China with the world’s third-largest bond market has been a popular place to raise money for climate finance, with sufficient depth and liquidity, as the market attracts a broad range of investors.
With many climate-focused products oversubscribed and in high demand, more private companies, banks and institutions are getting in on the act. For instance, over 200 of the largest asset management companies and institutions globally have now signed up to the Green Bond Principles.1 These guidelines indicate what constitutes a green bond versus a normal bond.
“Issuing a green bond is a big commitment and involves much more internal coordination,” explains Sheng Wang, Managing Director, Co-head of Financial Institutions Group, China for HSBC. “During the tenure of the bond you’re expected to keep disclosing your usage of the proceeds in green industries or green projects that you’ve committed upfront to, to your investors.”
Earlier this year the People’s Bank of China and the European Investment Bank (EIB) created a joint finance initiative to harmonise definitions between China and Europe on green investments. Aligning standards will make it easier to compare products across markets2 and differentiate them in the global marketplace.
“Issuing a green bond requires more professional bond knowledge and higher management ability,” explained Yaqin Shen, Head of the Environmental Finance Department at China’s Industrial Bank, at the recent HSBC Sustainable Financing Forum.
“Stricter requirements from the regulators are actually beneficial to corporations. Through third party assessment of your internal management logistics and the environmental benefits of your bond, it will help you improve your mechanisms of management.”
Climate-focused bonds are no longer just for large banks, smaller banks have also had successful cases of issuance.3 “We’ve also seen a lot of interest from offshore issuers coming to China to issue panda bonds,” explains Mr Wang.4 Green panda bonds are RMB-denominated products from a non-Chinese issuer sold in mainland China.
“For green bond issuance, there are now advantages in pricing,” states Ms Shen. “The country is still discussing further incentives, such as including them in approved currency debt and increasing the mobility in the secondary market. These are all developments we look forward to.”
The experience of the New Development Bank
The New Development Bank (NDB) was the first international financial institution to issue a green bond onshore in China last year, worth USD448 million.5 It was oversubscribed three times.6
“Issuing the bond was a very important milestone for us,” explains Leslie Maasdorp, Chief Financial Officer at the NDB. “It’s very important to know that there is an additional layer of work required. It is not daunting in any way. The rules are clearly defined, you just have extra reporting requirements.”
The development bank, which was set up by the BRIC countries, Brazil, Russia, India and China, to provide support for infrastructure, lent USD1.5 billion on 2016,7 and the first five projects were in renewable energy setting a strong environmentally focused precedence.
Hong Kong power firm benefits from Paris Agreement
In July this year Castle Peak Power Company Limited (CAPCO), Hong Kong’s main electricity generation company and a subsidiary of CLP Holdings Limited (CLPH) – one of the largest investor-owned power businesses in Asia, issued an Energy Transition Bond, valued at USD500 million.8 Though this was not a green bond, its focus was on abatement of carbon emissions. The debt was issued to raise money for a gas-fired power unit, replacing coal. It was oversubscribed by more than two and a half times.8
“Under COP21 the Hong Kong government has a very definite plan to bring down the emission level,” explained Francis Ho, Senior Director, Corporate and Project Finance at CLPH.9
“In order to do this the government granted approval to CAPCO to build a gas-fired unit. This power project will save at least half of the amount of carbon footprint for the same amount of electricity generation by a conventional coal-fired plant. We also believe that it will bring out a new sector of bond investors to CLP.”
- Green, Social and Sustainability bonds, International Capital Market Association
- People’s Bank of China and EIB initiative to strengthen green finance, EIB
- Green Bonds Highlights 2016, Climate Bonds Initiative
- China's Panda-Bond Boom Threatens Dim Sum Market Survival, Bloomberg
- BRICS bank to issue $448 million of yuan green bonds, Reuters
- BRICS bank issues RMB green bonds, State Council of the People’s Republic of China
- BRICS development bank aims to make $4 billion in loans in 2018, Reuters
- Issue of US$500,000,000 3.25% Notes due 2027 by Castle Peak Power Finance Company Limited, CLP media statement
- Hong Kong’s Climate Action Plan 2030+, Environment Bureau, Hong Kong