China, green bonds & emerging markets: leveraging private capital; opportunities along with the Belt & Road Initiative

China, green bonds & emerging markets: leveraging private capital; opportunities along with the Belt & Road Initiative

The global green bond market is growing rapidly – including emerging markets. From 2016 to date, about 35% of green bond issuance is from Emerging Markets! 

With 30% of total issuance last year, China has become the global market champion.

In Beijing yesterday, 500 people came together for the International Green Finance Forum, hosted by China’s Green Finance Committee.

One panel discussed green bond developments in emerging markets, and the opportunities for green bonds in China’s ambitious Belt & Road Initiative. Sean Kidney, CEO at Climate Bonds Initiative, moderated the session.

 

A lot is happening in emerging markets:

  • The Securities and Exchange Board of India (SEBI) released green bond guidelines in May. India has now issued USD4.5bn green bond with further USD10bn in the pipeline.
  • Nigeria, Kenya, and Argentina are planning to issue sovereign green bonds.
  • Corporate, bank and sub-national green bonds have been issued in the Philippines, Mexico, Peru, Brazil, Colombia, South Africa, Morocco, Argentina and Costa Rica.
  • The world’s first ‘green sukuk’ was recently issued in Malaysia, for RM250 million.
  • The ASEAN Capital Markets Forum of regulators is soon to announce green bond guidelines for the region.

 

Eugene Wong, Managing Director of Corporate Finance and Investments Business Group of Securities Commission Malaysia:

ASEAN needs USD110bn every year to build infrastructure, and we have made commitments to NDCs. We want to have a standard that identifies ‘true green’, and we will not allow fossil fuel projects to be included. We need to build things right upfront.

The Climate Bonds Initiative expects to see strong growth of green bonds in emerging markets.

 

Greening the Belt & Road

China’s Belt & Road Initiative (BRI) is also providing huge investment opportunities for (green) infrastructure projects. China’s President Xi has emphasised that the BRI needs to be ‘green’ and so green bonds are expected to become a feature of the financing packages for these projects in 2018.

ASEAN countries and other EMs along the Belt & Road can issue green bonds in/outside China to refinance their infrastructure. Chinese investors can also issue green bonds to leverage private capital to green infrastructure projects. With the Hong Kong-China Bond Connect Programme, Chinese green bond issuers can more easily attain cheaper capital from overseas investors.

Wang Sheng, Managing Director, Co-Head of Financial Institutions Group, HSBC:

“Overseas investors have high appetite for green investment, and some are dedicated to green bonds. Bond Connect provides great opportunities for them to access the domestic green bond market in China.”

 

However, for Chinese green bond issuers to attract overseas investors, some challenges still need to be addressed, including differences between China’s green definitions and internationally accepted green definitions, and lack of information on China’s green bond market.

Recommendations to address these issues have been discussed at the UK-China Green Finance Forum yesterday.

Green bonds provide a useful tool to mobilise private capital to meet the investment needs involved in building low carbon and climate resilient infrastructure.

The main challenge now is a paucity of investible projects; the bankable projects pipeline needs to improve.

 

The ADB and blended finance 

In a separate presentation at the Forum, Anouj Mehta of the Asian Development Bank (ADB) introduced their new blended finance “Green Finance Catalysing Facility” (GFCF).

The aim is to unlock and leverage private finance into bankable green projects by creating a pool of bankable green infrastructure projects, and making sure the projects pipeline is both environmentally and financially sustainable.

It will blend different sources of capital including concessional debt, private debt and equity, government grants, and funds raised via capital markets such as green bond markets. GFCF diversifies and reduces risks as it serves as a portfolio vehicle for a pool of green projects.

Anouj Mehta, Principle Financial Management Specialist, Asia Development Bank:

“Leverage and bankable projects are important. No public fund should be used if there is no leverage of private funds.”

 

As ADB is emphasising, leveraging private capital is critical to filling the expected infrastructure investment gap. Even though deal flow is thin at the moment, the expected investment needed for building low carbon and climate resilient infrastructure is USD90 trillion over the next 15 years.

The private sector is expected to contribute 50% of the investment gap, with this private sector percentage expected to be more like 80-90% in China. Green bonds can play an important role in mobilising institutional investors.

 

Why Green Bonds?

  • High investor appetite“Green bond is an easy sale. Investors have high appetite though a lot of work needs to be done to educate issuers and scale up green bond issuance.”
    Benjamin Lamberg, Global Co-Head for Syndicate, Credit Agricole, CIB.

 

  • Diversified investor base and pricing benefits

“We find that Chinese issuers attract new overseas investors every time, when they issue green bonds. Dedicated green bond investors are proactive to buy Chinese green bonds. We can see some pricing benefits of green bonds compared to normal bonds, although the pricing difference is small.”
Wang Sheng, Managing Director, Co-Head of Financial Institutions Group, HSBC.

 

  • Transparency

“Green bonds have more transparency on use of proceeds, and so are more attractive to international investors. They have become a preferred financial product by investors.”
Ricco Zhang, Director, Asia Pacific, International Capital Market Association (ICMA).

 

  • Improving internal process, reputation and environmental benefits

“Issuing a green bond actually improves our internal process and optimise our operational system. And clearly it can raise our profile in the market. Issuing a green bond forces us to consider the environmental impacts we are going to bring. The goal of our green bonds programme is to maximise environmental benefits for society, which is beneficial to all market participants.”
Chen Yaqin, Director, Green Finance Department, China Industrial Bank.
Sean Kidney, CEO of Climate Bonds Initiative, summarised the session:

Our environmental challenges are huge. We need to fix climate change and environmental issues quickly for our children. To meet our Paris Climate Agreement targets we need to be ambitious on green standards — as ASEAN are being.

We need to learn as we are doing; we can’t wait for everything to be perfect. China is a good case study here. China Industrial Bank is one of the biggest green bond issuers in China. It is expecting to increase green bond issuance this year.

We expect to see around USD150bn in global green bonds issuance this year.

 

The Last Word

We’ll keep you up to date with more developments as the China green finance story unfolds.

Our latest list of every green bond issued in China from Jan to June 2017, download our China Mid-Year Update 2017.

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