Roadmap for China: green bond guidelines for the next stage of market growth

1 Climate Bonds Initiative | International Institute for Sustainable Development Contents

This issues paper contains the following sections: This is the first in a series of four 2016 discussion papers issued by the Climate Bonds Initiative and the International Institute for Executive Summary Sustainable Development (IISD) on prospects for the Chinese green bond market. 1. Current State of Green Bond Markets in China The four papers are: 2. Green Definitions Green Bond Guidelines (Paper 1) 3. Management of Proceeds Roadmap for China’s Green Bond Market-Scaling up Issuance 4. External Reviews & Assurance (Paper 2)

5. Reporting & Disclosure Roadmap for China: Using green securitisation, tax incentives and credit enhancements to scale green bonds (Paper 3) 6. Conclusion Extending the Joint Leadership of China and the UK on Green Appendices Finance (Paper 4)

This 2016 series of discussion papers follow the March 2014 How to Grow Green Bonds in China report1 and the Growing a green bonds market in China: Key recommendations for policymakers in the context of China’s changing financial landscape report of March 2015.

Report by: Weihui Dai (Lily), Research & Standards Analyst, Climate Bonds Initiative Sean Kidney, CEO, Climate Bonds Initiative Beate Sonerud, Policy Analyst, Climate Bonds Initiative

Our thanks to the United Kingdom Foreign & Commonwealth Office (FCO) for their project funding support for the China Roadmap series of reports

2 Roadmap for China: green bond guidelines for the next stage of market growth Executive Summary

China’s central bank, the People’s Bank This framework has been applied to of China (PBoC), and its macroeconomic each segment of China’s current green management agency, the National bond guidelines: green definitions; Development and Reform Commission management of proceeds of green bonds; (NDRC) published green bond guidelines external reviews and assurance; and in December 2015 and January 2016 reporting and disclosure requirements. respectively. PBoC’s guidelines are the main focus of this paper, as these are more Findings: Current state of harmonisation comprehensive than NDRC’s guidelines. is good The table overleaf outlines the current state Framework: Aiming to harmonise of harmonisation and clearly shows that Chinese and international green bond there is strong alignment in most areas. guidelines This issues paper sets out a roadmap In particular, full alignment already for the next steps of the green bond exists for Management of Proceeds guidelines in the Chinese domestic and Reporting and Disclosure. External green bond market with the aim of Reviews and Assurance guidelines are harmonising these guidelines with closely aligned, with China taking early international practice. steps to strongly encourage the use of independent verification. To develop a roadmap for China’s guidelines, the paper used the following Further efforts to harmonise the green framework: bond guidelines should focus primarily on Green Definitions, with particular Step 1: Current green bond guidelines emphasis on development of Sector- released by China: what do they say? Specific Criteria and the Basis for Criteria. Step 2: What is the international practice in the area? How does this compare to China’s guidelines?

Step 3: Roadmap to achieving harmonisation between China’s green bond guidelines and international practice. Table 1: Summary of alignment between China and international standards

Current level of alignment Roadmap to achieve harmonisation for Chinese and international green bonds

Green Labelling

Management of Proceeds Fully aligned Continue current approach

Reporting and Disclosure Fully aligned Continue current approach

External Reviews Closely aligned Further encourage third party assurance as standards and criteria are and Assurance adopted and Chinese verifier capabilities improve

Green Definitions:

Categories Mostly aligned Excellent alignment already. A small number of areas to explore further, such as low-carbon equipment supply chains and projects involving fossil fuels.

Sector-Specific Criteria Some alignment Further work on investigating overlaps and differences between Chinese definitions and international criteria. Important work needed to align with international efforts as China builds-out (or adopts) its library of sector- specific criteria.

Basis for Criteria Some alignment Use a scientific framework to ensure that the project-level criteria for green bonds are in line with China’s national environmental targets, including emission reduction targets.

4 Roadmap for China: green bond guidelines for the next stage of market growth 1. Current State of Green Bond Markets in China

China’s challenge: Meeting environmental Figure 1: The interbank market is the dominant part of China’s bond markets (share of targets while maintaining growth bonds outstanding at the end of 2015)9

The rapid economic growth achieved in the last decades has been reliant on coal- based energy consumption, road-based Exchange 4% transportation and a carbon-intensive OTC 2% industrial structure. This has led to China Others 1% now facing a vast number of environmental issues, including air, water, soil pollution and climate change. The World Bank estimates that the cost of environmental damages, which is still rising, and will reach 3% to 6% of China’s GDP.2 China’s government is recognising that there is a need for China to change its high-pollution and energy- intensive growth model and transition towards a green and sustainable economy.

China’s green transition requires massive investments: The majority from the private sector Inter-bank 93% An annual investment of at least RMB 2 trillion-4 trillion (USD 320billion-640 billion) will be required to address environmental issues and climate change.3 The PBoC has made a clear statement that public Previously, a quota system has limited foreign Globally, the green bond market has grown investment alone is not sufficient to meet this investment in the interbank market. The rapidly, from USD 11 billion (RMB 72.4 billion) investment requirement: public funds would latest announcement removed all quotas for of issuance in 2013, to USD 36.8 billion (RMB only contribute 10% to 15% of the required qualifying93 foreign investors. Qualifying foreign 242 billion) in 2014 and USD 41.8 billion+421+B investment, with the private sector expected investors include most real money institutional (RMB 275 billion) in 2015. The growth in to be by far the largest source of capital for the investors, including insurance companies, green bonds is expected to continue. SEB green transition, contributing 85% to 90%.4 pension funds, most commercial banks, estimates that global green bond issuance will fund/asset managers, endowment funds and grow to USD 80 billion-USD 100 billion (RMB charities.7 Foreign hedge funds and retail 362 billion-RMB 526 billion) in 2016.10 China International investors could provide an investors are not eligible to invest. The process is seen as a leading source of green bond important capital source, facilitated by the for foreign investors to register with the market growth going forward.11 recent improved opening of the interbank Chinese authorities to be formally approved for market to foreign institutional investors investments has also been simplified.8 Green bonds can tap into international capital at scale. Demand from green bond investors Institutional investors outside of China are in the international market is outstripping increasingly looking for investments with Green bonds are proving successful in supply. International institutional investors, positive environmental impacts. These tapping into private sector capital including pension funds and insurance international investors can be an important companies, can now more easily access green source of capital to finance China’s green Labelled green bonds are increasingly bonds issued in the Chinese domestic market transition, especially given the improved considered an ideal vehicle for tapping into after the opening up of China’s interbank access to China’s interbank market granted to private sector capital. The proceeds of these market. Investment can also occur at scale, foreign investors in February 2016.5 The recent bonds are used for green assets and projects as quotas limiting the amount of foreign regulatory changes are a significant step in the and are labelled accordingly (mostly climate investments have been removed. gradual opening of China’s interbank market to change mitigation and adaptation projects). international investors, a process that has been Proceeds can be allocated to new projects on-going since 2010.6 The interbank market, or for refinancing existing green projects, or regulated by the PBoC, accounts for the vast a mix of both. Green bond investors equally majority of China’s debt market (see Figure 1). accept both.

5 Climate Bonds Initiative | International Institute for Sustainable Development There is strong policy support to grow the green bond market in China Table 2: Summary of green bonds issued by Chinese entities as at March 2016

In May 2015, policy incentives for developing Domestic Market Dim Sum market Overseas Market the green bond market was one of the (Hong Kong) recommendations made by the Green Finance Task Force, led by the People’s Bank Industrial Bank of China, Xinjiang Goldwind Science Agricultural Bank of of China (PBoC), for establishing a green RMB 2.6 billion (USD 0.4 billion) and Technology China USD 1 billion with financial system in China. Following this green ABS one RMB-dominated USD 0.3 billion landmark report, PBoC established a Green tranche of RMB 0.6 Industrial Bank of China, Finance Committee (GFC)12 to undertake billion (USD 91.2 million) RMB 10 billion (USD 1.5 billion) research on how to practically implement the PBoC’s vision for a green financial system in Shanghai Pudong China. China’s State Council also encourages Development Bank, the establishment of green financial system RMB 35 billion (USD 5.3 billion) in their Ecological Civilisation Master Plan, Bank of Qingdao, RMB 4 billion and explicitly points out the need to develop (USD 0.6 billion) green bonds in China. Concord New Energy RMB 200 million Official guidelines for green bonds have (USD 30.9 million) been published Total issuance Total issuance Total issuance In December 2015, PBoC published the RMB 51.8 billion RMB 2 billion RMB 6.6 billion first official Chinese green bond guidelines. (USD 7.83 billion) (USD 0.3 billion) (USD 1.0 billion) The guidelines set out the official requirements for what projects qualify as green, management of proceeds and In March 2016, the Shanghai Stock Exchange based on PBoC’s green bond guidelines, the reporting. PBoC is the regulator overseeing (SSE) published its own set of green bond Industrial Bank of China (CIB) and Shanghai the interbank bond market, which accounts guidelines for corporate issuers. The SSE Pudong Development Bank (SPDB) issued for 93% of outstanding bonds in China, guidance refers to the PBoC’s catalogue for the first officially recognised green bonds in and also directly regulates issuance from what projects qualify as green, and provides the domestic market. The two banks have 13 financial institutions. See Appendix 1 for similar guidance to the PBoCs on management obtained approval from PBoC to each issue up an overview of the regulatory structure in of proceeds, reporting and disclosure, and use to RMB 50 billion (USD 7.6 billion) of green China’s bond markets. of third party audits or certification. bonds. The Bank of Qingdao is the first city commercial bank to issue green bonds. In January 2016, China’s macroeconomic management agency, the National China plans to issue RMB 300 billion of More is planned in the near future. Bank Development & Reform Commission green bonds annually by 2020 of Zhengzhou is waiting for approval to (NDRC) published a separate set of green issue RMB 5 billion (USD 770 million) of bond guidelines. NDRC is the regulator The official guidelines for green bonds now green bonds. Bank of Communications has responsible for corporate bond issuance, provide the foundations for rapid green received approval for a green bond issuance which accounts for a smaller share of China’s bond growth in China. The Research Centre quota of RMB 70 billion (USD 10.8 billion), bond market. NDRC’s guidelines are less for Climate and Energy Finance (RCCEF)14 the largest green bond issuance quota comprehensive than PBoC’s guidelines: estimates that by 2020, RMB 300 billion approved per March 2016.16 they do not offer criteria for management of (USD 45.6 billion) of green bonds will be proceeds or reporting. issued annually in China.15 There is also potential for foreign entities to issue RMB-denominated green bonds PBoC’s guidelines are therefore a resource Chinese issuers have already come to market in the Chinese domestic market (Green also for non-financial corporates to refer to, with several green bonds (see Table 1). Panda bonds). There is demand from foreign as they offer more extensive guidance on the Xinjiang Goldwind Science and Technology, entities to enter the market and issue Panda whole green bond issuance process. NDRC’s a wind energy company, issued China’s bonds, and guidelines for green Panda bonds guidelines are limited to a list of qualifying first corporate green bond in July 2015. are being developed.17 green projects that should be supported by Agricultural Bank of China issued China’s first green corporate bonds, and proposals for RMB-dominated green bond in the London- policy incentives for green bonds. markets in October 2015. In January 2016,

6 Roadmap for China: green bond guidelines for the next stage of market growth Large existing portfolios of green loans in China’s major banks indicate immediate potential for green bonds in China.

Under the China Banking Regulatory Commission (CBRC)’s green definition for green credit, which is aligned with PBoC’s catalogue for qualifying green bond projects, there was RMB 5.72 trillion (USD 920 billion) of outstanding green loans in the largest 21 Chinese banks in 2014.

This gives an indication of the immense immediate potential for green bonds to be issued in China, as refinancing of green loans is the main role of green bonds. According to the Green Finance Committee, around 30% of all bonds to be issued by corporates and financial institutions in China will be eligible as green bonds.18

Ensuring the environmental credentials of green bonds by developing definitions, verification and reporting procedures

For green bonds to play a role in achieving China’s overarching goal of meeting environmental goals, including climate targets, it is essential that rapid overall market growth in green bond issuance must be balanced with some level of environmental ambition for individual issuances.

Investors want to know that the green bonds they invest in will have genuine environmental benefits. Similarly, governments supporting the growth of green bonds need to be assured that the green bonds will finance projects and assets which have a significant environmental impact in line with policy imperatives.

To ensure the green bond market is a trusted and robust market, processes and definitions need to be established to ensure that funds are allocated to qualifying projects and assets with genuine environmental benefits. Moreover, this must be verifiable by trusted entities.

To enable scale, this must be possible to do with low transaction costs. Throughout the bond term, regular reporting from the issuers also plays an important role in providing progress updates to investors and regulators.

7 Climate Bonds Initiative | International Institute for Sustainable Development 2. Green Definitions

Developing definitions for what is green sets the foundation for ensuring green bonds Table 3: Comparisons between China’s high-level green definitions and the finance only qualifying green projects and international Climate Bonds Standard assets. This includes first developing high- level categories of green projects and assets, Sectors Aligned Sectors aligned that can be Sectors for example renewable energy, low-carbon further developed by China not aligned buildings and water projects (see section 2.1).

Industry and energy- Renewable energy Fossil fuels Then, within some of these areas, it includes intensive commercials supply chain coal-powered developing further technical criteria for what generation, Energy distribution and ICT is green; for example, defining the specific “clean” coal, and management broadband, teleconferencing and level of emissions intensity a building must fuel production telecommuting software and have to be considered a low-carbon building Green buildings services (see section 2.2). different technical criteria applied Adaptation

Finally, the underlying basis for what is energy, industry and waste, Renewable energy green must be clear. Firmly establishing the transport, food supply chain, and solar, bioenergy, wind, hydro, scientific link between green bond project financial sevices geothermal and marine criteria and national environmental targets Transport creates a longer-term approach to driving Waste, pollution control and pubic bike, multi-modal logistic the necessary transition within the Chinese sequestration hubs, and public transport (the economy (see section 2.3). recycling, circular economy Cimate Bonds Standard require Transport additional emission threshold)

new energy vehicles, biofuels, 2.1 Categories of qualifying green Agriculture and Forestry private transport, ICT projects and assets The Climate Bonds Standard requires Current practice in China: PBoC endorses Adaptation mitigation or adaptation benefits specific categories for what is green different examples from agriculture and forestry The official green definitions for projects qualifying for green bond issuance in China The exception is with nuclear energy, which China’s categories of green projects are are broad and comprehensive. PBoC requires is included by NDRC but not endorsed by mostly aligned with international practice issuers to refer to the China Green Bond PBoC.19 Appendix 2 provides an overview Endorsed Project Catalogue (the Catalogue), of green definitions endorsed by PBoC and China’s categories of qualifying green an official list of the types of green projects NDRC. projects as set out in the Catalogue endorsed eligible for financing via green bonds. The by the PBoC are mostly aligned with the Green Finance Committee, which sits under The main difference between the two sets categories of green projects covered by the China Society for Finance & Banking, of green definitions is that the Catalogue international guidelines and standards, such developed the Catalogue. endorsed by PBoC provides an exclusive list as the Green Bond Principles and the Climate of what projects qualify for regulatory green Bonds Taxonomy and Standards. China’s The Catalogue, endorsed by PBoC, is bond approval, while NDRC’s guidelines aim categories of what is green also cover the the most comprehensive guideline for to highlight specific project types they are main themes that green bond issuers in the what is green in the Chinese green bond particularly encouraging to be financed by international market have allocated proceeds market. It covers climate change mitigation green corporate bonds. to in practice. and adaptation projects, and broader environmental projects, such as projects For example, NDRC lists the desalination of In some categories of projects, China’s addressing air pollution, to be in line with seawater and utilisation of reclaimed water definitions are fully aligned with international China’s environmental policy priorities. The as eligible within the “water saving and practice—the projects in these categories Catalogue sets up six categories with 31 sub- utilisation” category, while PBoC contains would automatically qualify with categories of projects that are eligible for a wider range of project types in the “water international guidelines and standards— financing via green bonds. saving and utilisation” areas, without guiding while in other categories, further evidence on which specific project types should be of environmental credentials of specific NDRC’s guidelines also define a list of prioritised within this investment area. projects within the category will be required projects eligible for green bond issuance, to ensure the projects meet international which are largely in line with the Catalogue expectations. of projects endorsed by PBoC.

8 Roadmap for China: green bond guidelines for the next stage of market growth However, there are some categories of Fossil fuel projects are the main area exchange of ideas to enable harmonisation qualifying green projects included in the of divergence between Chinese and to occur. The Green Finance Committee Chinese guidelines that differ from practices international definitions. can then seek to minimise the gap and in the international green bond markets, A key topic to consider for future harmonise with international practice in in particular fossil fuel projects, public harmonisation is the current inclusion of future revisions of the Catalogue. transport projects that use fossil fuels, and fossil fuel-based projects in the PBoC- supply chain investments (see Appendix 3 endorsed definitions. A significant share Domestic harmonisation of green for more details). of international green bond investors are definitions between different bond market expected to be reluctant to invest in green regulators in China. Roadmap for next stage of China’s bonds with part of the proceeds allocated to In addition to international harmonisation, green definitions: Harmonisation with fossil fuel projects, as they do not consider it domestic harmonisation in green definitions international green definitions to attract to comply with their green mandates. would also be useful. China’s bond markets low-cost international capital are fragmented, and include multiple While fossil fuel-based projects remain regulatory authorities (see Appendix 1) that Harmonisation can make it easier for included in the official guidelines, cover different types of issuers. At the initial international investors to invest in green international investors may face increased stages of the domestic green bond market, bonds in China. transaction costs in investing in Chinese the different regulators have developed Aligning domestic categories of what green bonds, if they will have to evaluate and endorsed different green definitions: is green with categories of qualifying the green credentials of individual Chinese PBoC has endorsed the green definitions green projects used in the international green bond issuances to ensure that no developed by the Green Finance Committee, market would facilitate international proceeds are allocated to fossil fuel projects. as has the Shanghai Stock Exchange, while investors to more easily invest in Chinese Implementing a certification model adapted NDRC provides its own green definitions. green bonds, both in the domestic green to international investors’ expectations for bonds market and bonds issued in overseas fossil-fuel free green bonds to the Chinese Although largely in line with the definitions markets. The potential for accessing market may also address this issue (see endorsed by PBoC, a common set of green international capital for green bonds in section 4). definitions would be easier to navigate for China’s domestic market has dramatically potential issuers and investors. Additionally, increased after the requirements for foreign The harmonisation process would be a two- the National Association of Financial Market institutional investors to invest were eased way exchange. Institutional Investors (NAFMII) and China in February 2016.20 China can look to existing international Securities Regulatory Commission (CSRC) guidelines, standards and practice for what is are also developing their own green bond If green definitions are harmonised between considered green in the green bond market, guidelines, and it is possible that they will China and the international market, Chinese but also play a more active role in influencing endorse or develop green definitions that differ green bonds would adhere to guidelines and how the international guidelines and from those endorsed by PBoC and NDRC. standards international investors are already standards evolve going forward. Increased familiar with from the international markets. collaboration could be achieved by the Green Lack of domestic harmonisation around what This would reduce their transaction costs Finance Committee taking a more active role qualifies as green for the different regulators in investing, and could therefore facilitate in engaging with international guidelines and could potentially become a challenge to international capital to flow at greater scale standard schemes to encourage a two-way scale up the market in China, as it increases into China’s domestic green bond market. communication on how to harmonise green the transaction costs for issuers, investors definitions as the market develops. and policy-makers. Attracting international investment is crucial for China to meet the massive The Green Finance Committee could work Common green definitions across regulators investment needs for the green transition to examine in closer detail the current minor would facilitate greater capital flows to with low-cost capital. Lowering the cost differences between the green definitions green bonds across the different segments of capital increases the economic viability used in the China Green Bond Endorsed of the bond markets in China, helping of green projects with high upfront capital Project Catalogue and those used in the the green bonds market to achieve scale. needs, as the amount required to be international markets. The differences Harmonisation across regulators could be spent on serving interest rate payments set out in Appendix 3 provide a starting facilitated by more communication and decreases. For green projects with relatively point for this analysis. The Green Finance coordination between different authorities. high upfront capital needs, the interest Committee could benefit from collaborating Efforts for closer collaboration between the payments can account for a significant closely with organisations actively working different regulators on green bonds would share of the total project costs. Attracting on green definitions for green bonds in also create benefits for China’s general international investment at scale also the international market. This would help bond market reform, where reducing the diversifies the investor base and increases more easily identify differences and how fragmentation of the capital markets is on market liquidity. to manage them, and ensure a two-way the agenda.

9 Climate Bonds Initiative | International Institute for Sustainable Development 2.2 Sector-specific criteria within selected categories of green Table 4: International sector-specific criteria are available for an increasing projects number of sectors under the Climate Bonds Standard

Current Practice in China: Sector-specific Available now Available soon criteria based on national standards

Solar Bioenergy Within the high-level categories of energy efficiency and green buildings, the current Catalogue endorsed by the PBoC sets out Wind Water additional sector-specific criteria that projects must meet to qualify for green bond issuance: Low Carbon Transport Food, Agriculture & Forestry

Energy efficiency: Projects must meet the reference value of energy Low Carbon Buildings Hydro Power consumption per unit of product as set in the national standard for industrial energy consumption21 to be considered as green. Geothermal Marine & Coastal

Green buildings: Newly-built residential Information & Communications Technology (ICT) and public buildings must be rated no less than “two star” according to the national building standards Evaluation Standard for Industrial Energy Efficiency

Green Building22 to be considered eligible. Waste Management & Circular Economy These sector-specific criteria contained in the Catalogue are based on China’s current domestic policies. Roadmap for next stage of China’s Convening expert working groups is one green definitions: Leverage approach to harmonising sector-specific criteria. International practice: Sector-specific criteria international standards for sector- To harmonise sector-specific criteria between are emerging in a range of different sectors specific technical criteria China and the international markets, China’s Green Finance Committee can convene—or In the international green bond market, The sector-specific criteria for energy ask another entity to convene on their behalf— sector-specific criteria that issuers can efficiency and green buildings in the sector-specific working groups of experts to voluntarily adhere to are emerging in several Catalogue endorsed by PBoC are at develop Chinese sector-specific technical sectors. There are no regulatory requirements present not easily comparable with criteria that are harmonised as much as to adhere to certain sector-specific criteria. international criteria in these investment possible with international practice. The Green Bond Principles do not set out areas. Identifying how the sector-specific sector-specific criteria directly, but instead criteria currently endorsed for green The working groups of experts should consider refer issuers to existing sector-specific bond projects in China compare with any current sector-specific criteria used in technical standards, such as green building international sector-specific criteria in the the Chinese market, as well as sector-specific standards or the Climate Bonds Standard. green bond market is a first step to explore criteria that are being developed in the how to harmonise criteria. international green bond markets. The experts Adherence to common sector-specific criteria can then determine how best to harmonise, developed by respected external organisations Different sector-specific criteria in and in which sectors China can leverage can be a way for green bond issuers to ensure China and the international green bond international criteria directly to easily align investor confidence in the environmental markets can be a barrier to attracting domestic guidelines with international practice. credentials of the bond and reduce any risks international capital, as it increases For example, the Climate Bonds Standard and that the green credentials of the bonds are not international investors’ transaction costs Certification scheme has developed a range sufficiently robust. Whether an issuer chooses in evaluating the environmental credentials of sector-specific criteria specifically for the to comply with sector-specific criteria for their of the bond, since they have to familiarise green bond market (see Table 3). The process green bond to increase investor confidence themselves with China-specific criteria, is intended to be dynamic, with sector-specific in the bond is largely driven by the issuer’s and evaluate whether these are in line criteria updated at regular intervals to take into internal risk management procedures and with the criteria they are used to from the account technological progress and changes in branding considerations. international market. environmental policy targets.

10 Roadmap for China: green bond guidelines for the next stage of market growth Box 1: Step-by-step guide to harmonising given does not provide a direct indication this is done, the international criteria for technical criteria for the green of emissions performance. low-carbon buildings under the Climate building sector between China and Bonds Standard can immediately be used in the international market that can be Step 3: Assess alignment with criteria used China to define what buildings are eligible replicated in other sectors in the international green bond market for green bond issuance. The current qualifying threshold for green Step 1: The Green Finance Committee, bond eligibility of minimum “two star” Chinese city-level emissions performance or another entity approved by the Green under China’s national green building baselines can be established using data for Finance Committee, establishes a Green standard is not easily comparable to buildings that is available from emission Buildings Working Group international standards for green buildings, exchanges in selected cities that are Members can include academics, other such as the Climate Bonds Standard for covered by the 7 pilot emission trading scientific experts and industry representatives. Low-Carbon Buildings. schemes in China, including Shenzhen, The working group will include a range Shanghai, and Beijing.25 of actors who collectively have extensive A key difference is that the International knowledge and skills in the green building Climate Bonds Standard focuses on The alternative would be to develop new sector, and the capability to analyse building emissions and measures Chinese sector-specific criteria that are and compare different criteria for green emission performance of buildings harmonised as much as possible with buildings suitable for the financial sector. relative to an emission baseline. The international practice. If Chinese-specific emission baseline is established at the criteria are developed, any differences For example, representatives could come city level from actual operational data of with international practice should be from the Ministry of Construction (which buildings and represents the top 15% of clearly disclosed to aid international developed China’s national green building city-level emissions performance. This is investors in comparing China’s criteria with standards), building initiatives within the the minimum level of carbon emissions international criteria. industry, and local research institutes. performance that must be demonstrated International experts who have been by portfolios of buildings to be eligible for Step 5: Update the sector-specific criteria involved in developing international green green bond issuance under the Standard.24 at periodic intervals to consider progress building standards can also be included in technologies, policy targets and to provide international perspectives on Step 4: Assess whether sector-specific availability of benchmark data standards development in the area. international criteria can be directly applied To ensure the green building criteria for also to Chinese green bond issuance green bond issuance are aligned with Step 2: Identify the current sector- Directly applying international sector- China’s overall policy targets in the sector specific criteria to qualify for green bond specific criteria to the Chinese market and for emissions intensity for the economy issuance in China can save time and efforts in developing as a whole, the criteria for green buildings The Catalogue states that newly built China-specific criteria. For example, for will be reviewed and adapted regularly. residential and public buildings must be green buildings, China can easily adopt the rated no less than “two star” according international Climate Bonds Standard for For example, the Low Carbon Building to the national building standards low-carbon buildings to the Chinese context. sector-specific criteria under the Climate Evaluation Standard for Green Building23 Bonds Standard are reviewed by its to be considered eligible for green bond The only additional efforts required to technical working group on an annual basis issuance. This green building standard do this is establishing baseline emission in order to address any issues arise after covers a range of factors, and is not fully performance requirements for China using the release of those criteria. emissions focused, which means the score existing emission data of buildings. Once

A two-way collaboration would be most Box 1 presents an example of how an expert While work to achieve improved beneficial in achieving harmonisation committee convened by the Green Finance harmonisation is underway, an intermediate between Chinese sector-specific criteria Committee, or another entity approved step would be for the Green Finance and international criteria. by the Green Finance Committee, can Committee to more clearly disclose the The groups of experts convened in China harmonise criteria in the green building differences between domestic standards and could also contribute their findings to space for a next iteration of the China Green international standards in specific sectors. international guidelines and standard Bond Endorsed Project Catalogue. The same schemes to influence how these are steps can be repeated for other sectors to developed in the next stage of the harmonise sector-specific criteria between international green bond market. China and the international markets.

11 Climate Bonds Initiative | International Institute for Sustainable Development 2.3 Basis for what is green: The scientific link between project-level The link between green bond criteria and high-level climate targets allow project criteria and national issuers adhering to the Climate Bonds environmental targets Standard to assure investors that their green bonds provide a significantly ambitious Current practice in China: High-level green contribution to a low-carbon climate- definitions based on industry policy resilient economy.

The investment areas covered by the PBoC- endorsed Catalogue of green projects are Roadmap for next stage of China’s green based on existing national policies for green definitions: Providing scientific base for industry and climate change mitigation and qualifying green projects adaptation.26 However, within many of the investment categories it is not clear whether Future iterations of China’s green bond sufficient criteria are in place to ensure the project Catalogue could use a scientific green projects are achieving the level of framework to ensure that the project-level ambition set out in national targets in the area. criteria for green bonds are in line with China’s national environmental targets, For example, it is clear that the green project including emission reduction targets. category of clean energy included in the Catalogue is in line with China’s official A scientific framework is required to policies to reduce their carbon emissions. understand how the high-level policy targets However, it is not clear whether the criteria translate to project level criteria. set out for clean energy­—such as the inclusion of “clean” coal—is sufficiently strict A scientific framework would provide to ensure the clean energy projects funded a clearer guide for the Green Finance under the green bond guidelines are in line Committee in deciding what project types with China’s official emission reduction should be included or excluded from the targets to reduce carbon intensity by 60%- next iteration of the green bond Catalogue 65% relative to 2005 levelS by 2030.27 to ensure that the green bond guidelines are consistent with overall government targets for the transition to a green economy. International practice: Aligning green bond standards with scientific framework in the Scientifically based definitions would further climate space enhance both policy-makers’ and investors’ confidence in the environmental credentials of In the international markets, progress is the green bonds. being made to make a clear link between project-level criteria for green bonds and A clearer scientific link between China’s international climate targets. Climate change national environmental targets and the mitigation and adaptation projects account green bond definitions would also allow the for the majority of projects financed in the green bond definitions to be easily adjusted international green bond market. when national targets are altered in the future. This would help ensure that green The Climate Bond Standards and bonds remain a viable tool for China to Certification scheme use a scientific achieve its national targets. framework to ensure green bond project- level criteria are aligned with the levels of emission reductions required to meet the international targets of limiting global warming to less than 2°C. The framework provides investment pathways that will achieve the less than 2°C target, which then allows sector-specific standards to be developed that are in line with the investments needed.

12 Roadmap for China: green bond guidelines for the next stage of market growth 3. Management of Proceeds

Robust management of proceeds that In the very early stages of the market, issuers have done in practice. The international ensures that all funds from the green bond might have to invest in money market market focuses on disclosure, rather than issuance are allocated to qualifying green instruments only, as the pool of domestic requirements. For example, the Green Bond projects plays an important role in building green bonds from non-financial corporates to Principles recommend issuers disclose to investor confidence. invest in is non-existent or limited. investors what instruments they will use to invest the balance of unallocated proceeds. Funds raised from green bond issuances can PBoC requires that all green bond proceeds Similarly, Moody’s proposed Green Bonds be allocated to new projects or be used to must be allocated to qualifying green Assessment encourages issuers to set up refinance existing green assets. The main projects or assets within one year of the clear eligibility criteria for investment of role of bonds in the financial markets is green bond issuance within one year of unallocated proceeds. However, neither generally to refinance existing loans, which the green bond issuance. This can be all provides clear guidance on what specific implies refinancing should account for the refinancing of existing green assets, new instruments are deemed most suitable to largest share also of the green bond market projects or assets or a mix of the two. reduce the risk of proceeds being temporarily (see Appendix 4). invested in non-green assets. NDRC’s green bond guidelines do not yet cover any specific rules for management of proceeds. The PBoC is closely aligned with the Current practice in China: Requirements Climate Bonds Standard on management for tracking funds and investing of unallocated proceeds. The standard unallocated proceeds International practice: Earmarking mostly sets clear rules for investment of used to track funds and investment of unallocated proceeds to ensure non- Tracking of proceeds unallocated proceeds is disclosed contamination of the proceeds. Under the PBoC has set stringent rules for tracking standard, the unallocated proceeds can the use of proceeds of green bonds: how Tracking of proceeds be held as either temporary investment much of the proceeds have been allocated International practice is for corporate instruments that are cash, or cash to qualifying green projects or assets at any issuers, including commercial banks, and equivalent instruments, within a Treasury given time in the bond term, and how much municipalities to use earmarking (keeping function; or as temporary investment remains unallocated. a nominal relationship between green bond instruments that do not include funds and money allocated to qualifying greenhouse gas intensive projects. Under PBoC’s guidelines, tracking requirements green projects) rather than ring-fencing provide that issuers either ring-fence or (segregating proceeds in a separate account earmark the proceeds to qualifying green only used for qualifying green projects). The PBoC is closely aligned projects. Ring-fencing means issuers establish Earmarking is widely accepted by green with the Climate Bonds a special account for the green bond proceeds, bond investors as sufficiently robust to Standard on management which is only used to allocate proceeds to ensure funding is allocated to qualifying of unallocated proceeds. qualifying green projects. Earmarking does projects: the important thing is ensuring an The standard sets clear not require proceeds to be segregated in a amount equivalent to the proceeds raised are rules for investment of special account, but instead only requires allocated to qualifying projects or assets. unallocated proceeds to issuers to keep a nominal relationship between ensure non-contamination the amount of proceeds raised and funds A smaller number of international green of the proceeds. allocated to green projects—and pending full bond issuers ring-fence the proceeds in a allocation to qualifying projects, a nominal separate account, including development relationship with the unallocated amount banks such as the European Investment of proceeds and qualifying instruments that Bank and project bond issuers. For green Roadmap for next stage of management of ensures the funds are not temporarily invested project bonds, ring-fencing the proceeds in proceeds: Earmarking provides investors in non-green projects. a separate account comes with the nature with sufficient assurance of project bonds—the funds raised from the Management of unallocated proceeds bond issuance are allocated to a specific More guidance to help issuers choose Under PBoC’s guidelines, issuers are project and the project backs the bond, between different tracking systems and required to invest temporarily unallocated rather than the issuers’ balance sheet. The then implement them proceeds in green bonds from other issuers ring-fencing of proceeds used by green PBoC’s current guidelines provide robust (only non-financial corporates qualify) project bonds is therefore not specific to guidance to issuers for management of or money market instruments with good green, but a general feature of project bonds. proceeds by requiring ring-fencing and credit rating and liquidity. This is to ensure earmarking of the green bond funds. To that proceeds are not temporarily invested Management of unallocated proceeds further improve the guidance, PBoC could in non-green projects that green bond PBoC’s guidelines take a step further than consider providing more details on the investors would not accept. many issuers in the international markets differences between earmarking and ring-

13 Climate Bonds Initiative | International Institute for Sustainable Development 4. External Reviews and Assurance

fencing. Guidance from PBoC would give There is a range of mechanisms to verify that Third-party certification: The third- issuers a stronger basis for deciding which green bonds finance qualifying green assets. party verifier, who is arranged by the tracking system to use. The most common mechanism is for green issuer, reviews the bond against relevant bond issuers to use an external review to criteria for the environmental credentials Further guidance on tracking systems for provide investors with increased confidence of projects and assets. The criteria have green bonds could include highlighting that, in the green credentials of the bond both pre- been previously developed by another in the international market, earmarking issuance and post-issuance: independent entity (the standards is considered to provide investors with provider). The verifier also checks sufficient assurance that funds are allocated Pre-issuance: External reviews are used compliance against standard criteria to green projects. Earmarking recognises pre-issuance to provide investors with for management of proceeds and the fungible nature of money within the information particularly on what types reporting as also developed by the issuer entity, and is particularly suited for of green projects the bond will fund and standards provider. corporates, including financial and non- what management processes the issuer financial corporates, and municipalities. has in place to ensure the funds are allocated only to these green projects. Current practice in China: Independent Future guidelines can also provide review of green bonds credentials more information on how to implement Post-issuance: Post-issuance, external encouraged earmarking in practice by explaining that reviews are used to assure investors that it only requires a nominal relationship to the funds are allocated as was promised PBoC’s Guidelines encourage issuers be kept between the total sum of green pre-issuance, and provide more information to arrange external reviews on the green bond funds raised, and the sum of proceeds on the environmental impacts of the bonds. credentials of the bonds, although it allocated to qualifying green bond projects. is not at present a requirement. Pending full allocation of proceeds to External reviews are an important The recommendation does not distinguish qualifying projects, earmarking requires improvement on issuer disclosure (first party between second-party reviews and the issuer to have a sum equivalent to the review), as they provide an independent check third-party certification. The official unallocated proceeds invested in qualifying on the validity of the issuers’ claims for the encouragement of external reviews for green cash-equivalent instruments or green bonds environmental credentials of the green bonds. bonds is useful to drive issuers to getting from other non-financial issuers; again, external reviews, but also in incentivising it’s a nominal relationship that is required. Another benefit of external reviews is to institutions and service providers to develop help educate new green bond issuers on the necessary capabilities. Management of unallocated proceeds what information investors are seeking so PBOC’s current requirements for they can be confident of the environmental The first green bonds issued in China since investment of unallocated proceeds credentials of the green bond. the release of the guidelines suggest issuers provide sufficiently robust rules to ensure will follow the recommendations from PBoC that unallocated proceeds are not invested External reviews can cover use of proceeds, and choose to get external reviews of their in non-green projects. management or proceeds and reporting green bond claims, as set out in Table 5. procedures. In the green bond market, To improve investor transparency, future external reviews come in the form of second- There is not yet a standardised procedure iterations of the guidelines could consider party reviews or third-party certification: for providing external review on green encouraging issuers to disclose to investors bonds in China. where unallocated proceeds have been Second-party review: A second party The lack of standardised procedure is invested. For example, how much of the organisation—an external organisation with evident from the difference in reviews in unallocated proceeds were temporarily environmental expertise—is arranged by the table above. Different verifiers each invested in green bonds from other issuers, the issuer to check the issuance framework have their own procedures and criteria that and how much was invested in cash- and green credentials of the bond. Often the they include in a second-party review. This equivalent instruments to be in line with second party also works with the issuers increases transaction costs for investors in recommendations in international green to help them with the initial development using the reviews to evaluate green bonds. It bond guidelines. of a green bond framework, which the also limits the comparability of green bonds second-party provider then subsequently from different issuers, particularly if different PBoC could also emphasise in future evaluates. External help in developing reviewers cover them. iterations that the annual reporting on green bond frameworks is valuable for the the green bond proceeds (see section 5) issuers, particularly for first time issuers; The second-party reviews are not fully provides a simple check that issuers have however, it reduces the independence of independent checks of the green claims of complied with the rule of all proceeds being the second-party in reviewing the issuer’s the bonds, as the second-party reviewers allocated to qualifying green projects within framework, as the second-party provider is often help issuers develop their green a year of issuance. then reviewing their own work. bond frameworks as well as checking

14 Roadmap for China: green bond guidelines for the next stage of market growth Table 5: Examples of external reviews of green bonds in China

Issuer Type of review External reviewer What’s included in the review

Shanghai Second-party review EY Pre-issuance report covering green credentials, management of Pudong following international the use of proceeds, and reporting and disclosure. The review Development certification methodology28 checked the green bond’s alignment with PBoC’s guidelines.

Bank

China Industrial Second party review RCCEF Pre-issuance report covering use of proceeds, decision Bank making process and technical criteria of project selection, and environmental objectives of the underlying projects. The review checked the green bond’s alignment with PBoC’s guidelines and the international Green Bond Principles. them. This lack of independence is International practice: Second-party review reviews; however, it’s not comparable to increasingly a concern as the market grows for most green bonds with an increasing reviews from other service providers. and more issuers enter the market, as number of third party certifications the opportunity for environmental fraud The lack of standardised reviews means then increases. Having truly independent The majority of green bonds in the investors still have to evaluate the green reviews is an important mechanism to international market use some form of credentials of each individual green bond prevent inappropriate environmental external review. This is particularly prevalent issuance, which keeps their transaction claims and fraud. in the European market, but it is also being costs relatively high. This solution can increasingly used in the US market. work for a niche market; however, it is not Third-party certification will help scalable in the mainstream market as the standardise the external review process. International practice for second-party transaction costs to investors become We are yet to see third-party certification reviews significant when the volume of green bond following standardised procedures for the Second-party review is the most common investment increases. Second-party reviews external review of a green bond in China. type of review in the international green are however an important tool while This is despite the issuance of approximately bond market, used by 60% of green bonds standards are being developed. USD 5 billion of green bonds in the issued by mid-2015.29 Second-party reviews Chinese market following the international are provided by research service providers Another issue is that the second party certification methodology without being focused on Environmental Social and reviews do not truly represent an directly certified. Governance (ESG) or scientific expertise.30 independent review of the green claims of The second-party typically reviews the the bond, as the second-party organisation The capacity to implement third-party adherence of the bond to the four pillars of typically helps the issuer develop the green certification against green bond standards the Green Bond Principles: use of proceeds, bond framework as well as checking it. is emerging in China. Approved verifiers process for project evaluation and selection, under the international Climate Bonds management of proceeds, reporting. Some International practice for third-party Standard & Certification Scheme, such second-party reviews also provide additional certification as KPMG, EY, DNV GL, Bureau Veritas evaluation of the greenness of the eligible For third-party certification, at present, there and Trucost, could provide certification projects or assets. is only one certification scheme for green services in China against the Climate bonds in the international market—the Bonds Standard. SynTao Green Finance However, the second-party reviews Climate Bonds Standard & Certification became the first Chinese company to currently lack standardisation across Scheme. The scheme uses standardised be approved as a verifier against the different providers and typically also approaches and has set up clear rules and international Climate Bonds Standard in within the same provider, leading to procedures for verification and certification January 2016. incomparability among different green in terms of green credentials, use of bonds. One of the second-party reviewers, proceeds, and reporting.31 As at mid-March This means that all of these verifiers can CICERO, has attempted to address 2016, certification has been used by USD 5 provide issuers with third-party certification the issue of lack of standardisation by billion of green bonds.32 Increased uptake against the international Climate Bonds developing a rating system for the green is expected over the next years as sector- Standard, as well as checking adherence to bonds (“Shades of Green” ratings), which specific criteria are being provided for an PBoC’s Guidelines. increases comparability between their increasing number of sectors.

15 Climate Bonds Initiative | International Institute for Sustainable Development Certification of green bonds against a Figure 2: Independent, standardised reviews become more important as the Chinese green standard allows investors, governments bond market grows and other stakeholders to prioritise green bonds with confidence that the China green bond market size funds are being used to deliver a low- (RMB bn) carbon and climate-resilient economy. It avoids investors having to evaluate or do expensive due diligence on green credentials of green bonds.

International experience with policing of green claims So far, reputation and regulatory anxiety has been sufficient policing mechanisms External review not to prevent environmental fraud, but as the standardised (mix of 2nd market grows and opportunities for fraud party review and 3rd party increase, further policing mechanisms may certification be explored. In the international market, there has been discussion of investor-led penalties in the form of raised interest rates External review through 3rd party payable to the bondholders if issuers default approved verifier model on green credentials of their green bonds; Time however, no such policing mechanism has yet been implemented. Stage 1 Stage 2 (Current)

Roadmap for the next stage of external reviews in China: Implementing a third- to ensure the validity of issuers’ green Clear criteria for approving verifiers should be party certification approved verifier model claims. Moving towards third-party review established by the gatekeeping organisation enables market scale (certification) at an early stage will minimise to ensure that only verifiers with sufficient the risk of these problems in the next stage expertise are allowed to provide verification A robust model for external reviews of green bond market growth in China. services for green bonds. This will minimise becomes more important as China’s green the risk of inappropriate environmental claims bond market grows. PBoC could endorse the use of an approved and fraud in the green bond market. A range Moving to a third-party review (certification) verifier model for implementing third-party of different organisations could be approved model in the next stage for China’s green bond certification. as verifiers for China’s green bonds market. market growth enables investors to evaluate Using an approved verifier model to Examples of criteria that could be established the credentials of each green bond with lower implement certification implies that one for approving verifiers, and the types of transaction costs. This enables investment organisation acts as a gatekeeper to allow organisations well placed to comply with the to scale, as investors can evaluate the green a range of verifiers into the green bond criteria, are set out in the box below. credentials of the standard that is certified markets to provide certification. The Green against, instead of evaluating each individual Finance Committee could take on this bond issuance. A third-party certification gatekeeper role, or delegate it to an entity model also ensures the verifiers provide with relevant experience, such as the Climate a truly independent check on the green Bonds Standard & Certification Scheme. credentials of the bond, which is important to The Climate Bonds Standard & Certification prevent inappropriate environmental claims Scheme already uses the approved verifier and fraud as the market grows and a broader model internationally. range of issuers joins the market. The approved verifier model enables The potential for inappropriate standardisation of what is provided by environmental claims and fraud increases verifiers, as the approver can set criteria if policy incentives for green bonds are for verifiers and the services they provide implemented in the next stage of the market, for green bonds. This helps to ensure as has been proposed by PBoC and NDRC, that a level of quality is maintained in prior to establishing a robust mechanism the verification process.

16 Roadmap for China: green bond guidelines for the next stage of market growth International green bond certification Box 2: How to select and approve green A range of different organisations could schemes could also be officially endorsed. bond verifiers in China be approved as verifiers for China’s green bonds market: China could also directly make use of Examples of criteria for selecting and the existing international Climate Bonds approving green bond verifiers Domestic organisations; The first Standard & Certification Scheme. Issuers domestic organisation has been could engage with a list of verifiers approved Sufficient levels of environmental approved as a verifier under the by the Climate Bonds Standard Board to knowledge, technical expertise and Climate Bonds Standard (SynTao obtain a dual certification that would check financial understanding to verify all Green Finance). Types of organisations that issuers first meet the requirements aspects of the green bond. that could qualify as verifiers include from PBoC’s domestic Guidelines— universities with relevant environmental a requirement for official issuance approval­ Experience with the use of international expertise and audit firms. and subsequently that they also comply with assurance standards, e.g. ISAE 3000 the international Climate Bonds Standard. (see further details in Appendix 5) for International organisations with existing The additional certification against the the process of assurance engagements. expertise in offering green bond reviews. international standard will help attract International organisations who already international investors. Financial heath and history of the have been approved as verifiers under verifier, i.e. lower financial risk. the Climate Bonds Standard include The opportunity to attract international Bureau Veritas, DNV-GL, EY, KPMG and capital at scale for green bonds increased Professional liability insurance. This is Trucost. They are well placed to help markedly with the opening up of China’s to protect verifiers against the costs of improve the green bonds’ international inter-bank market to foreign investors in any claims for mistakes or negligence credibility by offering ‘dual certification’ early 2016, as the interbank market accounts when the verifier is providing against the Climate Bonds Standard and for 93% of outstanding bonds in China.34 professional services to bond issuers. PBoC’s guidelines. The potential for dual certification is Avoiding conflict of interest.33 A Joint venture between domestic available to the asset classes where the conflict of interest may create a threat and international organisations: PBoC Guidelines and the Climate Bonds to the objectivity of the verification International verifiers could set up Standard are fully aligned. A small share report provided by the verifier. joint venture with local organisations of green bonds may not be eligible for dual For example, the objectivity of the to provide certification services. It certification if they allocate proceeds to verification report may be affected can help build the capacity of local projects which qualify under the PBoC’s when a verifier has helped to develop certification institutions on green green bonds Guidelines but are excluded the internal green bond procedures bonds, while also tapping into the under the international Climate Bonds for the issuer, which the verifier then domestic institutions’ expertise about Standard, notably fossil fuel-based projects. assesses as part of the verification. the Chinese context. As an intermediate step, supporting standardisation of second party reviews is also valuable. The organisation approving verifiers could Various mechanisms can be implemented to This can be useful in the early stages of publish guidelines for verifiers to facilitate police verifiers and reduce risk of problems. the market since sector-specific standard good practice. The risk of inappropriate environmental criteria required for third party certification To implement an approved verifier model, claims and fraud can further be reduced by are not yet available in all sectors. the Green Finance Committee could the implementation of effective controls Standardised second-party reviews would also publish guidelines that set out what for verifiers. The Green Finance Committee reduce transaction costs compared to verifiers should do during the certification can supervise verifiers directly or they can the current model of non-standardised process—they could also delegate this delegate this to another appropriate entity with reviews, and improve comparability to another organisation with expertise relevant experience, such as the Climate Bonds between different green bonds, allowing in the area. Providing verifiers with clear Standards & Certification Scheme. Effective investors to more easily distinguish guidelines will help ensure a level of quality controls for verifiers can include reviewing between different green bonds as the is maintained in the market, and that the verifier reports to maintain quality as well as market grows. However, transaction costs process is standardised to keep transaction the threat of spot audits of verifier reports. The for investors would remain higher than costs low. Clear guidelines reduce the risk range of control mechanisms for verifiers should under a third-party certification model, as of inappropriate environmental claims and be included in contracts with the approved they would still have to evaluate individual fraud, as verifiers will be guided on how to verifiers, and be clearly communicated to bond issuances rather than a one-off best prevent these outcomes. them in the approval process. evaluation of a standard.

17 Climate Bonds Initiative | International Institute for Sustainable Development 5. Reporting and Disclosure

Reporting by the green bond issuer to The Green Bond Principles set out to kick-start the market. However, as China’s investors and the wider market on the reporting guidelines. market matures, a much broader range green bond throughout the bond term is The Green Bond Principles suggest that, of issuers will join the market and the risk an important feature of the green bond in addition to the reporting on the use of of inappropriate environmental claims concept. Reporting provides investors with proceeds and investment of unallocated and fraud around the green credentials of information on their investment beyond the proceeds, issuers should use qualitative and/or the bonds will increase. Requiring, rather financial performance of the bond. quantitative performance indicators to measure than recommending, disclosure of the the environmental impact of the specific environmental impacts of green projects investments where applicable. Environmental would enable investors to further evaluate the Current practice in China: Reporting on use impact indicators can include greenhouse gas green credentials of the bonds they invest in. of proceeds required, environmental impact emissions reductions or appropriate proxies, This could increase their confidence that the reporting encouraged such as avoided vehicle miles travelled. green bond is making a material contribution to the shift to a green economy. PBoC’s guidelines require issuers to report The Climate Bonds Standard sets out quarterly to the market the types of green reporting requirements, rather than projects the bond is funding. For example, a recommendations. Requiring, rather than first report from an issuer could state that The requirements are aligned with and build recommending, disclosure of RMB 1 billion of a RMB 3 billion bond has on the reporting recommendations of the the environmental impacts of been allocated to solar projects, and RMB 1 Green Bond Principles. Issuers are required to green projects would enable billion has been allocated to water projects report annually what green projects or assets investors to further evaluate and RMB 1 billion has not yet been allocated. have been funded, the amounts disbursed the green credentials of the A special auditor’s report is required to to the different projects or assets, and the bonds they invest in. confirm the use of proceeds. Issuers must expected environmental objectives of the also submit an annual report on the use of projects with qualitative and/or quantitative proceeds directly to PBoC. performance indicators where applicable. In a next stage of the guidelines, the PBoC could therefore include disclosure PBoC guidelines encourage issuers to report Standardisation of reporting is important requirements related to more detailed on the environmental impact of the underlying to reduce transaction costs for investors environmental information of the underlying projects as well; however, this is not a and issuers. green projects, in addition to the current requirement. This means that an issuer would be The first few years of the international green reporting requirements on the use of required to disclose that proceeds are allocated bond market saw a less standardised approach proceeds. Further strengthening the to solar projects for example, but providing data to reporting, but steps are being taken to reporting requirements for green bonds in on emissions saved from the investment is not standardise. In 2015, a group of multilateral future iterations of the official guidelines is a necessity to comply with PBoC’s guidelines— development banks came together to develop a aligned with other actions Chinese regulators although it is encouraged. The guidelines do harmonised approach for similar organisations are already taking to improve environmental not include any information on what kind of on the reporting of environmental impacts of disclosure in the equities space.36 environmental information should be disclosed. green bonds. A proposed harmonised reporting approach from eleven financial institutions Encouraging standardised reporting by NDRC’s guidelines do not yet cover reporting. was published in December 2015.35 Under offering more detailed guidance on what to the Climate Bonds Standard, the reporting report on requirements are standardised for all issuers The PBoC could encourage standardised International practice: Comprehensive to provide the minimum information investors reporting by detailing in their guidelines the recommendations for reporting on use want to see. Issuers can then enhance their types of environmental information to be of proceeds, management of proceeds reporting and disclosure if they want to. disclosed for different project types. and environmental impacts, moving to standardisation Standardising the disclosure of the Roadmap for next stage of reporting environmental impacts would enable The international green bond market requirements: Standardisation and investors to evaluate the green bonds more has increasingly comprehensive improved disclosure of environmental easily, and facilitate comparison between recommendations for reporting that cover impact of projects different green bonds. It would also help use of proceeds, management of proceeds issuers know what to include in reporting, and environmental impacts. Current Moving from recommending to requiring and therefore reduce their transaction costs. practice in the international market is annual reporting on green credentials reporting on the green bonds throughout the At the initial stage of green bond market bond term, in a separate report, or as part of development, limiting the required reporting the issuer’s annual report. to keep transaction costs low is appropriate

18 Roadmap for China: green bond guidelines for the next stage of market growth 6. Conclusion

PBoC’s green bond guidelines provide Green definitions: Aligning with Management of proceeds: Earmarking a foundation for China’s green bond international definitions and linking provides investors with sufficient assurance market growth definitions to China’s official that green bond funds are being tracked environmental targets PBoC’s official green bond guidelines, PBoC’s current guidelines provide robust published in December 2015, support the At a high level, the main difference at guidance to issuers for management of building of a robust green bond market present is the inclusion of fossil fuel proceeds by requiring ring-fencing and in China. PBoC has provided guidance on projects for green bonds in China. earmarking of the green bond funds. green definitions, management of proceeds, This represents full alignment with reporting and disclosure, as well as assurance Within the sectors of energy efficiency and international approaches. services including second party review and green buildings, where China’s guidelines third party certification. NDRC has also include technical criteria, future iterations To further improve the guidance, PBoC developed green bond guidelines; however, can seek to leverage technical criteria that could consider providing more details these are less comprehensive than PBoC’s are being developed in the international on the differences between earmarking guidelines. The Shanghai Stock Exchange green bond markets. An intermediate step or ring-fencing to give issuers a stronger has released green bond guidelines which would be for the PBoC to more clearly basis for deciding which tracking system incorporate much of the PBoC’s requirements, disclose the differences between domestic to use. including the project catalogue. technical criteria and international standards in these sectors. PBOC’s current requirements for investment of unallocated proceeds Increasingly harmonising with international provide sufficiently robust rules to practice will enable increased foreign Future iterations of China’s ensure that unallocated proceeds are investment in China’s green bonds green bond guidelines could not invested in non-green projects. use a scientific framework This represents full alignment with Attracting international investment is crucial to ensure that the project- international approaches. for China to meet the massive investment level criteria for green bonds needs for the green transition with low-cost are in line with China’s Future iterations of the guidelines could capital. Lowering the cost of capital increases national environmental consider encouraging issuers to disclose the economic viability of green projects targets, including emission to investors where unallocated proceeds with high upfront capital needs. Attracting reduction targets. have been invested to be in line with international investment at scale also recommendations in international green diversifies the investor base and increases bond guidelines. market liquidity. Future iterations of China’s green bond guidelines could use a scientific framework PBoC could also emphasise in future The opening up of China’s inter-bank to ensure that the project-level criteria iterations that the annual reporting on bond market to international institutional for green bonds are in line with China’s the green bond proceeds provides a investors in February 2016 further enables national environmental targets, including simple check that issuers have complied foreign investment in Chinese green bonds. emission reduction targets. This would with the rule of all proceeds being Harmonising China’s green bond guidelines help ensure that green bonds remain allocated to qualifying green projects and practices with international practice, sufficiently ambitious to be a viable tool within a year of issuance. guidelines and standard schemes can make for China to achieve its national targets. it easier for international investors to take Reporting requirements: Environmental advantage of the opening up of the inter-bank Domestic harmonisation in green impact disclosure and encouraging bond market and invest in green bonds, as the definitions might also be required to standardisation guidelines ensuring the green credentials of scale up the green bond market in China. the bonds would be more familiar to them. China’s bond market is fragmented, and PBoC’s current guidelines provide robust different regulators who cover different guidance to issuers for reporting and segments have published separate green disclosure, which represent full alignment Roadmap for future green bond guidelines bond guidelines. More communication with international approaches. development for China and coordination between different regulatory authorities could help PBoC could include disclosure This paper has compared China’s current harmonise domestic green definitions, requirements for more detailed green bond guidelines with international best which would help build an integrated, environmental information of the practice to develop a practical roadmap for national green bond market in China that underlying green projects, in addition to China’s policymakers to consider for the next can facilitate issuance and investment at the current reporting requirements of the iteration of official green bond guidelines. scale with low transaction costs. use of proceeds.

19 Climate Bonds Initiative | International Institute for Sustainable Development The PBoC could encourage standardised China could also directly make use of reporting by detailing in their guidelines the existing Climate Bonds Standard the types of environmental information & Certification Scheme, which also to be disclosed for different project applies the approved verifier third-party types. Standardising the disclosure of certification model. Issuers could obtain the environmental impacts would enable a dual certification that would check investors to evaluate the green bonds that issuers first meet the requirements more easily, and facilitate comparison from the PBoC’s domestic guidelines and between different green bonds. It would subsequently that they also comply with also help issuers know what to include the international Climate Bonds Standard. in reporting, and therefore reduce their The additional certification against the transaction costs. international standard will help take advantage of the potential to attract External reviews and assurance: international investors, which has been implementing a third-party certification- made possible at scale by the opening approved verifier model to enable of the inter-bank market to international market scale institutional investors.

PBoC’s current guidelines provide robust guidance to issuers for external reviews and assurance, which represent strong alignment with international approaches.

PBoC could endorse third-party certification as the preferred type of external review for green bonds in China. This would standardise the external review process and enable investors to evaluate the credentials of each green bond with lower transaction costs.

To implement third-party certification for green bonds, the Green Finance Committee could establish an approved verifier model for implementing third- party certification of green bonds against a standard. The Green Finance Committee could be the approver of verifiers, or they could delegate this responsibility to an organisation with existing expertise in the area. This gatekeeping role would involve selecting verifiers based on clear selection criteria.

A range of different organisations could be approved as verifiers, including domestic organisations, international organisations with existing expertise in offering green bond reviews and joint ventures between domestic and international organisations. PBoC could publish guidelines to set out what verifiers should do during the certification process. This would ensure a level of consistent quality is maintained, as well as reduce transaction costs.

20 Roadmap for China: green bond guidelines for the next stage of market growth Appendix 1: Regulatory System of the Chinese Bond Market

PBoC: People’s Bank of China 1. Based on market type of sectors under the Climate Bonds Standard CSRC: China Securities Regulatory Market type Regulatory authority Commission

CBRC: China Banking Regulatory Inter-bank bond market (93% of outstanding bonds listed here) PBoC Commission

Stock exchange bond market CSRC NDRC: National Development and Reform Commission

NAFMII: National Association of Financial Market Institutional Investors 2. Based on bond types under the Climate Bonds Standard

Bond type Regulatory authority

Government bond PBoC, Ministry of Finance, CSRC

Central bank bond PBoC

Financial bond Policy bank bond, special financial bond PBoC

Commercial bank bond, non-bank financial CBRC, PBoC institution bond

Securities company corporate bond, security PBoC, CSRC company short-term financing bond

Short-term financing bond, medium-term notes NAFMII

Asset-backed securities (ABS) CBRC, PBoC

Corporate bond NDRC, PBoC, CSRC

International institution bond PBoC, Ministry of Finance, NDRC, CSRC

Convertible bond PBoC, CSRC

Listed-company bond CSRC

SME private placement bond Stock Exchange

21 Climate Bonds Initiative | International Institute for Sustainable Development Appendix 2: An Overview of Green Definitions Endorsed by PBoC and NDRC

PBoC: China Green Bond Endorsed Project Catalogue NDRC green bond guidelines

Categories Sub-categories Areas

1. Energy saving Industrial energy saving Technology improvement for energy Sustainable buildings saving and emission reduction Energy management centre Green urbanisation37 - energy Urban and rural infrastructure construction with Energy saving and environmental energy-saving efficiency protection industry

2. Pollution prevention and Pollution prevention and control Pollution prevention and control control Environmental restoration project

Clean utilisation of coal

3. Resources conservation and Water saving and unconventional water use Circular economy recycling Redevelopment and integrated utilisation of tailings Water saving and unconventional and associated mine byproducts water use Recycling and utilisation of industrial solid waste exhaust gas and effluent Recycling, processing and utilisation of renewable resource Remanufacturing of electromechanical products Recycling and utilisation of biomass resources

Railway transportation Green urbanisation - transport 4. Clean transportation Urban rail transit Public urban and rural transportation

Waterway transportation

Clean fuel

New energy automobile

Internet application on transportation

5. Clean energy Wind power generation Clean and efficient use of energy Solar photovoltaic (PV) power generation New energy - hydropower, wind, Smart grid and energy internet nuclear, solar, bioenergy, geothermal, Distributed energy resource shallow geothermal energy, marine, Solar thermal application and air energy Hydropower generation Other new energy application

6. Ecological protection and Natural ecological protection and protective Ecological agriculture and forestry climate change adaptation development of tourism resource Ecological civilisation demonstration Ecological agriculture, husbandry and fishery projects Forestry development Low-carbon industry projects Emergency prevention and control of disaster Low-carbon demonstration projects

22 Roadmap for China: green bond guidelines for the next stage of market growth Appendix 3: Categories of Green Projects with Differences Between China and International Green Bond Market Practice

Fossil fuel projects: Currently included in In practice, it is expected that a significant China, but excluded internationally share of China’s public transport projects International green bond guidelines and that use fossil fuels would qualify with standards including those in the Green appropriate emission thresholds per Bond Principles, the Climate Bonds passenger. Standard and green bond indices have excluded the use of fossil fuels. In practice, Similarly, the PBoC endorsed Catalogue fossil fuel projects have also been excluded currently qualifies all rail projects for green from use of proceeds by issuers in the bond issuance. This is largely in line with international market to date. Fossil fuel international standards and practice, as all companies could issue green bonds rail—except rail lines dedicated to fossil provided the proceeds are allocated fuels, such as a coal mine—qualify under to green, non-fossil fuel projects, but the low-carbon transport criteria for the proceeds cannot be allocated to fossil Climate Bonds Standard, as all rail meets the fuel projects. carbon intensity criteria set out above. Future iterations of the Catalogue endorsed by In contrast, PBoC’s Catalogue includes ‘clean PBoC could apply an emissions threshold for utilisation of coal’38 as a qualifying green rail in the same way as for bus systems. project type. The guidelines also include fuel production and associated construction and operation of facilities as qualifying green Supply chain of green products or projects if the gasoline and diesel produced facilities can be included by China in meet the requirements set in China’s future iterations national standards.39 PBoC’s Catalogue only covers investment in Public transport projects that use fossil the direct construction and operation of green fuels: Further sector-specific criteria can be devices or facilities: it does not cover supply developed or adopted by China chain investments, except the manufacturing Under the international Climate Bonds of clean energy vehicles. For example, Standard, transport projects must meet the construction of a solar farm would a certain emissions intensity threshold qualify for green bond issuance, while the of gCO2/passenger-km (for passenger) manufacturing of the solar panels would not or gCO2/t-km (for freight) to qualify for qualify. This exclusion is due to the complexity financing by green bond issuance. in evaluating the indirect environmental credentials of the manufacturing process of That is, bus projects that use fossil green products or equipment.40 fuels are not automatically included in the international market, but can This contrasts with practices in the qualify on the condition that they prove international green bond market, where compliance with the threshold for supply chain projects and assets such as emissions intensity set out by the the manufacturing facilities for products standard. Electric buses or buses and/or equipment are normally included. powered by hydrogen automatically For example, the Climate Bonds Standard qualify under the standard, as all electric Taxonomy covers facilities for manufacturing and hydrogen buses meet the threshold for of wind power equipment. emissions intensity.

In the current PBoC-endorsed Catalogue, all bus projects are automatically considered as green without further conditions for emissions intensity. Future iterations of the Catalogue could consider implementing thresholds for emissions intensity to determine which public transport projects qualify for green bond issuance.

23 Climate Bonds Initiative | International Institute for Sustainable Development Appendix 4: Refinancing: The Role of Bonds in the Capital Pipeline

The largest share of bond issuance is used Figure 3: Bonds are mainly used to finance the lower-risk mature assets post-construction to refinance debt rather than provide initial debt to a new project. This is the role of Development Mature Asset, Operations & Management bonds in the capital pipeline generally, and will therefore also be the main role of bonds High-risk Low-risk, long-term holdings for long-term in financing green projects. Project finance investors

Bonds can lower total project cost of capital. Corporate

Refinancing through bond issuance allows companies to take on short-term bank Bank lending for the construction phase of a Asset-backed quity

loans Project project and then pay the loan back by E - Re-financing by utilities issuing bonds once the construction phase is Bonds - Bank securitization over. As construction is usually the highest Corporate risk part of a project, bond issuance post- Sovereign construction can provide a longer-term lower cost of capital. Public sector Public sector

Bonds allow lenders to recycle funds to First 2-5 years 15-25 years new projects.

Moreover, given that few institutional investors are comfortable with taking on construction risk in a large part of their portfolio, this allows the banks (and the smaller pool of institutional investors with a higher-risk appetite) to more quickly recycle their funds into new projects. Having an exit strategy gives banks an incentive to create an increased pipeline for these types of loans. The easier it is for loans to be offloaded, the more likely banks are to lend more and for longer terms.

Bonds are particularly suited for low- carbon projects.

Refinancing and obtaining lower-cost debt is particularly attractive for low- carbon infrastructure assets as they have a particularly low operating risk post- construction compared to the construction phase. This means that the difference between the cost of capital for low-carbon projects before and after construction could be significant.

24 Roadmap for China: green bond guidelines for the next stage of market growth Appendix 5: ISAE 3000

ISAE 3000 deals with assurance engagements other than audits or reviews of historical financial information. It provides guidance on verification process, which shall be used by approved verifiers under the Climate Bonds Standard to provide verification services for third party certification. ISAE 3000 is developed by the International Auditing and Assurance Standards Board (IAASB), who is developing auditing and assurance standards and guidance for use by all professional accountants.

The guidance on verification process contained in ISAE 3000 includes:

Conduct of an Assurance Engagement in Accordance with ISAE

Ethical Requirements

Acceptance and Continuance

Quality Control

Professional Skepticism, Professional Judgment, and Assurance Skills and Techniques

Planning and Performing the Engagement

Obtaining Evidence

Subsequent Events

Other Information

Description of Applicable Criteria

Forming the Assurance Conclusion

Preparing the Assurance Report

Unmodified and Modified Conclusions

Other Communication Responsibilities

Documentation

Full information can be found at: https:// www.ifac.org/publications-resources/ international-standard-assurance- engagements-isae-3000-revised-assurance- enga

25 Climate Bonds Initiative | International Institute for Sustainable Development Appendix 6: International Guidance on Green Definitions, Management of Proceeds, Reporting and Assurance

Guidelines and standards Green bond indices

Green Bond Principles: Voluntary guidelines The indices apply different filters for what for the green bond issuance process qualifies as a green bond, and therefore The Green Bond Principles, issued early in also play a role in enforcing robust green 2014, are a set of voluntary guidelines credentials in the market, in addition to developed around the design and reporting the external reviews initiated by issuers, characteristics of green bonds. The as set out above. As the bulk of assets principles promote the idea of green bonds under management globally are passive being about the use of proceeds for green investments tracking indices, green bond assets rather than for green “issuers”. They indices are an important mechanism cover establishing sound management to ensure the market is scalable, yet processes for the use of proceeds and the environmentally rigorous. use of independent reviewers for both environmental credentials and robust Several green bond funds have been reporting practices. launched that track green bond indices. Further development of indices is crucial An updated version of the principles was to facilitate the continued development of published in March 2015. While the principles green bond products. Another important do include broad categories for what can be role for green bond indices is building a included as green projects to be financed performance history for green bonds. by green bonds, they do not try to promote detailed criteria to standardise what is green. An overview of the green bond indices in the market and their inclusion criteria is Climate Bonds Standard: Criteria for what set out in the figure below. The indices in is green, as well as the issuance process the market to date have close to common The Climate Bond Standards seek to provide criteria for what is green. The Climate Bonds common, science-referenced classification Taxonomy is the base definition for what for the green bond market of what is green. is green for three of the indices (S&P Dow The Climate Bonds Standards Board, which Jones, Barclays & MSCI41 and Solactive) with represents investors with USD 34 trillion green bond data for the indices provided by of assets under management, oversees the Climate Bonds Initiative. Bank of America the development of the standards. The Merrill Lynch’s index uses data provider board convenes scientists, investors and Bloomberg’s definition for what is green, other specialists in expert committees that which is synchronised with the Climate develop clear and science-based criteria Bonds Initiative. to identify the assets and projects that can be financed with green bonds. The newly updated Climate Bonds Standard also sets up issuance processes for green bonds, fully integrating the Green Bond Principles.

The international Climate Bonds Standard is based on an overarching target of limiting global warming to an increase of less than 2°C of pre-industrial averages. The Climate Bonds Taxonomy serves as a screening tool for the Standard, selecting eligible projects areas with some further technical criteria within the project categories.

26 Roadmap for China: green bond guidelines for the next stage of market growth PBoC: China Green Bond Endorsed Project Catalogue

Categories Min Size Investment grade only Bond types Coupon Maturity Green criteria

Solactive $100m Mixed (non-investment Corporate, Bank, Fixed only >6 months Complies with grade & unrated Development Bank the Climate Bond included) Taxonomy

S&P n/a Mixed (non-investment Corporate, Bnak Fixed, zero, > 1 year Complies with Dow Jones grade & unrated Development Bank, step-up, the Climate Bond included) Municipal (ex US) fixed to float, Taxonomy floaters Separate unlabelled climate project bond

index

Barclays $250m Yes Corporate, Bank, Fixed only Matures Complies with & MSCI Development Bank, in index the Climate Bond Municipal (ex US), Taxonomy

ABS MSCI environmental assessment, unlabelled climate

bonds are eligible

Bank of $250m Yes Corporate, Bank, n/a >1 month Complies with the America Development Bank, Bloomberg green Merrill Lynch Municipal (ex US) bond definition

Green bond stock exchange lists Green bonds assessments from rating agencies Another tool that guides the market is green bond lists, established by stock exchanges. In early 2016, the international rating As at December 2015, Oslo, Stockholm, agency Moody’s announced a Green Luxembourg and London have launched green Bond Assessment framework for public bond lists, and Mexico has also announced consultation. The Green Bond Assessment they will be establishing one. The Shanghai does not set out specific criteria for what is Stock Exchange has just announced that it will green, but provides a framework to assess soon create a green bond list. issuers’ management, administration and reporting on environmental projects financed The lists are useful in improving the visibility through green bonds. of green bonds to investors, and encourage secondary market trading. So far, the green bond lists do not set criteria for green specifically, unlike the green bond indices. Instead, the requirement for inclusion is that the green bonds have a publicly available independent review.

27 Climate Bonds Initiative | International Institute for Sustainable Development 1. Prepared for the Development Research Centre (DRC) of the 30. ESG providers of second party reviews in the international State Council of China as part of a joint project with IISD market include Vigeo, DNV-GL, Oekom, Sustainalytics and KPMG, 2. The World Bank (2007). Cost of Pollution in China. and scientific experts include CICERO. Available from: http://siteresources.worldbank.org/ 31. With the Climate Bonds Standard, verifiers use a Readiness INTEAPREGTOPENVIRONMENT/Resources/China_Cost_of_ Assessment Protocol, a checklist-based approach, before bond Pollution.pdf issuance to ensure the bond’s conformance with the pre-issuance 3. http://finance.china.com.cn/money/bank/ requirements in the Standard. After the bond has been issued, yhyw/20160317/3631992.shtml an Assurance Engagement is conducted to provide assurance 4. People’s Bank of China/United Nations Environment on the bond’s conformance with the post-issuance certification Programme. requirements of the Standard. 5. http://www.pbc.gov.cn/tiaofasi/144941/144959/3021203/ 32. Including bonds issued, as well as pipeline soon to be issued, index.html per March 2016. 6. Liu, L. (2016) China: Liberalizing bond market access. Deutsche 33. A conflict of interest may arise when the verifier provides the Bank, February 2016. service related to a particular matter for two or more clients whose 7. Ibid. interests with respect to that matter are in conflict; or the interests 8. ibid. of the verifier with respect to a particular matter and the interests 9. http://www.chinabond.com.cn/Channel/19012917# of the client for whom the verifier provides the verification service 10. SEB (2016). Paris Agreement will propel the Green Bond related to that matter are in conflict. http://www.ethicsboard.org/ market to new heights. Available from: http://sebgroup.com/ iesba-code/part-b-professional-accountants-public-practice/ siteassets/corporations_and_institutions/our_services/markets/ conflicts-interest fixed_income/green_bonds/the_green_bond_2016_01_13.pdf 34. http://www.chinabond.com.cn/Channel/19012917# 11. Moody’s (2016). Green bond issuance could exceed $50 billion 35. European Investment Bank (2015): Joint communication on a in 2016. Available from: https://www.moodys.com/research/ revised proposal for Green Bond impact reporting harmonization. Moodys-Green-bond-issuance-could-exceed-50-billion-in-2016- Available from: -PR_343234 http://www.eib.org/infocentre/press/releases/all/2015/2015- 12. The Committee is placed under the China Society for Finance & 283-joint-communication-on-a-revised-proposal-for-green-bond- Banking, see more at http://www.greenfinance.org.cn impact-reporting-harmonization.htm 13. In China, financial bonds refer to bonds issued by financial 36. The Green Finance Committee has submitted a proposal institutions. to increase mandatory requirements for companies to disclose 14. The Research Centre for Climate and Energy Finance (RCCEF) environmental information to a Securities Law Working Group. The sits under the Central University of Finance and Economics in Hong Kong Stock Exchange has recently strengthened disclosure China. RCCEF is a member of the Green Finance Committee, requirements for companies on environmental, social and which is leading the research on the Green Bond Endorsed Project governance issues in its listing rules. The environmental disclosure Catalogue, i.e. the green definitions in China. See more at http:// level of listed companies in China has improved the last years, mpacc.cufe.edu.cn/qhynyjryjzx/index.html and companies with higher level of disclosure tend to have better 15. Bloomberg (2016) China’s $230 Billion Green Bond Thirst to credit ratings, according to the Evaluation Report of Environmental Supercharge Market. Available from: http://www.bloomberg.com/ Information Disclosure from Listed Companies in China (2014). news/articles/2016-02-04/china-s-230-billion-green-bond-thirst- 37. The green urbanisation projects under the NDRC guidelines to-supercharge-market include development of green buildings, building industrialisation, 16. http://www.globalcapital.com/article/x4djffxjd6sz/bocom- improvement of existing buildings for energy saving, construction unveils-mammoth-rmb70bn-green-bond-ambition of sponge (water protection) cities, construction of smart cities, 17. http://news.xinhuanet.com/finance/2016-03/08/c_128781321. construction of smart grids, and construction of charging facilities htm; Reuters (2015). http://cn.reuters.com/article/china-bonds- for new energy cars. idCNKBS0U708S20151224 38. i.e. construction and operation of devices or facilities 18. GFC (2015) China’s Green Bond Market is Promising. Available conducting coal washing and processing, using coal by quality and from: http://www.greenfinance.org.cn/displaynews.php?id=462 classification, utilisation technologies such as gasification that are 19. The international green bond market is not yet aligned on easy for pollution treatment inclusion or exclusion of nuclear. The reluctance to include nuclear 39. GB V standard for gasoline and GB IV standard for diesel. is not because of any debate around the sound low-carbon 40. GFC (2015) Preparation Instructions on Green Bond Endorsed credentials of nuclear, but for other environmental safety concerns. Project Catalogue (2015 Edition). Available from: http://www. 20. The changes to foreign investment in the interbank market greenfinance.org.cn/displaynews.php?id=468 announced by PBoC in February 2016 includes: more foreign 41. Barclays & MSCI’s green bond index provides an additional institutions will be allowed to investment in the market; there is environmental assessment on top of the foundational criteria to no limit of how much they can invest; the management process comply with the Climate Bonds Taxonomy. of the bonds has been simplified http://www.pbc.gov.cn/ tiaofasi/144941/144959/3021203/index.html 21. National Guidance for Industrial Energy Consumption (2014) 22. GB/T50378-2006. The standard includes requirements of land saving and outdoor environment, energy saving and utilisation, water saving and utilisation, materials saving and utilisation, indoor environment quality, and operational management of residential buildings and public buildings. The rating of the building is based on how many targets have been achieved under each dimension. 23. GB/T50378-2006. The standard includes requirements of land saving and outdoor environment, energy saving and utilisation, water saving and utilisation, materials saving and utilisation, indoor environment quality, and operational management of residential buildings and public buildings. The rating of the building is based on how many targets have been achieved under each dimension. 24. CBI (2015). Climate Bonds Green Property Standards: An overview. Available from: http://www.climatebonds.net/ standards/resources/climate-bond-standard/low-carbon- buildings-standard 25. China has established 7 pilot emission trading schemes in 2011, which are located in Hubei, Guangdong, Beijing, Shanghai, Shenzhen, Tianjin and Chongqing. The national emission trading scheme is aimed to be set up in 2017. 26. E.g. National Key Energy-Efficient and Low-Carbon Technologies Promotion Catalogue and Catalogue for Low-carbon Technology Promoted with Priority 27. Department of Climate Change, NDRC (2015). China’s INDC: Enhanced Action on Climate Change. Available from: http:// www4.unfccc.int/submissions/INDC/Submission%20Pages/ submissions.aspx 28.EY produced a pre-issuance second party review using the international Climate Bonds Standard certification framework, however, the bond was not certified against the Climate Bonds Standard. 29. Climate Bonds Initiative and HSBC (2015) Bonds and climate change: State of the market 2015.

© Published by the Climate Bonds Initiative, in association Disclaimer: This report does not constitute investment with the IISD International Institute for Sustainable advice and the Climate Bonds Initiative is not an investment Development, April 2016. adviser. The Climate Bonds Initiative is not advising on the merits or otherwise of any bond or investment. A decision The Climate Bonds Initiative is an investor focused not-for- to invest in anything is solely yours. The Climate Bonds profit, mobilizing debt capital markets for a rapid transition Initiative accepts no liability of any kind for investments to a low-carbon and climate resilient economy. anyone makes, nor for investments made by third parties.

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