As Chinese green bonds increasingly harmonise with international standards so that international investors feel more comfortable with the country's onshore market, London, Luxembourg and Hong Kong are likely to benefit from an expected surge of issuance.
But international investors remain sceptical. “International investors are interested in green bonds, but the challenge is, are they genuine? They ask: 'Are these bonds really green?'” said Chaoni Huang, director of green and sustainable solutions in corporate and investment banking at Natixis, at the International Capital Market Association (ICMA) Asia Primary Market Forum in Hong Kong at the end of February.
ICMA, headquartered in Switzerland, supports and organises the green bond principles which underpin international green standards.
Chinese green bond standards are edging closer to international standards. In late March, officials in China, the EU, Japan and other countries will meet in Brussels to discuss the harmonisation of green bond standards.
The fraction of Chinese green bonds that failed to meet international standards fell 12 percentage points to 26% last year, according to a report in February from the Climate Bonds Initiative and China Central Depositary & Clearing Company, a Chinese state-owned institution which provides services for securities. At the same time, the issuance of internationally aligned green bonds rose by a third to $31.2 billion.
Last year, 14 Chinese issuers sold $9.5 billion of green bonds in the offshore market. This accounted for 18% of global issuance, and the country is the second largest green bond market in the world. It lags behind the US which sold $34.1 billion of green bonds in 2018, according to the report.
Aside from changing regulations, market forces offer another way to bring Chinese green bonds closer to international standards.
For instance, ICBC listed $1.58 billion of certified climate bonds which listed on the London Stock Exchange International Securities Market in July last year, which at that time was the largest green bond to be listed on the London Stock Exchange. And in October 2017, the Big Four Chinese state-owned banks issued $2.1 billion of green bonds and listed them on the Luxembourg Green Exchange.
“Big green issuers like ICBC move the Chinese market towards international standards. Given international investors’ demand, Chinese firms will tend to adopt international standards when issuing green bonds to reach these investors,” said Anna-Marie Slot, a partner at international law firm Ashurst.
Nonetheless, differences between Chinese green bond standards and international standards remain, and the gap is unlikely to disappear.
One major difference is how coal is treated. If a coal project comes under the Chinese classification of clean coal, it can be considered for a green bond.
International investors may prefer that China move away from this, but this must be weighed up with the reality of the country's economic need for its coal reserves for heating and energy. “China will want standards that make sense for itself,” said Slot.
HONG KONG'S ROLE
Hong Kong has the infrastructure to give third-party advice on the extent to which a Chinese green bond fits international standards, and explain it to international investors. By doing this, Hong Kong can improve the market as a whole. “A market grows out of transparency. That has the potential to boost the number of green bonds in Hong Kong,” said Slot.
The Hong Kong Stock Exchange is the largest listing venue for offshore Chinese green bonds and accounts for 37% of total offshore volume. Last year, nine issuers listed $2.3 billion of green bonds, which was 4.6 times the $501 million issued in 2017.
Volumes are expected to grow dramatically this year. Hong Kong’s green bond market will receive a boost from the government’s plan to print HK$100 billion of sovereign green bonds which will also help the market with benchmarks for pricing.
The London Stock Exchange is the second largest offshore market for Chinese green bonds, while the Luxembourg Green Exchange is currently ranked third, though that could change. Last year Luxembourg signed an agreement with the Shanghai Clearing House to facilitate access to Chinese green bonds for international investors.
European investors are hunting for growth, said Benjamin Lamberg, Asia and Japan head of global debt markets at Credit Agricole Corporate and Investment Bank, at the forum on February 26. “Where do they go? Asia,” he said.
