China's proposal to stop recognizing clean coal as projects qualified for green bonds could attract more interest from foreign investors, as the policy change brings domestic standards closer to the more stringent international definition of green projects.
"Clean utilization of fossil fuel," which ranges from coal washing to carbon capture, is excluded from the list of projects eligible for green bond financing, according to a proposal released by the People's Bank of China in May. It did not say when the policy will be implemented. Clean coal projects have always been excluded in green bonds that are certified by international standards.
The gap between the standards acceptable in China and elsewhere has been one of the reasons why some international institutional investors have been staying away from green debt issued by Chinese issuers, as well as the faster growth of locally compliant green bonds targeting mostly onshore investors in China, analysts say.
China's intention for clean coal exclusion makes it "very attractive to international investors," Maitri Asset Management Chief Investment Officer Ankit Khandelwal said via email. "As responsible investors, we welcome this alignment as it is more relevant to our investment strategy.
"Clean utilization of coal being eligible for Chinese green bond projects has traditionally been an area of contention for global green bond investors."
Trend may reverse
In the first half, China's issuance of green bonds that only met domestic definitions totaled US$7.97 billion, well above $4.37 billion for the globally aligned bonds, according to the Climate Bonds Initiative, or CBI. Overall, green bond issuance has slowed so far in 2020 amid the pandemic.
For the second quarter through June alone, green bonds issued on the Chinese standards more than doubled to $5.92 billion from the previous quarter, while the globally aligned green bonds also nearly doubled to $2.82 billion, CBI added.
In 2019, locally aligned green debt in China totaled US$24.5 billion, less than US$31.3 billion for the bonds aligned with the global standards, according to the CBI.
China's proposal could encourage more issuance of globally aligned green bonds, said Shuang Liu, senior associate at Sustainable Finance Center of World Resources Institute. "It'll also send a policy signal for Chinese stakeholders to mainstream climate considerations," Liu said.
China's decision about clean coal exclusion "is a message that China will become more environmental-conscious and investors are taking this in a positive manner," said Tamami Ota, senior researcher at Daiwa Institute of Research. "Some investors could divest coal [in their portfolios], instead of investing in other green projects."
Still falling short
Despite the change, Chinese standards still fall short of international standards. For example, green bonds aligned only to local rules allow Chinese issuers to use up to 50% of proceeds to repay bank loans or for general working capital, while international standards allow no more than 5% of proceeds for that.
On the definition of projects, the international guidelines pay more attention to climate change mitigation and adaptation, while China's domestic rules emphasize environmental benefits such as pollution reduction, resource conservation and ecological protection in addition to the reduction of greenhouse gas emissions, according to a 2019 CBI report.
Clean transport and clean energy are the two biggest uses of proceeds from China's domestically aligned green bonds, representing 26% and 27%, respectively, of the nation's total issuance of locally aligned green bonds in 2019, according to the report. They were followed by pollution prevention and control and general working capital.