As one of the world’s largest polluters, China’s ‘dual carbon’ goals – which call for carbon emissions to peak by 2030 and decline to net zero by 2060 – will play a critical role in meeting the goals of the Paris Agreement to limit global temperature rises to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
By supporting China’s decarbonisation ambitions, international investors can make a significant contribution to tackling the climate crisis.
Sustainable funds, however, have long been wary of China’s definitions of environmental finance. Until recently, clean coal projects were included in its green finance catalogue, and companies were allowed to use a portion of green funding for general corporate purposes – in contrast to international standards. Global scrutiny of greenwashing has only amplified those concerns, keeping investors away from any projects that may be less green than advertised.
This picture is changing, however, thanks to a concerted effort by regulators and the financial sector to bring standards closer together.
In November 2021, the People’s Bank of China (PBoC) and the European Commission (EC) published the first Common Ground Taxonomy (CGT) in November 2021. The document, updated in June 2022, lists activities that meet green finance definitions in both China and the EU, making it easier for Chinese borrowers to access green funding in the international capital markets. This follows the publication of the EU Taxonomy in 2020, with wide-reaching impacts for corporates and investors in Europe and beyond.
China followed up in July with the publication of the China Green Bond Principles, bringing local standards in line with global use-of-proceeds requirements.
Hong Kong: bridging the gap
Hong Kong has taken these harmonisation efforts a step further and, as an international financial centre, is ideally placed to contribute to China’s decarbonisation by bridging the gap between global investors and China.
At its fifth annual forum on 22 September, the Hong Kong Green Finance Association (HKGFA) released a new report, Understanding Use Cases of the Common Ground Taxonomy, giving guidance on the CGT.
Chaoni Huang, Head of Sustainable Capital Markets, APAC at BNP Paribas and Vice President and Secretary General of the HKGFA, comments: “We expect the CGT to be widely adopted, so providing practical guidance for how it can be used will help to accelerate that process.
“BNP Paribas’ clients, including both issuers and investors, can have confidence that their green initiatives in Greater China are consistent with their global standards.”
The harmonisation initiative is already helping mobilise more funds for China’s transition. Chinese issuers sold a record US$23.91 billion of internationally-aligned green bonds in the second quarter – more than twice the volume for the same period last year, according to the Climate Bonds Initiative.
In May 2022, ahead of the HKGFA updated report published in September, the Hong Kong branch of China’s Industrial Bank issued a US$650 million green bond, the first in alignment with the CGT’s use-of-proceeds requirements from Chinese joint stock banks. BNP Paribas supported Industrial Bank on its application of the CGT principles.
Bank of China Frankfurt Branch’s US$500 million deal, priced on 9 June 2022 , was the first green bond aligned with the latest CGT guidelines updated on 3 June 2022. BNP Paribas acted as Joint Lead Manager and Joint Bookrunner for the transaction, which priced at 20 basis points (bp) over US Treasuries – the lowest spread ever achieved by an Asian commercial bank at the same tenor.
“Previously, Chinese issuers only had to allocate 70% of the funds from green bonds to green activities,” said Huang. “Now, paper from Chinese corporates adopting the CGT’s 100% allocation of proceeds for green projects, aligning with international practices, will appeal to international investors wanting to access the onshore market.”
This proved to be the case for Industrial Bank, whose issuance was 5.23 times oversubscribed. This resulted in a lower coupon, achieving a better cost of capital for the issuer.
A collaborative approach
The HKGFA report draws on the experience of BNP Paribas and other members in dealing with green taxonomies – particularly the EU and China taxonomies.
Huang explains, “The CGT is an analytical tool that provides a thorough mapping and comparison of the two taxonomies, and this report demonstrates their broader applications, from green financing to investment strategies and ESG reporting.”
The power of six
The HKGFA outlines six use cases for the CGT, in line with the specific requirements of market participants. These are:
- Debt financing: the CGT allows clearer comparisons between financial instruments. This increases transparency by enabling issuers and investors to accurately evaluate sustainably labelled products.
- Investment strategies: the CGT offers the potential for investors to synchronise cross-border investment processes and select stocks for creating portfolios.
- Benchmark and index creation: data vendors can use the CGT to create benchmarks that track assets that align to both the EU’s and China’s green investment classifications.
- Corporate disclosures: companies that are required to report on their ESG and sustainability performance will find the CGT helpful in quantifying their progress against their peers, which in turn will discourage greenwashing. Local regulators could also use the CGT as a basis for their own corporate disclosure rules.
- Investor disclosures: institutional investors could use the CGT to standardise green and ESG definitions for labelled funds. This would allow more accurate comparisons between portfolios and funds.
- Policy setting: by aligning local taxonomies with the CGT, policymakers can prevent market fragmentation. Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group has announced that it will adopt the CGT as the basis for developing a local taxonomy.
The CGT, combined with other initiatives to harmonise standards in green finance, will be instrumental in mobilising the funds needed for China’s decarbonisation. Hong Kong, as a capital connector, can play a central role.