At COP21, countries around the world submitted plans on how they intend to shift their economies onto a low-carbon pathway. The question now is: How will they pay for it?
China recently took a step forward in answering that query. Late last month, the People’s Bank of China released the Green Financial Bond Directive. This directive outlines standards on how to use “green bonds,” where funds are exclusively applied to finance new and existing green infrastructure projects. The directive is the country’s first guideline on green bonds, which should help significantly scale up their use and ensure increased development of low-carbon projects like renewable energy and public transit systems. The Green Finance Task Force of the China Council for International Cooperation on Environment and Development (CCICED), a group that WRI co-chairs, recommended the creation of such guidance earlier this year.
Green Bonds Growing in Popularity
China joins the ranks of many other countries in pursuing green bonds as a way to support sustainable development. Since the first green bond was issued by the European Investment Bank in 2007, green bonds have gained popularity year after year, reaching $10 billion by mid-2012 and $65.9 billion by June 2015.
Green bonds became so popular because they solved the maturity mismatch problem with traditional bank loans. Banks get money from depositors, who usually save for the short-term, which limits banks from investing in long-term projects. Green bonds offer a cheap yet stable funding option for projects that usually require intensive capital investment upfront and bear long payback tails. For investors with long-term investment preferences, green bonds offer an ideal financing solution. Proceeds from green bonds have supported renewable energy and energy efficiency projects, public transit programs, water management and pollution control schemes, sustainable agriculture and forestry initiatives, and similar efforts.
A Few Key Issues with Green Bonds
As with any financial products, the issuance and the use of proceeds of green bonds must be strictly regulated. Without clear and widely accepted standards, environment-conscious investors in green bonds will worry about “green-washing,” where money raised for promoting green growth is used for non-green purposes such as investing in oil and gas. Therefore, the international financial community has developed standards to regulate the market, the most prominent of which are the International Capital Market Association’s (ICMA) Green Bond Principles, the Climate Bond Initiative’s (CBI) Climate Bond Taxonomy – Definitions, and the Barclays MSCI Green Bond Index. These standards are voluntary, but they help investors understand how green bonds define and select projects, use and track proceeds, and verify and disclose information.
A Year for Green Bonds in China
The Green Financial Bond Directive—as well as the associated Green Bond-Endorsed Project Catalogue, which spells out the type of projects eligible for green bonds—joins the ranks of the international standards, but applies more specifically to the Chinese context.
The Catalogue is based on Chinese environmental policies as well as international standards from ICMA, CBI and others. It classifies projects into 31 types under six categories: energy conservation, pollution control, resource conservation and recycling, clean transport, clean energy, and ecological conservation and adaptation. Developers hope that with clear and simple guidelines and criteria, China’s green bond market can get off the ground quickly and efficiently.
The fledgling green bond market will build on the progress China has already made with bonds aligned with climate change goals. For example, China Rail has issued bonds over the past decade to support the country’s fast-speed rail boom. In July 2015, Gold Wind Science and Technology Ltd., a Chinese company that played a role in supporting the growth of China’s wind power sector, issued the country’s first green-labelled bond. And in October 2015, Agricultural Bank of China issued green bonds equivalent to $1 billion at the London Stock Exchange, marking the first RMB-denominated green bond issued by a mainland Chinese financial institution.
With the release of the Green Financial Bond Directive and the Green Bond-Endorsed Project Catalogue by China’s central bank, there is no doubt that 2016 will not only be the Year of the Monkey—it will be the year of the green bond market as well.