As one of the largest suppliers of sustainable finance, China originated over $131 billion onshore and offshore labelled green bonds in 2023. Despite volumes shrinking 3.5% over the previous year, the market remained the largest green bond market in the world for a second consecutive year.
A from the Climate Bonds Initiative (CBI) shows that over 80% of the green bond issuers in 2023 were state-owned enterprises (SOEs), and the contribution of non-SOEs declined by around 4% in the same year. 84% of the supplies were from repeat issuers, most of whom are from the financial, industrial and utilities’ sectors.
Additionally, social and sustainability bond issuances in China, mainly from the infrastructure sector, reached $13.7 billion, and sustainability-linked bonds recorded a total of $5.7 billion.
During FinanceAsia’s 6th China Fixed Income Summit on November 27, speakers from a panel titled “Driving Innovation in Green Finance” discussed China’s sustainable finance landscape from an offshore investment perspective, as well as new trends such as transition finance.
Unified guidelines
Winnie Leung, head of fixed income at Hang Seng Investment Management, said that a key challenge faced by investors in green bonds is a lack of unified standards to view issuances across different markets.
“For managers constructing portfolios on either risk or impact basis, it’s often very time-consuming and requires a lot of resources to clearly define the results,” she explained.
Announced during COP29 in Baku, Azerbaijan, the People’s Bank of China has co-developed a Multi-Jurisdiction Common Ground Taxonomy (M-CGT) together with the European Union (EU) and the Monetary Authority of Singapore (MAS).
M-CGT is the expansion of an existing common ground taxonomy framework between mainland China and the EU, and now serves as a technical reference document for the definition of green activities, and provides cross-border investors aligned references across the jurisdictions.
Despite such cross-border progress Jonathan Lin, group sustainability manager at Prudential, said that a nation-wide standard in China is still needed.
In the case of transition taxonomies, which offer guided references around qualified transition activities, only cities such as Chongqing or Huzhou have issued local-level guidelines.
The lack of interoperability across these local standards has created additional challenges for investment managers when they report to international limited partners (LPs), Lin underlined.
Additionally, Leung pointed out that most of the green bond offerings from China mature in less than five years, which don’t qualify for investors that prefer long-term assets, such as life insurance and pension funds.
Financing transition
Transition finance, which refers to financing activities to support high-emission sectors in their green transition journey, is gaining traction. Such industries include coal, steel, real estate, chemicals, among others, which are sometimes referred as “hard-to-abate sectors”.
The development of transition finance is still at a nascent stage, with the issuance of several local taxonomies, and a few transition bond issuances led by governments or financial institutions. Hang Seng Investment Management’s Leung agreed that the concept is yet to be fully understood by investors.
To fulfil environmental, social and governance (ESG) requirements, investors have tilted towards cleaner industries such as renewables and have exited or divested from carbon-intensive sectors.
Lin shared that Prudential published in September an organisation-wide transition framework to review future investment opportunities. These could potentially cover high carbon emission companies with solid transition plans, whereas before they used to be left out.
He explained the rationale: “If [a company] does have a target to materially reduce their carbon footprint, they should at least be considered rather than outright excluded. There should be a more nuanced screening process applied, whether it’s in China, or other emerging markets that we operate in.”
While panellists agreed that the development of green and transition finance needs industry-wide action, it remains challenging from a return perspective, as paying “greenium” is not an attractive option. Standardised taxonomies, transparent data points, as well as industry awareness are key factors to push the agenda forward.
Veronique Lafon-Vinais, adjunct associate professor of finance at HKUST Business School, warned that the record October flooding this year in the Valencia region of Spain, where over 200 people died, showed the reality of climate change and the urgency that is required from all parties. Two record breaking hurricanes in Florida this year have also caused alarm to climate scientists.
The summit took place at the Kowloon, Shangri-La hotel in Hong Kong.
