Chinese companies are issuing green bonds at a record pace, although some analysts say the securities do not always meet environmental requirements common in other parts of the world.

China, the world’s largest producer of carbon dioxide, has pledged to reduce its emissions. To finance the transition, his companies have adopted green bonds, which are typically designed to fund climate-friendly initiatives like switching to alternative energy from fossil fuels.

The guidelines for green investments are binding in many places, and in the Chinese domestic bond market, they are more so. The Chinese market is regulated by several agencies, which have different rules on the use of cash and disclosure. In some cases, up to half of the proceeds from onshore green bonds can be used to fund a company’s daily cash needs instead of climate-related projects. The equivalent international maximum is 5%.

“This could increase the risk of greenwashing, where the true environmental benefit of the transaction is overestimated,” said Lori Shapiro, sustainable finance analyst at S&P Global Ratings.

Yet the Chinese government has tightened standards for the use of green bond proceeds in other ways, such as vetoing coal-related deals. And investors are lining up to provide capital to help Chinese companies reduce their carbon emissions, as they are doing in the United States and Europe.

Chinese companies issued $ 20.7 billion in green bonds from the year to Tuesday, including onshore and offshore debt, which is a record compared to the same periods in previous years, according to Dealogic. Global green bond issuance so far this year stands at around $ 160 billion, also a record.

Bankers and investors believe that China’s pursuit of ambitious goals should lead to continued market growth. Under President Xi Jinping’s leadership, it has pledged to reach its peak emissions by 2030 and achieve carbon neutrality by 2060.

The United States, also a major emitter of greenhouse gases, is working with China to tackle climate change despite diplomatic tensions. John Kerry, the Biden administration’s special envoy on climate change, said in April that he and his Chinese counterparts had discussed the possibility of China strengthening President Xi’s commitment to achieve carbon neutrality.

“Green finance has become a priority in most sectors of the economy,” said Atul Jhavar, head of sustainable capital markets for the Asia-Pacific region at Barclays..

“There is significant regulatory pressure … for everyone in China to work towards these goals.

Government funding is “far from sufficient” to support China’s net zero target, People’s Bank of China Governor Yi Gang said in April. Mr. Yi said it could cost 2.2 trillion yuan per year by 2030 and 3.9 trillion yuan by 2060, or $ 342 billion and $ 606 billion, and described a series of steps the central bank was taking to facilitate the process.

Yet parts of the Chinese green bond market do not meet the definition of “green” given by many global investors.

While there are tensions between the United States and China over trade and technology, climate change is one area the couple could work on together. Gerald F. Seib of the WSJ explains why this could also lead to competition for global leadership. Photo illustration: Ksenia Shaikhutdinova

Alan Meng, head of data analysis and services at the Climate Bonds Initiative, said that CBI’s preliminary analysis suggested that 33 out of 127 green bonds issued in China so far this year did not meet its criteria. CBI has helped set global standards for the industry, and its scouting data is used by several green bond index compilers, meaning excluded debt is off limits to investors who track those benchmarks.

Most bonds were excluded for the use of the proceeds of the transaction for daily cash flow needs, but other transactions also raised different red flags.

Mr Meng said CBI plans to exclude green bonds sold last month by Zijin Mining Group and China Petrochemical Corp., the state oil major also known as Sinopec Group, whose proceeds will be used to build solar panels. Mr Meng said transactions would likely be excluded based on data disclosed in bond prospectuses.

“These panels will most likely support their own businesses, which are mining and oil extraction,” he said. For example, he cited documents from Sinopec that laid out plans for solar panels to be installed in the company’s oil fields.

Sinopec said the bonds will fund more than 70 projects in areas such as solar, wind and geothermal energy, and that this could lead to substantial reductions in carbon dioxide, sulfur dioxide and carbon dioxide emissions. nitrogen, as well as the use of coal. Zijin did not immediately respond to a request for comment.

The Chinese central bank has stepped in to tighten standards in the market. In April, the People’s Bank of China said green bonds could no longer be used to finance so-called clean coal projects, bringing the Chinese system closer to its international counterparts. Mr. Yi, the governor, also said the central bank would introduce more consistent disclosure rules.

“There is no other alternative for the Chinese government than to open up the economy and align itself more with international standards”, to attract foreign bond investors, said Christophe Crétot, head of the origination and advice for the Asia-Pacific region of Crédit Agricole CIB. .

Offshore, Chinese green bonds are more similar to their foreign counterparts. The market has been dominated by bonds issued by banks rather than industries that emit significant amounts of carbon. Some investors would like to see more deals from non-financial companies, which may have to make bigger changes to their business models than banks to get green funds.

Investors have adopted a handful of recent deals from real estate developers and are hoping for green bonds from companies in areas such as construction, transportation and infrastructure, said Dhiraj Bajaj, fund manager at Lombard Odier.

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Besides green bonds, Chinese borrowers are also likely to adopt other financial instruments to help them meet the challenge. Alternatives include sustainability bonds, which require issuers to meet their environmental goals or face financial penalties, and bridging bonds, which help issuers in dirtier industries clean up their actions. So far, the issuers of these bonds include units of Bank of China Ltd.

and China Construction Bank Corp.

Future candidates for bridging bonds could include heavy industrial companies, said Paul Lukaszewski, Asia-Pacific corporate debt manager at Aberdeen Standard Investments. Financing companies such as steel producers “would have a massive positive impact on reducing emissions,” he said.

Write to Frances Yoon at [email protected]

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