China fuels green bond take-off
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Northeast Asia

China fuels green bond take-off

Once one of the world’s worst offenders in terms of industrial pollution, China is changing its ways, not least by becoming a leader in issuing green bonds.

By Allen Cheng


Christopher Flensborg, the Stockholm-based investment banker often called the father of the green bond, is unshakeable in his belief that China will be a leader when it comes to green bonds, despite a slowdown in 2017.

“China will be the biggest market,” says Flensborg, whose idea for green bonds – linking government or corporate bonds with environmental pledges and commitments – back in 2007 was picked up by the World Bank.

“Other markets may catch up, but there is no question in my mind that China will still be the global leader in green bonds,” Flensborg, head of climate and sustainable financial solutions at Skandinaviska Enskilda Banken and an adviser to China’s government, tells Asiamoney.

The global use of proceeds from green-bond issuance reached a new high of $133 billion last year, up about 45% from 2016, according to SEB. If green asset-backed securities are included in the tally, global green-bond financing amounted to $163 billion last year.


Christopher Flensborg,

Total green-bond issuance from Chinese entities, both onshore and offshore, amounted to $30 billion last year, down 12% from 2016, according to SEB, citing Bloomberg data. China accounted for 23% of the global green-bond market last year, down from 38% in 2016, although as a country it remains the single largest source of green bonds in the world.

If green asset-backed securities are included in the numbers for 2017, the US ranks as the leading source of green finance, according to SEB.

In honour of China’s commitment to green finance, Asiamoney is recognizing 10 financial institutions, one local government and one individual, for their leadership in promoting environmental protection, green technologies and sustainable development through finance. 

Chief among the winners are Industrial Bank, which wins the award for best green bank of the year for its approach to green finance; Industrial and Commercial Bank of China for being the best green national commercial bank because of its strong commitment to policy and scholarly research on green finance; and Citic Securities for being the best green securities house because of its leadership in bringing corporate green bond offerings to market.

Laurence Brahm, a Beijing-based American lawyer who acted as an adviser to China’s ministry of environmental protection, says the nation – once one of the world’s worst industrial polluters– is in the process of changing its entire power grid away from fossil fuels.

Officials, says Brahm, are determined to reduce the share of electricity generated from coal and gas from 70% of the power grid supply to 50% in the next decade. 

Brahm, who helped the government draft its green investment policy ‘Ecological civilization’, also says the authorities are determined to promote electric vehicles so that 30% of all cars, buses and trucks on the road will be zero emissions by 2025. All new sources of energy will be green by 2030, he says, adding that by 2050, the target is that 80% of China’s national grid will be green.

“That kind of scale of transition in a nation of 1.3 billion people can only happen if the financial services sector drives it,” Brahm says. “Green finance is critically important, as it is at the core of determining future infrastructure away from fossil fuel economies.” 

We don’t see competition to be bad as long as it helps grow the market and does not cause anti-competitive and market destructive practices - Judy Li, Ernst & Young

Chinese authorities have not only set up a national financial system for issuing green finance but have also worked with industry to establish mechanisms of accreditation and verification to ensure that green-bond issuers are keeping their promises by implementing their environmental pledges, particularly the reduction of carbon emissions and pollutants.

“This shows the political will to shift away from a fossil fuel-based economy towards a renewable energy-based economy,” says Brahm. “This does not exist in the US; in many European countries, especially in Nordic countries, while they have the will, their scale is quite small as many countries there have populations of [about] five million, which is just a district of a major city in China.”

Of the Rmb2 trillion ($312 billion) of bonds issued each year in China, roughly 2% are green, according to Judy Li, the Beijing-based head of the green finance verification team in the Greater China region for Ernst & Young. 

China’s leaders hope that will rise to between 15% and 20% in the next decade, adds Li, and they are implementing a range of policies to stimulate green growth through green financing.

“We hope to work with our peers to grow the market,” says Li. “We don’t see competition to be bad as long as it helps grow the market and does not cause anti-competitive and market destructive practices.”

Li heads a team of 70 accreditation and verification experts in Beijing, Shanghai, Guangzhou, Shenzhen, Taiwan and Hong Kong – the biggest in the market – and she has overseen the firm’s drive to become the leading name in the accreditation of green finance issues in China. It now has a market share of between 60% and 65% of the green bond accreditations.

Li joined Ernst & Young four years ago and had previously worked for just over a decade at United Nations Development Programme on climate credit and climate negotiations, first at UNDP headquarters in New York and then at UNDP’s offices in Beijing.

She has a wide range of experts on her team, including those who have had years of experience in environment technology and clean-up, energy generation, climate change and emission control. They now specialize in making sure issuers of green bonds fulfil their pledges.

“Ernst & Young is very committed to green finance and sustainable development,” Li says, adding that she sees “green finance and sustainable development to be a huge opportunity for our growth as a firm in China.”

Strong research

Growth will only come when regulation and policies are backed up by strong research, says Yin Hong, the Beijing-based deputy head of Industrial and Commercial Bank of China’s Urban Finance Research Institute. Although she is a banker by profession, she leads a team of post-doctoral dissertation students in both academic and applied research on green finance.

Yin and her team at ICBC produce two journals on the topic; one is a scholarly publication full of mathematical modelling on the impact of green finance on China’s economy, while the other analyzes how green finance can be applied in the real world.

“Most banks only look at customer needs, which may include green finance, but we at ICBC look far deeper at green finance, and that includes taking a serious scholarly approach to understanding how green finance impacts society,” says Yin, who is also the deputy secretary-general of the central bank-linked Green Finance Committee, which oversees policies for the sector.

“We look across the spectrum, including energy needs, emission and technology standards, and we conduct research that in the end helps not only our customer relations managers, but all of China’s green finance sector as a whole,” Yin says. 

What we found is a transparent and scientific approach for all commercial banks to follow for financing green projects - Yin Hong, Industrial and Commercial Bank of China

Her research has produced some very practical and tangible results, including helping ICBC set standards for determining what type of applicants qualify for green finance. 

“As a result of our research, ICBC has made green standards a part of the entire process of loan applications and is now an integral part of our entire group strategy,” she says.

Her team also has used social science research methodology to set up mathematical modelling of risk and credit. Such research has helped the bank to dramatically reduce risk associated with green finance loans.

“What we found is a transparent and scientific approach for all commercial banks to follow for financing green projects,” Yin says, adding that ICBC’s top management has remained highly supportive of her research institute in spite of the fact that she and her dozens of research staff have not made any financial gains for the group.

“Our institute is not profitable,” she says. “Our bank leaders have a sense of social responsibility, and that is why they support us. Our bank leaders want us to very much be a green finance brain trust for the entire group.”

Leader of the pack

Issuing green bonds can be profitable, though. Just ask the executives of Citic Securities, which is the market leader in underwriting corporate issues of green bonds.

Among Chinese brokerage houses, Citic is not only the largest in the field, but also stands out as the leader of the green finance pack. 

The brokerage firm has a commanding share of the green bond market among brokers and has underwritten a vast number of green finance projects that are directly issued by companies themselves. 

From April 2017 to March 2018, Citic underwrote Rmb56 billion -worth of various green financial instruments, accounting for 27% of total market value. 

Citic counts among its clients the leading hydropower company China Three Gorges; last year Citic helped it issue Rmb7.5 billion-worth of bonds to fund three hydropower plants.

Unlike banks, which issue bonds through the interbank market and then lend the proceeds to enterprises, Citic helps corporate clients to issue their own green bonds direct.

Though more complex to issue, Chinese regulators are making it more worthwhile for companies to issue green bonds, notes Nie Lei, an executive director in charge of green finance at the firm. Chief among the new regulatory reforms is allowing investors to use their green bond assets as collateral. 

“The new reforms make green bonds more attractive as investments,” he says.

Citic is participating in a number of highly innovative green financial initiatives. So far, it is the only securities company to participate in the study of non-fixed-term capital supplementary bonds.

SEB’s Flensborg says that he is impressed by China’s regulators and by their efforts to push the expansion of the green finance market.

“I have been working with officials in China in the past three years; we are in close dialogue and have been for a long time,” says Flensborg. “We are impressed by the ownership and drive of Chinese regulators. We are impressed by their drive for innovation and experimentation.” 

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