On 2 April, China’s Ministry of Finance debuted on the London Stock Exchange its first ever green sovereign bonds. The money raised will go towards projects in China in sectors such as clean transportation, marine conservation and recycling.
The event makes China the latest of more than 50 jurisdictions to issue green sovereign bonds, Xie Wenhong, head of the China Programme at the Climate Bonds Initiative (CBI), told Dialogue Earth. The industry had long been looking forward to China following suit, he said.
Dialogue Earth consulted several experts regarding the launch. Broadly, they welcomed it as a move that would help spur international investment in green projects in China, and offer the country an opportunity to deepen climate cooperation with the UK and EU. China could also include green investment plans in its new climate action plan under the Paris Agreement, they said.
How significant was the bond issuance?
Governments issue green sovereign bonds to raise funds for environmental protection and green development. The money is often invested in areas such as renewable energy, low-carbon transport, green buildings and conservation. It supports national green-development strategies and attracts international investment to projects related to sustainability.
China’s green sovereign bonds issue in London was worth RMB 6 billion (US$824 million). Of this, half have a 3-year maturity at 1.88 per cent interest, and the other half a 5-year maturity at 1.93 per cent.
For comparison, in 2016 China issued RMB 3 billion of ordinary sovereign bonds in London. Xie explained that it is normal for green sovereign bonds issues to be comparatively large. Germany, for example, issued US$7.7 billion of green bonds in 2020, alongside ordinary sovereign bonds to the same value.
“However, consideration needs to be given to the size of demand for green funds. Will it be possible to use all the money raised?” Xie said.
The first ever green sovereign bond was a US$800 million 5-year bond issued by Poland in 2016, according to a report by the CBI. EU nations including France, Germany and Hungary followed suit, along with emerging economies such as Chile, Indonesia and Thailand.
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Issuing bonds in London helps China attract international investors, and offers the City a chance to diversify its offering of green financial products and distinguish itself from Wall Street.
Mao Xuxin, head, Bank of China London Research Centre
In 2017, France issued US$7.5 billion worth of 22-year green sovereign bonds and has since “tapped”, or increased, the size of the issue to US$29.5 billion. In 2020, Egypt issued US$750 million of 5-year green sovereign bonds, the report notes.
China’s debut of RMB 6 billion (US$824 million) is not particularly large. Mao Xuxin, head of the Bank of China’s London Research Centre, told Dialogue Earth it was understandable for China to keep its first green sovereign bond issue relatively small as it would lead to a higher ratio of bids to sales.
According to Xinhua News Agency, the London bonds “spurred strong demand” from international investors. This was despite the interest rates being lower than those of regular government bonds issued in Hong Kong at a similar time, with a similar maturity length. In the end, the bids were 6.9 times greater than the bonds available, Xinhua reported.
Issuing an RMB-denominated bond in London has another advantage for China: it helps internationalise the currency, says Zhang Chuanjie, an environmental, social and governance (ESG) senior researcher at the Bank of China’s London branch. Growth in green finance, Zhang explained, is seen as a way to drive that process, within which the UK is a key location.
“Globally, the UK has always been an important site for the RMB foreign exchange spot market. After Hong Kong, London and Singapore are the two most important international centres of RMB business,” he said.
A focus on climate adaptation in the use of funds
In February, the Ministry of Finance published a framework for issuing green sovereign bonds. It specified possible uses of the funds, including direct investments in projects, contributions to project running costs, support for local governments, and tax rebates. The catalogue of eligible projects refers to an existing list for green bonds, with six major categories:
- Clean transportation
- Sustainable water resources and wastewater management
- Sustainable management and restoration of biological and land resources
- Restoration of marine environments
- Prevention of pollution
- Resource recycling and reuse
“At present, renewable-energy projects – wind and solar power – are not on the list,” Xie observed. “In contrast, a large number of sectors related to ecological conservation and restoration have been incorporated into the framework.” He believes this may signal the emergence of a new trend: using fiscal tools and the bond market to finance projects focused on climate adaptation and resilience.
Sean Kidney, CEO of the CBI, told Dialogue Earth: “The framework is meeting the requirements of China’s national ‘taxonomy’, the Green [Bond Endorsed] Projects Catalogue. That is perfect for sending the right signals to the market.”
Making national climate plans investable
The green transition is a vast project, and the most important aspects of it – climate actions and the energy transition – are facing huge funding gaps. A recent report from the World Economic Forum puts demand for climate finance up to 2030 at US$9 trillion a year, increasing to US$10 trillion a year from 2031 to 2050.
A report from the consultancy Oliver Wyman found that China will need RMB 3.5 trillion a year in green finance from 2020 to 2060. Current policy would see an estimated RMB 2.4 trillion of that come from government, leaving a RMB 1.1 trillion gap to fill, the reports states. Market reports have shown that the lack of private investment has consistently been a problem.
Sovereign debt is backed by the state. This means lower risk, making it more attractive for some investors. Green sovereign bonds are, therefore, a good way to leverage private investment in national or regional green transitions. In 2019, the CBI’s Green Bond European Investor Survey found an appetite for more green bonds from sovereign issuers.
Sovereign bonds can also catalyse the corporate bond market. A working paper from the International Monetary Fund found that “the number and the size of corporate green bond issuance increase more in a jurisdiction after the sovereign debut”.
The same research found the effect was strongest in countries with stronger climate policies. That is, alignment between green sovereign bonds and national policies is more likely to drive green investment by the private sector.
Sovereign bonds aligned with national strategies are generally more attractive, said Thomas Dillon, head of sovereign ESG at Aviva Investors, the UK’s biggest investment firm, in a seminar.
Antonina Scheer agrees. She is a policy fellow at the London School of Economics (LSE)’s Transition Pathway Initiative Centre (TPI Centre). The LSE is the academic partner of the investor-led TPI, which aims to support companies and investors in aligning with the low-carbon transition.
Scheer told Dialogue Earth that, to encourage private investors to participate in climate finance and investment actions, it is worth considering how investment frameworks and standards can align with national strategies.
Scheer noted that incorporating investment plans into the updated Nationally Determined Contributions (NDCs) “could also boost investor confidence and drive more private climate investment”. Under the Paris Agreement, signatories should have submitted updated NDCs in February – but most countries, including China, have not. Countries that haven’t yet finalised their NDCs could still include investment needs and plans in those documents.
International cooperation
In theory, it doesn’t matter where you issue sovereign debt – international investors will always be able to buy it. But, said Mao, launching in London draws more attention.
“Issuing bonds in London helps China attract international investors, and offers the City a chance to diversify its offering of green financial products and distinguish itself from Wall Street,” Mao added. The Bank of China’s London branch also plans to issue new sustainability bonds this year, in both RMB and GBP, Zhang noted.
Kidney told Dialogue Earth that usually, countries tend to issue their green sovereign bonds at home, and this is the first time another country has done so in London.
“China is doing it specifically to underline the green underpinnings of the UK-China climate dialogue, i.e. for political purposes,” he said, welcoming the move. The UK government recently announced that China and the UK are set to restart formal climate talks, with China’s environment minister to visit London and the talks to become institutionalised for the first time.
According to a Bloomberg report, China’s choice of London to issue green sovereign bonds “will test appetite among international investors to shift climate bets to the world’s top polluter” and is aimed at “showcasing the nation’s green leadership credentials as the US retreats under President Donald Trump”.
Experts who spoke with Dialogue Earth all mentioned the effect of the change in administration at the White House and agreed this could be an opportunity for better climate cooperation between China and the UK, and China and the EU.
Speaking to the Financial Times, Adair Turner, chair of the Energy Transitions Commission, said that China, the EU and the UK should form a climate coalition of “the world apart from the US” in response to the US retreat under President Trump. If China’s first green sovereign bonds are successful, there are hopes they will result in more climate investment both in the country and internationally.
This article was originally published on Dialogue Earth under a Creative Commons licence.
