In late December, the People’s Bank of China (PBoC) and China Securities Regulatory Commission (CSRC) jointly released new guidelines for green bond verifiers and verification activities in China.
What's it all about?
In late December, the People’s Bank of China (PBoC) and China Securities Regulatory Commission (CSRC) jointly released new guidelines for green bond verifiers and verification activities in China.
The new guidelines will be under the supervision of a new ‘Green Bonds Standard Committee’, currently in the process of being set-up.
The “Green Bond Assessment and Verification Guidelines (Provisional)" introduce regulatory requirements for verifiers – essentially a verifier licencing scheme. They stipulate required qualifications and credentials, verification methods, and reporting requirements.
First time a regulator has ventured into supervising verifiers
This is the first time a government has developed regulatory supervision. The scheme is broadly modelled on the international Climate Bonds Standard & Certification Scheme.
Before they can undertake green bond reviews, verifiers in China will have to register with the Green Bonds Standard Committee and provide evidence of:
- Professional expertise in assurance, accounting and auditing
- Expertise in key qualifying sectors, such as clean energy and low-emission transport
- Having current professional liability insurance cover
- Established internal procedures, pricing structure and quality control
Verifiers will also be required to undertake ongoing training to remain competent.
The Green Bonds Standard Committee will be reviewing the practices of verifiers and sharing of the results through designated websites. This is unique to the Chinese market.
The Guidelines also require verifiers to ensure their independence: no economic interests or affiliations between verifiers and issuers are allowed. And verifiers should price their external review services “reasonably”; unfair pricing competition is prohibited.
Both pre-issuance and post-issuance verifications are required
To ensure verifications are carried out in an orderly and prudent manner, verifiers should follow either domestic or international standards recognized by the Green Bonds Standard Committee.
Another new requirement is that verifiers will now have to undertake both pre-issuance verification and post-issuance tracking (periodically in accordance with the bond tenor).
While verification at the post-issuance stage is not mandatory according to the Green Bond Principles (GBP), it is a requirement of the Climate Bonds Standard & Certification Scheme.
Recommendations on verification procedures and methods are included in the Guidelines, such as interviews and on-site appraisals. Verifiers should ensure that green projects funded by the bonds are compliant with regulations, and that the screening of green projects, decision-making processes, management system of proceeds as well as the information disclosure and reporting are complete.
Verifiers are obliged to gauge whether the expected environmental impacts of green projects are reasonable or not.
The guidelines specify that the time from the signing date of verification contract to the issue of verification report should be no less than 15 days.
Standardising verification reports
The Guidelines also standardise verification reports by setting up requirements on what should be reported and how.
The Guidelines also standardise reporting requirements for verifiers. A report should include:
- the basic information of the green bond, including underlying assets and environmental impacts
- a description of verification methods used
- a summary report.
Verification reports will need to be made public to investors through designated websites or made available to specific investors as agreed.
Breaches of the regulations will attract penalties
Verifiers are required to conduct self-assessment of their green bond verification performance business once a year. The Green Bonds Standard Committee will have the power to make spot checks of verifier reports, as well as request peer reviews.
The Chinese regulators also say they intend to incorporate a penalty mechanism into the new rules, in the event of submission of false information, or a breach of professional ethics and independence requirements.
Under existing regulations, potential issuers have to first apply to a regulator for permission or have a programme of green bond issuance. They then issue a series of bonds against the programme, as they need and market conditions permit.
In future, whenever a verifier submits a post-issuance report with a “negative” conclusion, the bond issuer will have to take corrective action. If they fail to do so, their right to use the green label will be revoked for the remaining time to maturity and re-certification is not allowed. (This is similar to the revocation of Certification under the Climate Bonds Standard.)
They have also suggested that investors might want to start asking for a put option in the bond covenants, which they could exercise in a case of green label revocation (i.e. the issuer will have to buy back the bond if the green label is revoked).
Most stringent green bond rules in the world? Green Label Revocation
There has been a lot of international investor concern about the robustness of China’s green bond market. We discussed in our June 2017 post “Myth buster: why China’s green bond market is more orderly than you might think” the ongoing regulatory developments and structuring of China’s green bond market.
While there are still issues for international investors around the catalogue of qualifying assets and projects in China (notably “clean coal”), in terms of regulatory oversight it’s now the most comprehensive in the world.
This is a significant step and one worth watching as the market develops.
Tightening supervision on verifier quality is necessary
In China, the vast majority of green bond issuers receive third party external review, and this has become a norm - green bond issuance without verification would hardly be recognised by the market. But there have been some complaints about variations in the quality of verifications.
While 73% of verifiers operating in China are licensed verifiers under the international Climate Bonds Standard & Certification Scheme, their domestic verifications have not involved Certification to date and so have been unsupervised.
The move to tighten supervision on verifiers was foreshadowed in the recently published “Establishing China’s Green Financial System”, edited by Dr. Ma Jun, Special Advisor to the Central Bank’s Governor and Chairman of China's Green Finance Committee.
As implementation of the Guidelines proceed, market concern over “greenwashing” will increasingly be addressed and we expect international investors interest in China’s green bond market to grow.
The Last Word
Voluntary schemes have served the industry well, with the green bonds market continuing to grow rapidly.
But when governments start to introduce incentives for green bonds, whether for issuers or investors, regulatory oversight becomes essential.
That’s one of our super trends for 2018 towards a $1trillion a year market by 2020.
China has already introduced incentives such as fast-tracking approval processes for green versus other bonds. We expect other jurisdictions to follow suit in 2018;
The European Commission announced at the Macron Climate Change Summit last December that it’s looking into capital weighting incentives for green mortgage and vehicle bonds, and the European High Level Expert Group on Sustainable Finance has called for an EU wide approach to green standards and labelling.
With China and the EU stepping up their efforts, we expect attention to now turn to harmonisation between different national schemes.
'Till next time,
Climate Bonds
PS: Reminder: The 2018 China Green Bonds Investor Forum takes place at the London Stock Exchange Monday 19th March.
A joint CBI Euromony event that kicks off a week of green bonds activity in London including our Annual Conference and the 3rd Annual Green Bond Pioneer Awards. More information on our Conference site.
Dont miss it!
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