green." That means that they incorporate various ESG (environmental, social and governance) approaches into their investment philosophy, and all things being equal in a bond sale, these investors will opt for a green bond over a conventional bond. This investor base will continue to grow as "colour blind" investors, or those with no preference for green investments, will shrink.

    The Chinese green bond market began its development from the top down, following China's establishment of its own guidelines, and the government has sent a strong message that green financing is a priority for the country. But many green bond advocates agree that the top-down approach can only go so far.

    "For the long term sustainable development of the market, we need the market to push from the bottom up," said He Ji, deputy general manager in the treasury department at the Agricultural Development Bank of China.

    Governments around Asia, including Singapore and Hong Kong, have introduced subsidies to encourage green issuance, offering to offset the added costs of verifying green compliance. But many people believe that the subsidies are, and should be, a temporary measure. "If we rely on subsidies, then the green market will not develop in a healthy way," said Han Zhang, CEO of iGreenBank. "Many of the subsidies we see have no exit mechanisms," he added, explaining that such an approach will stymie the market.

    To fill the gaps in the market and encourage development, banks will play a key role. Market leaders like HSBC have to start with many potential borrowers from scratch, helping them develop their own company green frameworks, and educate them on the benefits and appeals of being a green issuer.

    "Green bonds really help a sustainable corporation like Modern Land to position itself responsibly among all stakeholders, including shareholders, clients and regulators," said Cristiano Cui, Managing Director of Board Office, Modern Land China.

    Banks are also educating the investor base in Asia, which currently lacks many green-dedicated funds, to show how green products fit into portfolios. These banks are able to base their Asian green strategy off their European experiences, bringing in successful western practices to encourage engagement in the region.

    And, banks will continue to lead as the market moves to new financing options including green loans and green asset backed securities. "Financial Institutions have played an important role in greening China's financial system," added Gan. "From providing green credits, to issuing green bonds, then to issuing sustainability bonds, which fund both green and social projects. China Construction Bank is a good example."

    Added Ji, "By issuing the green bonds, we are not only financing, but we are also communicating to people and the world about the development of the green bond market."


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