China Tackles the Dirty Work of Finance #NewsChina

(Bloomberg Opinion) — Beijing is scrubbing up. Late last week, the central bank excluded so-called clean coal from a draft list of projects eligible for green bonds. It’s a significant move that puts the world’s number-two issuer on the path toward consistency with international norms, making it easier to attract the foreign capital required to finance hundreds of billions of dollars of environmental fixes. The next logical step will be to tackle what companies are allowed to do with the cash they raise. So-called transition bonds that aim to help sellers switch to a cleaner way of doing business could help soften the blow.

The world’s top emitter of carbon dioxide has been something of a trailblazer in environmental finance. From its first green bond in 2015, it jumped to well over $50 billion issued in 2019, up by a third from the previous year, according to a soon-to-be-released report from Climate Bonds Initiative, a U.K.-headquartered non-profit. Yet only a portion of that sum met international standards. In 2018, CBI excluded about a quarter of the total for failing to align with those rules. The compliant percentage has shrunk, to closer to $30 billion last year, according to both CBI and BloombergNEF — in part because of an increase in non-financial issuers.

If confirmed after public consultation, the list published last Friday tackles the most glaring discrepancy with global standards: a permissive stance on fossil fuels. Until now, more efficient coal-fired power projects might qualify, say, or an oil refiner improving its energy efficiency. The importance of the move goes beyond that, though, given Beijing’s top-down approach to going green.

China has chosen to signal that it can align fragmented regulatory standards and, after months of discussions, has brought the whole structure closer to international rules. It has made the reduction of greenhouse gases a priority, above simply tackling air pollution. This is especially true if the rules make it harder for China to fund coal projects overseas.

Importantly, officials have done all of this as climate finance moves forward, with the European Union standardizing its own definition of green, and when China’s own bond market is already opening up. That increases the potential reward.

It matters that the harmonization can go both ways, given Beijing’s record of innovation. The People’s Bank of China was one of the first central banks to allow green bonds as collateral, and has been a pioneer when it comes to reporting requirements. The country has also experimented with the use of pilot zones for green debt tools.