The removal of fossil fuels brings China into closer alignment with international practice

12 Jun, 2020 23:44
source: Singularity Financial

Singularity Financial Hong Kong June 13, 2020 – In May, the People’s Bank of China (PBoC), National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC) jointly published a draft of the 2020 version of the Green Bond Endorsed Project Catalogue (GPC) for comments.

The highlight of this draft is “China’s top regulators announce they will exclude fossil fuels from their green bonds taxonomy”. Dr. Ma Jun, Chairman and President of Hong Kong Green Finance Association (HKGFA) commented, the removal of utilisation of clean fossil fuel based energy in the Catalogue 2020 demonstrated China’s action in tackling climate change issue while pursuing pollution control and efficient utilisation of natural resources, which is highly aligned with its commitment in implementing the Paris Agreement.

It’s a major development, that will make it easier for international investors to participate in the growing Chinese green bond market. The consolidation of domestic green bond taxonomies has been an important reform goal for regulators for some time.

The new Catalogue would also save investors “search” costs and improves the attractiveness of Chinese green bonds for offshore investors.

All regions, departments and relevant institutions should act based on the Green Bond Catalogue (2020) with the combination of their own green development goals and tasks in respective fields and the construction stages of the green financial system, develop and implement relevant supporting policies, devote efforts to publicity and guidance, give full play to the supporting role of green bonds on environmental improvement, action to climate change and efficiency improvements, and promote sustainable economic and social development and industrial green transformation and upgrades.

The Catalogue has been published for public consultation – an unofficial English translation of the Catalogue can be found here.  The close of the consultation period for the updated catalogue was set for June 14.

China’s green bonds market is now the world’s largest. Domestic green bond issuance in China is highly regulated. The allocation of proceeds from green bond issuance has to be in line with official green project catalogues. Bond-issuing has multiple regulators, depending on where the bond is traded or the type of issuer.

The new catalog of projects will meet the “international relevant standards,” according to the central bank. According to the CBI, $24.2 billion – or 44% – of the $55.5 billion worth of labelled green bonds issued in China during 2019 were “not regarded as green by international investors”. Only $31.2 billion worth of green bonds in the total $42.8 billion issued in China in 2018 met global criteria.

“The new catalog would make investing in China’s green bond market a lot easier for international investors,” said Wenhong Xie, China program manager at the initiative. “In the past, a sizable portion of green bonds from China were considered uninvestable due to a small fraction of coal assets in an otherwise green bond.”

The new draft plan also consolidates standards among the central bank, the National Development and Reform Commission and the China Securities Regulatory Commission, making a single standard for sustainable finance-worthy projects in China going forward. Under current rules, several different regulators in China are in charge of green bond issuers from specific sectors – resulting in several green bond-eligible catalogues in China. The PBoC is in charge of financial entities, the NDRC of government-controlled businesses, and the CSRC of publicly-listed firms.

Unifying the policy within the country’s various regulators is a “hugely significant step that will be welcomed by international investors,” said Sean Kidney, chief executive officer of CBI. The removal of fossil fuels brings China into closer alignment with international practices, he said.

According to Bloomberg’s recent report, China is the world’s largest emitter of greenhouse gas and mines and consumes about half of the world’s coal. Although it’s investing in renewable and nuclear energy to reduce coal’s share in the energy mix, consumption of the dirtiest fossil fuel remains near record levels. The country this year already approved building more new coal plants than it did in all of 2019.

It’s also the largest investor in renewable energy, having poured more than $750 billion into clean energy projects from 2010 through the first half of 2019, according to BloombergNEF.

“This new initiative allocates money to the right projects and will have a huge impact in the global fight against climate change,” said Liu Junyan, a Beijing-based senior climate and energy campaigner with Greenpeace East Asia.

What’s been cut from the previous catalog:

1. Large ultra-supercritical or supercritical coal-fired power plants, which were previously included as energy-saving projects.

2. Projects that process coal to remove impurities.

3. Ventures that produce fuels and fuel additives including gasoline and diesel with higher environmental standards.

What’s been added:

1. More clean energy projects, including hydrogen, geothermal, tidal power, biomass, energy storage, and carbon capture and sequestration.

2. A new category of “green services” which includes trading carbon emission credits and renewable energy certificates, as well as demand-side management in the power market and designing green industrial projects.

3. Infrastructure supporting new energy vehicles including distributed charging points and hydrogen charging stations.

This is a great signal that China has sent to the global market, that China is willing to harmonise green finance standards with the world.

In January, the China Banking and Insurance Regulatory Commission (CBIRC) issued guidance in which it called upon banks and insurance firms to establish environmental and social risk management systems, incorporate environmental, social and governance (ESG) requirements into its lending process, and strengthen ESG data disclosure.

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