Abstract: In this paper, the author stresses the importance of combining top-down policy implementation with bottom-up efforts as China strives to develop a high-quality green bond market. He introduces the work of the National Association of Financial Market Institutional Investors (NAFMII) in this regard from the aspects of nurturing more ESG investors, reinforcing information disclosure requirements, regulating the behaviors of intermediary institutions, and introducing innovative products. He believes that China and Japan have much to benefit from collaboration in the field of green finance.
I. NAFMII’s role in promoting the high-quality development of green finance
Following a unique development pathway, green finance started late in China but developed fast.
The Chinese central government first proposed to promote financing models such as green credit and pollutant emission rights in a 2015 document titled Opinions of the CPC Central Committee and the State Council on Accelerating the Construction of Ecological Civilization. In 2016, seven ministerial agencies promulgated the Guidelines for Establishing the Green Financial System, which catalyzed the rapid development of green bonds including financial bonds, corporate bonds, enterprise bonds and debt financing instruments. In September 2020, President Xi made an international commitment to achieve the 30/60 goal, elevating green, low-carbon development to a national strategy.
Nevertheless, top-level design by itself could not provide sufficient drive for the high-quality development of China’s green financial market, the process requires a combination of top-down and bottom-up efforts.
In this regard, National Association of Financial Market Institutional Investors (NAFMII) has been playing a positive role, advancing the high-standard development of China’s green financial market from the aspects of nurturing more ESG investors, reinforcing information disclosure requirements, regulating the behaviors of intermediary institutions, and introducing innovative products.
First, facilitating the alignment of domestic green finance with international standards. The Green Bond Endorsed Project Catalogue (2021 Edition) released recently by the People’s Bank of China, the China Securities & Regulatory Commission and the National Development & Reform Commission has removed the clean use of fossil fuels from the list of eligible projects that can be financed through green bond issuance, bringing China into close alignment with international standards.
Under the direction of relevant regulatory bodies, NAFMII has also been working with self-regulatory organizations and market players to set up a Green Bonds Standard Committee, which will take on the tasks of drafting green bond principles, harmonizing domestic standards, and bringing the Chinese interbank market, the biggest green bond market in China, into line with international standards.
Second, reinforcing information disclosure requirements, which is the prerequisite for the disciplinary mechanism of the green financial market.
At present, NAFMII is encouraging financial institutions, bond issuers, and the public sector to enhance the mandatory and standard disclosure of environmental information and take such disclosure down to program level. We are also guiding and enhancing the disclosure of environmental impact information of carbon reduction efforts, so that investors can have a clear recognition of their contribution to carbon cuts.
For example, the carbon neutrality bonds introduced by NAFMII must follow clearly defined information disclosure requirements for fund destination, program assessment, approval procedure and management, and support green investment in areas such as clean energy, clean transportation, sustainable building, and low-carbon industrial upgrading.
Third, providing training for ESG investors. To push forward the high-standard development of the green bond market, on one hand, we must make green finance more attractive to investors through product innovation, standard unification and information disclosure, on the other, sound incentive mechanisms must be designed to foster social responsibility awareness among investors.
Green bonds have a strong environmental effect and hold considerable attraction for institutional investors engaged in ESG and responsible investing, since they are willing to pay a premium and accept a relatively lower yield rate.
In recent years, many domestic investment institutions have disclosed their social responsibility information. However, some of them only showed a mediocre performance, if their data are any indication, while others have made claims that are misleading or over-exaggerated. Since last year, NAFMII has stepped up its efforts to motive market players by publishing a monthly ranking of green investors, dispersing best green bond practices, and hosting seminars and workshops to disseminate and discuss regional green policies.
In terms of policy guidance, NAFMII has also sought to bring about more green investments and green investors through differential regulatory policies, fiscal subsides and preferential treatments.
Fourth, regulating the behaviors of intermediary institutions. Assessment and rating institutions are critical to the high-quality development of the green bond market. Currently, the Chinese market is abundant with such institutions, including accounting firms, rating agencies, energy and environmental consulting institutions, and academic institutions, among others.
There have been various efforts on the part of NAFMII to regulate the behaviors of intermediary institutions, carry out the registration of green bond assessment and rating institutions, and unifying green bond rating standards through market-based evaluation and cross-examination of business quality.
Fifth, support high-standard development through product innovation. China has a high share of traditional energy, which means that the issuance of green bonds alone cannot achieve the goal of low-carbon transition. Therefore, we must look to international experience to introduce more innovative financial products that facilitates green transition, create a multi-layered product system, and put in place targeted mechanisms to promote the high-standard development of green finance and actively support the realization of China’s low-carbon development goals.
To meet China’s carbon neutrality pledge, NAFMII launched the first batch of carbon neutrality bonds on February 8. The six bonds are a type of green bonds that aim to raise funds for green projects that can help reduce carbon emissions, similar to the climate bonds certificated by the Climate Bonds Initiative (CBI) and the transition bonds defined by the International Capital Market Association (ICMA).
In addition to the carbon neutrality bonds mentioned afore, NAFMII has also debuted the Sustainability-Linked Bond (SLB) on April 28, which targets regions and sectors severely shocked by the 30/60 goal. Seven issuers rolled out the first batch of SLBs on May 10.
Bond issuers from the conventional energy sector must make a commitment to achieve a certain amount of carbon reduction. If the promised cuts are realized, they can repay the principal and interests back when the bond matures; and if not, adjustments will be made to the interest rates, maturity, and size of the bond issuance.
In other words, failure to fulfill previously agreed-upon conditions will trigger punitive adjustments of clauses in bond documents. This type of financial products link bond purchase clauses with issuers’ sustainable development goals and entrust third-party institutions to periodically evaluate the issuers’ performance towards said goals. They thus serve as an effective market mechanism for the low-carbon transition of bond issuers.
II. Great potential in China-Japan green finance collaboration
Despite elements of competition, China, the United States and Japan share a broad range of common interests in climate mitigation and green finance development. As members of a community with a shared future, China and Japan have much to benefit from collaboration in the field of green finance.
As a developed country, Japan has accumulated rich experience in green finance development and could play a larger part in the development of China’s green bond market. In recent years, NAFMII has been pushing forward reforms in market mechanisms such as market access and custody arrangements, to facilitate the investment of foreign institutions into China’s bond market. We hope to see more investment from Japanese financial institutions in China’s green bonds.
Meanwhile, China has made much progress in the development of its panda bond market, especially in the areas of institutional arrangements and investment convenience. We welcome Japanese firms in need of green finance to issue green panda bonds in the Chinese market to support the low-carbon transition in Japan.
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