On 29 July 2022, the Green Bond Standard Committee released the China Green Bond Principles (referred to as the “Green Bond Principles”), which is a milestone in the development of China’s green bond market and an important symbol of China’s green bond standards achieving initial domestic unification and convergence with international standards. This article compares and analyses the similarities and differences among international green bond standards, such as the ICMA Green Bond Principles and the CBI Climate Bond Standard (2021 Edition), and makes further suggestions for the promotion and application of the Green Bond Principles and for the development of China’s green bond market.
I. Interpretation of the key contents of the Green Bond Principles
(1) The four core elements of green bond issuance in China
The Green Bond Principles are consistent with the definition of green bonds in the Green Bond Endorsed Projects Catalogue (2021 Edition), i.e., green bonds are bonds that raise funds specifically to support green industries, green projects, or green economic activities that meet the prescribed conditions, are issued following statutory procedures and are repayable with interest and principal. Green bonds refer to securities whose raised funds are specially used to support green industries, green projects, or green economic activities that meet the prescribed condition. Green bonds are issued in accordance with legal procedures, where the principal and interest are repaid as agreed. The Green Bond Principles set out the basic requirements for green bond issuers and related institutions in terms of four core elements: the use of funds raised, project evaluation and selection, management of funds raised, and post-issuance reporting.
In terms of the use of proceeds, the Green Bond Principles specify the requirements for the use of funds raised by green bonds. Firstly, 100% of the funds raised from green bonds must be used for green projects in line with the Green Bond Catalogue 2021, such as green industries and green economic activities. Secondly, overseas issuers’ eligible green projects must meet the Common Ground Taxonomy – Climate Change Mitigation requirements and EU Taxonomy Climate Delegated Acts. Furthermore, the funds can be used for construction, operation, acquisition, supplementary working capital, and interest-bearing debt repayment.
For project evaluation and selection, the Green Bond Principles require issuers to disclose detailed information on green projects in the prospectus and other relevant documents. However, issuers that do not have specific project details before issuance should disclose the classification criteria for the selection of green projects, technical standards or specifications, their assesment standards for environmental benefits etc. Regarding internal control, issuers are also required to disclose their decision-making process, including the basis for established selection process of green projects, the allocation of responsibilities, and the specific implementation process. Also, issuers should ensure that the selected green projects are legally compliant, and the procedures are, accurate and complete without false records, misleading statements, or major omissions. In addition, issuers are advised to engage independent third-party assessment and certification bodies to assess and certify the green bonds and are encouraged to disclose the greenness of the bonds and the evaluation methods in the conclusions.
The Green Bond Principles require issuers to open a supervisory account for raising funds (e.g. enterprises) or establish a special ledger (e.g. banking financial institutions) to track the flow of the raising funds. At the same time, the Green Bond Principles state that idle funds can be invested in cash management operations with a single investment period under 12 months, such as investing in safe products with good liquidity including treasury bonds, policy bank financial bonds, and local government bonds.
In terms of bond information disclosure, the Green Bond Principles require that the relevant information should be recorded before the proceeds are fully invested. Information should be kept for more than two years after the expiration of bond duration. Besides, issuers are asked to disclose the overall use of proceeds on yearly basis and include information about the progress of green projects, expected or actual environmental benefits, etc. They are encouraged to disclose and implement continuous third-party tracking evaluation certification and disclosure of relevant reports within half a year or quarterly.
(ii) Promote the standardization of green bonds by the Green Bond Principles
Previously, the People’s Bank of China, National Development and Reform Commission, exchanges and National Association of Financial Market Institutional Investors issued guidelines on the issuance of different types of green bonds, mainly including green financial bonds, green corporate bonds, green enterprise bonds and green debt financing instruments, with different requirements on the proportion of funds to be invested in green projects and the frequency of information disclosure within the duration. The Green Bond Principles, state that 100% of the funds raised by green bonds must be invested in qualified green projects. The Green Bond Principles also require annual disclosure of the use of funds raised in the previous year within the duration, and encourage more frequent disclosure on a semi-annual or quarterly basis, while the current minimum disclosure frequency is annual. Promoting the unification of green bond standards not only facilitates the issuance of green bonds by the same issuer in different markets but makes is easy to compare green bond issuance in various markets and reduces unnecessary issuance costs during the process.
II. Comparison of International Green Bond Principles between China Green Bond Principles
The Green Bond Principles refer to the relevant regulations of ICMA Green Bond Principles and are made in accordance with the actual market situation in China. In terms of the four core elements of green bonds, the Green Bond Principles are consistent with the ICMA Green Bond Principles and the CBI Climate Bond Standard, which include the use of funds raised, project evaluation and selection, management of funds raised and information disclosure. Under these four core elements, the use of proceeds for the construction and green projects operation, disclosure of the assessment and selection process of green projects, and the specialized management of the funds are all mentioned in these three principles. While 100% green investment not only enhances the greenness of green bonds but also makes it easier to gain recognition from international investors. In addition, the Green Bond Principles are further refined and required in line with domestic practice, such as encouraging the frequency of information disclosure to be increased to every six months or every quarter, and the single investment period of idle funds raised should be less than 12 months. The ICMA Green Bond Principles and the CBI Climate Bond Standard both recommend disclosing the processes for identifying and managing social and environmental risks about projects and developing relevant risk mitigation procedures, which are not explicitly stated in the Green Bond Principles.
Compared with the ICMA Green Bond Principles and the CBI Climate Bond Standard, the most significant difference for the Green Bond Principles is the criteria for identifying green projects. According to the Green Bond Principles, the range of green projects for domestic issuers is based on the Green Bond Catalogue 2021, including energy efficiency improvement, sustainable construction, pollution prevention and control, water conservation, non-conventional water use, comprehensive resource use, green transportation, green agriculture, clean energy, ecological protection and construction, green services, etc. The scope of green projects for foreign issuers is based on international green industry classification standards such as the Common Ground Taxonomy – Climate Change Mitigation and EU Taxonomy Climate Delegated Acts. The ICMA Green Bond Principles support 10 categories of projects, including renewable energy, energy efficiency improvements, pollution prevention and control, sustainable management of natural resources and land use, terrestrial and aquatic biodiversity conservation, clean transportation, sustainable water and wastewater management, climate change adaptation, products adapted to a circular economy, production technologies, green buildings, etc. The CBI Climate Bond Standard includes seven categories: energy, transport, water resources, buildings, land use and marine resources, industry, waste and information and communication technologies. The differences among the Green Bond Catalogue 2021, the ICMA and CBI standards for qualifying green projects are focused on nuclear power, combined cooling, heating and power, passenger rail, environmental protection equipment manufacturing, air pollution prevention and control, and low carbon related services, as shown in Table 3. Overall, the introduction of the Green Bond Principles further aligns China’s green bond market with international standards.
III. Recommendations
(i) Promote and apply the Green Bond Principles to attract more capital to the green sector
The introduction of the Green Bond Principles has further promoted the construction of China’s green financial standard system, which helps regulators, financial institutions, enterprises, investors and other relevant market stakeholders to carry out green financial practices with rules to follow. On this basis, to promote and apply the Green Bond Principles and reduce the financing costs of green bond issuers, local governments or regulators still need to introduce more incentives to ensure that the Green Bond Principles work well. Some local governments are currently providing financial subsidies for the issuance of green bonds, while the SSE has reduced the registration fee rate and interest payment service fee rate for green bond issuance by 50%, providing a good reference for relevant incentives to promote the development of green projects. Besides, to enhance the internal momentum of the development of the green bond market and its contribution to China’s carbon compliance and carbon neutrality targets, the mainstream international environmental information disclosure standards and frameworks such as TCFD should be benchmarked to further clarify the standards for measuring environmental benefits and disclosing environmental information, to reduce increased identification costs for investors and lower external financing costs for enterprises due to asymmetric market information. Therefore, more capital can be attracted.
(ii) Improve third-party assessment and certification bodies to promote the development of green finance
As the “gatekeeper” of the green bond market, third-party assessment and certification bodies play an important role in preventing “greenwashing”. In September 2021, the Green Bond Standard Committee issued the Guidelines for the Conduct of Assessment and Certification of Green Bonds (Interim) and supporting documents, which regulate the conduct of third-party assessment and certification bodies in the green bond market while also clarifying the criteria for judging their professional competence, and third-party assessment and certification bodies entered the stage of self-regulation. With the introduction of the Green Bond Principles, it’s asked that the third-party assessment and certification bodies should become more professional. They should proactively enhance their abilities, continuously improve the quality of green bond assessment and certification, and effectively promote the healthy development of green finance.
(iii) Strengthen international exchanges and cooperation in green finance and enhance China’s discourse power in the global green finance
The Green Bond Principles promote further alignment of China’s green bond market with international green financial standards and help attract higher international investors to participate in the development of China’s green bond market, so it is extremely necessary to strengthen international exchanges and cooperation in green finance. At present, China has made some progress in it. In June 2022, an updated version of the IPSF Common Ground Taxonomy Table (CGTT), led by China and Europe, was released to provide financial institutions, enterprises and third-party assessment and certification bodies, etc. with the latest practice guidelines recognized by the international market. The Green Bond Principles also recognize the industry classification standards described in the CGTT. China should continue to strengthen international cooperation in the criteria for the identification of green economic activities, principles for the development of green financial markets, standards for the assessment and certification of green bonds, and standards for environmental information disclosure, to enhance China’s discourse power in the global green finance.