Energy Transition In China With Sustainable Debt Support

Sustainable debt has gone on to gain popularity as a means to fund green and sustainability-focused efforts since its beginning in the mid-2010s. This has gone on to result in a rise in clean energy projects. The global sustainable debt issuance has increased quite significantly, growing almost 10 times since 2016 and reaching a high of more than US$1.7 trillion in 2021. Governments have gone on to utilise these instruments so as to generate capital for green infrastructure, while financial institutions have employed them to support green or sustainable lending. Apart from this, governments have utilised these instruments to raise funds for their net-zero initiatives.

One of the aspects that is pushing the increase in bond issuance happens to be the willingness of numerous investors to accept less interest rates in case of bonds that are mentioned as either green or sustainable. This distinction is commonly known as the greenium.

There are numerous forms in which sustainable debt issuances can be undertaken. Green, sustainability, social as well as transition bonds are taken into account as the use of proceeds bonds. This means that the funds that are raised by way of these bonds are essentially designated for specific activities or projects. These are typically mentioned in a guidance document named as taxonomy. Additionally, they typically have strict reporting as well as verification criteria. Green bonds happen to be the most general type of issued sustainable debt, thereby making up almost 40% of the total.

In the time that have gone by, sustainability-linked bonds- SLBs have become more popular and flexible option when it comes to accessing the green debt market. SSLBs go on to possess a distinctive structure in which the interest paid to bond-holders can fluctuate based on the issuer’s prolific attainment of specific sustainability objectives. These goals may go on to have decreasing emissions intensity or even absolute emissions. Unlike proceeds bonds, that happen to be tied to specific tasks or projects, they are not restricted in such a manner. The flexibility when it comes to these bonds has made them popular among carbon-intensive industries as well as sovereign issuers. These industries require funding for a wide range of transition activities, and sovereign issuers often face restrictions on how funds can be made use of due to public finance management practices, which may even be legally mandated.

China has rapidly become one of the leading nations when it comes to adopting sustainable debt instruments, with an impressive growth. The Chinese market has gone on to experience significant growth, mostly because of green instruments. In fact, these instruments made up nearly 70% of sustainable debt issuance last year. In 2022, the majority of these issuances happened to be in the form of bonds, amounting to US$120 billion. Since 2021, China is the 2nd largest market for green bonds in the world, just behind the US. Besides, there is still significant potential when it comes to additional growth. Green bonds currently represent almost 1.5% of the total onshore bond market in China. In contrast, green loans accounted for almost US$3 trillion in 2022, making up about 10% of the total loan market in the country.

The drivers as well as beneficiaries of growth in China’s sustainable debt market differ from those in OECD nations, where sustainable finance is mostly driven by the private sector. In China, market has experienced expansion at quick rate, all thanks to the support of state-owned banks which have played a critical role in providing indirect financing to prominent firms that operate in the energy, power, and industrial landscape. It is worth noting that many of these firms also happen to be state-owned. In China, banks contribute to 45% of the overall sustainable debt activity, whereas in OECD economies, this figure stands less than half of it at 20%.

As per the analysis from early 2023, another significant difference happens to be the absence of greenium in China’s onshore market. This is likely due to an excess of available green opportunities. The rapid increase in issuance to meet China’s carbon neutrality targets has been pushed by policy banks and state-owned enterprises. However, this has not created increased interest among buyers, resulting in reduced pricing advantages.