China to stop green bond financing for ‘clean coal’ projects

China is set to halt financing for so-called clean coal projects through green bonds, in a landmark move that could help convince foreign investors to play a greater role in its huge sustainable debt market.

A draft list of projects considered eligible for green bond financing, released by the People’s Bank of China on Friday, excluded those intended for the “clean utilisation of fossil fuels”. The decision was made to “align with international standards”, the central bank said in a statement alongside other government bodies.

The move follows calls from global investors for Beijing to more closely follow international guidelines on green financing. Bonds tied to environmentally friendly assets have become a popular way for investors to back projects line with global climate goals.

Environmental groups argue that clean coal and other efforts to improve efficiency of fossil fuel use should not receive green financing, saying investment in these initiatives could slow the transition to sources such as wind and solar power.

The move is a “hugely significant step that will be welcomed by international investors”, said Sean Kidney, chief executive of Climate Bonds Initiative, a UK-based markets watchdog.

Flows into Chinese bonds from international fund managers have been boosted over the past year following the inclusion of the country’s debt into global indices. But green bonds have remained relatively untouched by overseas investors.

That is despite China’s issuance of green bonds having grown rapidly in recent years. In 2019, $31.3bn was raised via issuance that met international standards, according to CBI, second only to $51.3bn in the US. But a further $24.2bn in green bonds issued in China last year did not meet global standards.

However, the pace of new green bonds has slowed markedly this year in China due to the coronavirus pandemic. As of late May just $3.8bn had been issued via 23 deals, according to information provider Dealogic.

The question of China adhering to international standards has been a sticking point for green bond investors.

“As China seeks to open its domestic bond markets to international investors, global green bond investors will be looking to see China’s domestic frameworks better align with international standards before making meaningful allocations,” said Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard Investments.

The exclusion of clean coal is subject to public consultation and comes alongside plans to better align standards across China’s regulatory bodies, which have historically maintained different standards on green financing.

“The unified standard could help increase market participation and further grow the Chinese green bond market,” said Nan Luo, head of China at the UN-backed Principles for Responsible Investment group.

Still, the efforts are likely to fall short in bringing China in line with international best practice.

For example, China’s state planner does not mandate that all money raised from green bond issuance must go towards sustainable assets and allows for 50 per cent of proceeds to be used for general working capital.

In addition, not all listed companies in China are required to disclose environmental, social and governance risks, although the authorities are gradually raising requirements.