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Earth Day Special: Exploring the ‘Green’ in Green Bonds

The desire of the public for cleaner, greener energy sources has affected how banks and governments approach both old and newfound environmental challenges.

Yet, the exact means by which green finance has kept up with the demand is changing by the year.

One thing is certainly clear: Mother Nature requires a lot of green financing, and that definition of green is not as straightforward as the one we might use to describe a grassfield. 

In order to meet the global objective listed in the Paris Agreement on Climate Change to keep the global temperature rise this century below 2 degrees Celsius, significant financing is needed. 

Insert green bonds: these refer to any type of bond where the proceeds will only be applied to finance or refinance that is eligible for environmentally beneficial projects.

This includes programs that work to deliver clean water or promote renewable energy sources and practices.

For example, Goldman Sachsーa Climate Bonds Partnerーserved as the lead manager for the first renewable natural gas (RNG) project financing in the US capital markets.

The renewable natural gas plant in the U.S, owned by Equilibrium Capital, will convert manure from dairy farms into RNG that will be used primarily as transportation fuel, cutting down carbon emissions equivalent to over 24 million gallons of conventional gasoline per year. 

These substantial wins for our planet are made possible because of the Climate Bonds Initiative (CBI), an international organisation working to mobilise the largest capital market of all, the $100 trillion bond market, for climate change solutions.

Partners range from investors representing $14 trillion of assets under the world’s leading investment banks such as HSBC, UBS, Goldman Sachs, BNP Paribas, Credit Suisse, and PAAMC HK. 

Specifically, the mission is to drive down the cost of venture capital for large-scale climate and infrastructure projects and to aid governments seeking to increase investment to meet climate goals.

This is a relatively new phenomenon, with the first ever green bond issued in 2007. Due to its exponential growth, the green bond market recently hit $1 trillion in December of 2020. 

In 2019, China was the largest source of labelled green bonds. The total amount issued domestically and in offshore markets reached $55.8 billion, representing a 33% increase from the year before.

This comes as no shock. China is one of the most attractive emerging markets and offers stability to investors seeking to diversify their funds. 

Even so, the reason for this increase may not be as positive as one might assume.

Many countries apply their own definitions to what constitutes a green bond, and what exactly their environmental goals include.

China’s green bond market began in 2015 and included “clean coal use” as well as coal-fired power plants; yet for many international investors, fossil fuels simply could not be labelled as green or clean.

In 2017, Ma Jun, chair of the China Society for Finance and Banking’s Finance committee, stated that 30% of China’s green bonds were considered uninvestable.

Source: Climate Bonds Initiative

China’s 2020 Green Bond Catalogue removes these controversial coal investments and brings China closer to CBI and international standards.

Yet, from 2018 to 2019, there has been a significant increase in not only green bond issuance, but also in green bonds only aligned with Chinese definitions of ‘green’.

The 33% increase from 2018 therefore seems to unfortunately tie in with more issued bonds that deviate from the CBI standard.

This is even moreso the case because coal may have been removed, but oil and gas extraction still exist.

This is attributable to the immense inward pressure that China faces to improve air quality, and factors such as “clean coal” reduce sulphur dioxide and nitrogen oxide emissions, hence improving air quality, but they ultimately fail to reduce carbon emissions.

The industry believes that the new catalogue will render China’s green bonds more attractive to overseas investors, and that it is a step in the right direction both environmentally and economically.

Curiously, there are virtually no Chinese investment banks credited with the CBI title.

Just recently in March of 2020, Ping An of China Asset Management (Hong Kong) became the first Chinese asset manager to be a Climate Bonds Partner.

Theoretically, the largest source of labelled green bonds should have a decent amount of banks accredited by CBI, especially since China is looking to attract more and more investment in its green bond market.

52% of green bond investors in the onshore green bond market are commercial banks, and by the end of 2019, the total outstanding amount of China’s domestic green bond market stood at $140 billion, but only $90 billion complied with the CBI standard.

This point, combined with the lack of Chinese banks partnered with the CBI, suggests that there remains significant progress to be made within the Chinese threshold of understanding what ‘green’ means in order for domestic banks to follow suit with the rest of the international scene. 

Ultimately, the pandemic will lead to a record number of government special bonds, which may have the potential to be labelled as green bonds.

China has indeed been a world leader in kickstarting a domestic green bond market.

Now, all it needs are local and global harmonisation to tighten the meaning of the term ‘green’ in green finance. 

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