I’m in chilly Beijing today. Thanks to rain, the air quality is now “Good”, down from “Hazardous” when my high-speed train pulled into a moodily smoky station a couple of days ago.
As usual it’s been a round of meetings about green bonds with regulators, our Chinese partners like CCDC and CECEP, and industry associations.
Today it’s a seminar on responsible investment and green finance - I’ve just been listening to the central bank’s (PBOC) Dr Ma Jun, leaders of AMAC and IAMAC, China’s big investor associations, and Fiona Reynolds, CEO of the PRI, talk about their new cooperation on greening the investment side of China’s economy.
And then BlackRock’s Vice Chairman, Philip Hildebrand, comes on and says “China’s green finance reforms will be seen as a pivot point in the history of the development of the world’s financial system”. Agree.
The seminar is highly energized because of a big milestone just before the September G20 meetings in the Chinese city of Hangzhou: on 31 August seven Chinese state ministries jointly released new “Guidelines for Establishing the Green Financial System” (in Chinese).
The meeting that signed off on the Guidelines was, unusually, chaired by President Xi Jinping.
This is not normal – President Xi’s involvement is an incredibly important signal to Chinese institutional actors to get with the program and get with it now. It’s like a personal endorsement for the central bank’s work on green finance and green bonds, work led by the Dr Ma Jun. And it fed directly in to the following week’s G20 statement supporting green finance measures and green bonds.
The guidelines lay out a set of steps to improve how capital markets should allocate resources towards serving China’s transition to a green economy.
Key points about green bonds:
- Recognizing green bonds as a key component of a green financial system
The preface to the Guidelines note that “developing green finance is ... an integral part of the structural reform of supply side”, i.e. this not merely a part of China’s financial system reforms but also to its “supply side” economic reforms, which call for China’s industrial power to be re-orientated towards green.
The Guidelines set out a clear definition for Green Finance: “financial services provided for economic activities that are supportive of environment improvement, climate change mitigation and more efficient resources utilization”. That means “environmental protection, energy savings, clean energy, green transportation, and green buildings”.
The Guidelines then note that financial instruments such as green bonds are central to achieving the institutional arrangements of a green financial system in China.
- A shift to unified green bond definitions
The Guidelines note that relevant regulations and rules for green bonds issuance need to be improved and require “inter-departmental coordination” to do so. For example (the Guidelines note), regulators need to coordinate on:
- Requirements on the use of green bond proceeds. In general, green bond proceeds are required to be “fully (or mainly) used for green projects”.
- Requirements for information disclosure.
The Guidelines were issued jointly by the:
- People’s Bank of China (PBoC)
- Ministry of Finance
- National Development and Reform Commission (NDRC)
- Ministry of Environmental Protection
- China Banking Regulatory Commission (CBRC)
- China Securities Regulatory Commission (CSRC)
- China Insurance Regulatory Commission (CIRC).
Given the previously different green bond approaches taken by different regulators in China, this is a major development.
The guidelines call for unified definitions of green bonds, i.e. you can expect to see the differences between PBOC and NDRC rules disappear.
- Standardizing third party verification
The Guidelines talk about the need to explore “ways to formulate standards for third party verification of green bonds”, in line with international practices. No detail yet.
They also encourage rating agencies to get involved, in particular to evaluate the green performance of the issuers and the ‘greenness’ of the projects. The zinger: they should “evaluate the impact of environmental costs on creditworthiness”. Yep.
- Standardizing green bond information disclosure requirements
The Guidelines talk of the need to establish and improve a mandatory environmental information disclosure system for bond issuers. To improve market transparency, green bond issuers will be “required to disclose information that investors are seeking and improve investors’ confidence in the environmental credentials of the green bond”.
The Guidelines also raise the prospect of introducing penalties on listed enterprises and bond issuers that falsify environmental information. This idea was first advanced by UK insurance investors; in the US and Europe it’s been highly controversial, with most banks arguing it would threaten growth in the market; although it should be said that high-yield issuers have generally been comfortable with the idea.
- Bringing in more support for green bond issuance
The Guidelines note that regulator registration and approval processes for green bonds need to be efficient to encourage issuance - in fact they say they need to be improved.
In another measure, local governments are asked to promote the development of green bonds, including being asked to support issuance with specialized guarantees and credit enhancement mechanisms to reduce financing costs.
- Facilitating green bond investments
The Guidelines say that action needs to be taken to “encourage long-term investors such as pension funds and insurance funds to make green investments”.
And the encouragement has started: the green finance event I’m at in Beijing today is convened by PBOC, the Asset Management Association of China, and the Insurance Asset Management Association of China. They represent the bulk of the country’s investment sector.
A Last Word
Last night I had dinner with one of the country’s richest men. It turns out he is working with the government to finance a greening of the economy of the Hebei-Tianjin-Beijing area, an economic zone with 120 million people, 17% of the world’s iron and steel production – and vast coal-fired power stations that are in the process of being shut down to clean up the air. Yes, there will be green bonds in the mix.
This isn’t altruism - staying friendly with the government means you need to be seen to be actively supporting the country’s policy goals – and greening the economy is now a number one policy priority.
Folks, learn from China. We are seeing the pilot project for how we will shift the world economy to green.
