By JIANG XUEQING | China Daily

Environmentally sustainable financing system key to peaking CO2 emissions by 2030, reaching carbon neutrality by 2060

China's green bond market has been growing steadily as the system keeps improving and the idea of environmentally sustainable investment deepens.

In 2020, the world's second-largest economy issued 216 green bonds worth 222.88 billion yuan ($34.48 billion). Domestic issuers altogether issued 18 green bonds overseas, worth a total of about 49.6 billion yuan, according to a report released by China Lianhe Credit Rating Co Ltd.

Newly issued green bonds, except for asset-backed securities, involved 134 issuers, up from 121 in 2019.Among them, 97 were new issuers of green bonds.

Funds raised that are estimable and have clear project objectives were mainly spent on clean transportation, clean energy and pollution prevention. Money directed toward these areas accounted for 20.17 percent, 19.74 percent and 9.61 percent, respectively, of the total volume of funds raised, the report said.

Despite this steady growth, China's green bond market still has considerable room for improvement, as the number of green bond issuances in 2020 accounted for only 1.05 percent of the total, and the volume of green bond issuances made 0.81 percent of the total, said analysts at China Lianhe.

According to the National Association of Financial Market Institutional Investors, last year, Industrial Bank Co Ltd, Agricultural Bank of China Ltd, Bank of China Ltd, Shanghai Pudong Development Bank Co Ltd and China CITIC Bank Corp Ltd were the top five green bond investors among all the nationwide commercial and policy banks.

As of March 1, the outstanding balance of green bonds underwritten by Industrial Bank, a joint-stock commercial lender based in Fujian province, was 100 billion yuan.

Serving as the lead underwriter, Industrial Bank helped Zhuhai Port Holdings issue a seven-year, 200-million-yuan green debt financing instrument in early February, which will support the construction of wind power projects by integrating resources through mergers and acquisitions.

The bank also acted as the lead underwriter for a three-year 2-billion-yuan carbon-neutral bond, which was issued by China Southern Power Grid in February. Funds raised will be invested in the Yangjiang and Meizhou pumped-storage power station projects in Guangdong province. It is estimated that the projects will cut carbon dioxide emissions by 743,500 metric tons annually.

A carbon-neutral bond is a subcategory of green debt financing instruments in which funds raised are specially used for green projects to reduce carbon emissions.

Last month, China issued the first batch of carbon-neutral bonds as part of its efforts to allocate more financial resources to green and low-carbon fields of the economy. The larger plan is to help transform the country's industrial and energy structure.

The Central Economic Work Conference held in December listed carbon emission reduction as one of China's major tasks this year. The country aims to have carbon dioxide emissions peak before 2030 and achieve carbon neutrality by 2060.The objectives will bring huge opportunities to the financial industry, experts said.

Hu Kun, general manager of the investment banking and asset management department at Bank of China, a major State-owned commercial lender, said BOC forecast that the volume of green bond issuances will increase by more than 30 percent year-on-year in the next five years.

On Sept 14, Bank of China issued Asia's first blue bond, which is a debt instrument aiming to raise capital from impact investors to finance marine and ocean-based projects that have positive environmental, economic and climate benefits.

The blue bond issued by the bank comprised a three-year $500 million US dollar bond and a two-year 3-billion-yuan dim sum bond－a renminbi-denominated bond issued outside of the Chinese mainland. Funds raised are expected to be invested in environmentally friendly projects, including marine sewage treatment and offshore wind power projects supported by the bank.

The blue bond received a warm reception from global investors, such as large fund companies and asset managers in Europe and the United States. Non-Asian investors accounted for 41 percent of all those investing in the $500 million US dollar bond. This is the highest percentage of non-Asian investors for a US dollar bond offered by a Chinese financial institution since 2018, said Liu Quanlei, deputy general manager of BOC's global markets department.

"As environmental and social problems become increasingly prominent globally, the society needs to guide more investment toward green, social and sustainability projects. About 11 percent of asset owners have taken climate change as an important factor affecting their asset allocation decisions, and the number will keep rising," Liu said.

BOC has issued green, social and sustainability bonds－debt instruments whose funds are exclusively allocated to financing new or existing green or social projects or a combination of both－in the offshore market since July 2016, with a total volume of about $9 billion, including green bonds worth $8.3 billion.

The issuance of environmental, social and governance-themed, or ESG, bonds will become a priority for Chinese companies as they expand globally, said David Mao, managing director of Asia debt capital markets at Citi.

"As international investors have raised the requirements for ESG, and credit ratings agencies are placing greater emphasis on ESG-related risks, Chinese companies must follow international standards and play by the rules to boost their own development," Mao said.

Last year, China issued ESG bonds worth $8.9 billion overseas, accounting for 4 percent of the volume of China's offshore bond issuances in foreign currencies. The percentage is expected to increase to 10 percent in the next few years, he added.

Looking ahead, the volume of international green bond issuances will hopefully maintain the growth momentum, with the gradual containment of the pandemic, the continuous launch of policies promoting green bond issuances, and deepened cooperation on standards, investment and research of green bonds. Green bond issuers will further expand, and green bonds will become more diversified in terms of types, industries and regions, said the China Lianhe report.

In the meantime, domestic green bond market institutions will keep improving as the unification process of China's green bond standards had been accelerated and made huge progress last year. With the country pushing forward with the building of mechanisms for green finance standards, the synergy between standards for green bonds and green lending will hopefully strengthen further.

After the economy fully recovers, the country will rapidly press ahead with green projects, and demand for green bond financing will further increase. Besides, as more than 270 billion yuan of green bonds will reach maturity this year, the need for refinancing via green bonds will increase to some extent, the report said.

Several PwC partners from across a range of business areas said the goal of net zero emissions, which means that human-caused greenhouse gas emissions must be removed from the atmosphere through reduction measures, will be a big driver for the ESG sector in 2021, as governments and corporations move from idea to implementation.

They said green bonds and funds will continue to dominate ESG as an asset class. However, large financial institutions will start to innovate and create a more diverse range of ESG products. As banks incorporate ESG factors into their credit risk management, they will become green advisers for their clients. They will reach out to their borrowers in order to assess their ESG performance, including climate mitigation and adaptation plans, the PwC partners said.

By the end of 2020, the outstanding balance of green loans offered by 21 major banks in China amounted to 11.5 trillion yuan, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, at a news conference on March 2.

Industrial Bank, for instance, had provided 2.91 trillion yuan of green financing to 29,973 enterprises by the end of January. Every year, green projects supported by the bank are expected to save 30.5 million tons of standard coal and 410.47 million tons of water, to reduce 84.99 million tons of carbon dioxide emissions, 998,100 tons of sulfur dioxide emissions and 119,200 tons of nitrogen oxide emissions, and to comprehensively utilize 45.96 million tons of solid waste.