Date: 5/19/2016 Source: Caixin Energy
From the official launching of the green bond at the interbank bond market by the PBOC earlier this year to the incorporation of “green finance” into the Shanghai G20 summit communique, green finance is very much in vogue in the areas of finance, energy and environment.
Green bonds refer to those funds made available to ensure the provision of projects or refinancing packages with verified qualification in the improvement of the environment or the climate. In other words, a green bond has every function and attribute of a common bond, but with an emphasis on the utility for the environment. Therefore, with proper qualification in capital assets, any bond is entitled to a green bond.
Green bonds derive from ongoing attention of investors worldwide on climate change and environmental problems; it is an expansion of green finance, which has been a surge of interest in recent decade, into the international bond market.
The first quarter of 2016 has seen the issuance of green bonds to the value of ￥53 billion, equivalent to 50% of the global amount -- all happened in a matter of 3 months since the creation of the green bond market in China. And Industrial Bank leads the tide. As the first Equator bank in China, IB is among the first banks to obtain the authorization for the issuance of green bonds. With the launch of a￥10 billion green bond issue in the first quarter of the year at home, IB intends an issuance of ￥50 billion of green bonds this year.
What is the attraction of green bonds? How to properly conduct third-party appraisal? How to harness green finance for the benefit of corporate finance, industrial upgradation and green economy? With those questions, Caixin Energy held an exclusive interview with Fang Zhiyong, the head of the IB environmental finance department.
IB is allowed to launch an initial issuance of ￥50 billion green bonds this year
Caixin Energy: It is understood that Industrial Bank has obtained the authorization for an issuance of ￥50 billion green bonds at the outset, and indeed, how much out of this￥50 billion has been issued so far? And what is the investment planning of those bonds?
Fang: On January 20, 2016, IB has obtained the authorization for an issuance of ￥50 billion green bonds at the outset. On January 28, IB has issued its first note of green bonds to the value of ￥10 billion -- and the first in China at that, with a subscription rate of over 2 times, a very convincing victory in the market. Green bonds are issued with maturities of 3 years at an annual interest rate of 2.95% in IB. A great bulk of the funds raised will be allocated for low-carbon industries, recycling industries and eco-friendly industries. Special funds will be alloted to certified projects for energy saving industries, pollution control, green transport, clean energy and cyclic utilization of resources.
Why are fossil fuels incorporated into green bond projects?
Caixin Energy: The PBOC has initiated the programme of green bonds. Meanwhile, the Green Finance Committee of China Society of Finance and Banking has published the Green Bond Endorsed Project Catalogue (hereinafter referred to as the Catalogue and the Committee). And what role did IB play along the way? Take Climate Bonds Initiative. At present, most international institutions corresponding to the Committee reject projects related to fossil fuels as ineligible for green finance scheme. But those projects are found in the 6 categories of the Catalogue. What is the contributory factor?
Fang: Since the introduction of green finance to China in 2006, IB has been committing to green finance for 10 years. In those years, IB has devoted a great deal of effort to nourish and develop green finance, along with handsome provision of resources. All these have contributed to the development of the green financial system at home. IB has always called for the establishment of regulations on green finance for the development of energy-efficient and eco-friendly industries. Therefore, IB highly prized the opportunity to play a part in research programmes of green credit and green debt and the formulation of standards.
In the international context, the Climate Bonds Initiative puts particular emphasis on projects for emission control and the mitigation and adaption of climate change. But green finance in China is dealt with on a case by case basis. Careful consideration should be given to the economic conditions. In addition, we need to consider how to support and develop projects for industry energy conservation, pollution control and industrial restructuring. China is a developing country, and fossil fuels such as coal still make up a huge proportion of our energy mix. These are all inescapable facts and we know the optimization of the energy mix will be a gradual process.
Therefore, the Catalogue has incorporated projects on the clean utilization of coal. The aim is to promote a reduction in ecological damage along the way. This will also promote the optimization of our energy mix and the upgradation of the traditional energy industry.
How to properly conduct the third party appraisal for green bonds?
Caixin Energy: Why does Industrial Bank choose the Research Center for Climate and Energy Finance, Central University of Finance and Economics as its independent third party appraisal agency? What is the importance of the third party appraisal agency in the issuance of green bonds?
Fang: As for the selection of a third party appraisal agency, we prefer established and recognized institutions at home that are more familiar with the national conditions of China. To promote the transparency in the issuance of green financial bonds, we have, prior to the issuance of the bonds, engaged CUFE’s RCCEF as our independent third party appraisal agency. As the only observer recognized by ICMA Green Bond Principles in China, the Research Center has played a part in the formulation of China Green Bond Endorsed Project Catalogue. It is worth noting that RCCEF has a better knowledge of China’s policies on green bonds. After an evaluation on IB’s issuance preparations and capabilities for project management and financial management, the Research Center holds that “as one of the first Chinese banking institutions to play a part in the formulation of measures for the administration of green bond funds, IB has formed a professional team rich in financial acumen. Also, the Bank is well-versed in industrywide standards and risk management. Therefore, the Bank is held to be competent to issue green financial bonds, administer the funds, and monitor the environmental benefits.”
The main difference between green financial bonds and other bonds lies in the use of the funds. As an independent entity, a third party rating agency can improve the transparency in the issuance of bonds, and therefore reduce investment risks to attract more investors.
However, IB does not rule out the possibility of conducting cooperation with international professional institutions in the future.
How does IB select and manage its green projects?
Caixin Energy: As regards the selection and management of green projects, how does IB control the process of risk management and day-to-day operation?
Fang: In 2005, we set up the green financing division. The year of 2009 saw the establishment of Sustainable Finance Center, which has grown into today’s Environmental Finance Department. IB is now an established banking institution with systematic risk management and effective operation. In 2012, IB has issued the Notice on the Recognition Procedures of Green Finance Business and the Qualifying Standards for Green Finance Business of Industrial Bank. And certainly we will elevate these standards in accordance with the Administration’s policy and the market trend. For example, all the funds raised through the issue of￥10 billion green financial bonds will be allocated for projects covered by the Catalogue. Under particular provisions, all proposed projects designed for better utilization of standard coal and reduction in carbon dioxide emission must cut down industrial emission by at least 10% while those designed for reduction in other major pollutants are required to meet an agreed quota well above national standards.
At present, green finance projects go through the recognition procedures in pecking order in IB: from a business provision of a local branch, to an environment finance center of the branch, and finally to the environment finance department of the Headquarter. For example, product managers and the environment finance center of the local branch are responsible for the preliminary verification of proposed projects. Then, financing projects will be submitted to higher level for approval according to the preliminary results and the authorization level. In some cases, the environment finance department of the Headquarter or corresponding departments exercise the right of approval. The lending bank will release the funds according to the verification result, but a double check on the terms of loan will be conducted beforehand. Departments responsible for risk control at all levels shall conduct duration management on a regular basis and make nonregular reviews.
Can green credit solve the financing problems of small and medium-sized enterprises?
Caixin Energy: Previously, did IB mainly cooperate with the public sector entities and SOEs in green bonds? Can green credit play a role in easing financing problems of small and medium-sized enterprises?
Fang: Currently, China’s economy has entered into the New Normal, and with the differentiation growing between industrial structures, traditional industries with high pollution and high energy consumption are struggling on, while emerging strategic industries, such as those related to environmental protection, energy conservation, alternative energy and new material industries will have a better future. Green economy and sustainable development represent the trend of times, and no one can stand aloof. Organizations in needs of better adaptation to energy conservation and emission reduction and enterprises specializing in technological service must play their part. This includes public institutions, large SOEs, and small and medium-sized enterprises. In the segmentation market of energy conservation & environment protection particularly, there are professional providers of energy saving and environmental service who serve the owner through a whole package of contract energy management and contract environmental services. But those enterprises are small entities with limited assets. They have no effective tangible collateral. Consequently, regular risk management of banking institutions is not applicable in this case.
For those small enterprises with limited assets, our bank has developed special financial products which take the future revenue as collectibles (based on the contract energy management and environment service). Meanwhile, in cooperation with some international financial companies, our bank has rolled out three energy efficiency financial projects, and energy conservation & emission reduction financial products which cater to small- and medium-sized enterprises in less developed regions. We also have released other products such as pollution discharge rights granting credits and loans, carbon asset pledge loans. Those green financial products and services will help to ease the financing problem of small- and medium-sized energy conservation & environmental protection enterprises and promote their developments.
The development of green bonds necessitates preferential policies
Caixin Energy: Related personnel at PBOC emphasized in an interview the effect of policy guidance and incentives in the issue of green financial bonds. What is your point of view? Are there any preferential policies for green bonds, such as tax cut or administrative process streamlining?
Fang: The launch of green financial bonds this time has created a favorable policy and market environment for the development of green finance and has set a milestone through its development. Particularly, during the acceleration period of ecological civilization construction, green economy, and energy conservation and environmental protection industry, green financial bonds are of great significance in the development of our green industry and the economic structure transformation.
First of all, the issuance of green financial bonds meets the requirement of our industrial structure adjustment. Since the 12th Five-Year Plan, the theme of economic development has focused on promoting the economic structure transformation, improving the ecological environment and achieving sustainable development. The energy saving and environmental protection industry, which coincides with the two trends above-mentioned, is becoming a new growth point for china’s economic transformation and upgradation. The development of such industry requires a huge fund. The green financial bonds can not only become the major fund sources for financial institutions to promote green credit, so as to alleviate the shortage of credit funds, but also serve as an effective method to implement precision industrial upgrading in recent changes of China’s industrial structure.
Secondly, the green financial bonds are able to match the financing demand of the energy saving and environmental protection industry. The feature of such industry decides that its financing demand possesses the characteristics of huge amount, long period and higher management cost. A large number of energy conservation and environment protection projects ask for middle and long-term fund supports. International experience suggests that financial bonds issuance can become stable, long-term sources of funds, in match with the middle and long-term financing projects of green credit, and is capable of solving the mismatch between the maturity structure of liabilities and assets. Meanwhile, as an active debt instrument, it can lower the absolute proportion of deposits in commercial banks to prevent and defuse financial risks, thus improving the financial institutions’ ability and initiatives to promote middle and long-term green credit.
Thirdly, green financial bonds can contribute to advancing the standards of green finance service and the specialty ability of financial institutions. No.39 Notice issued by PBOC brings high standard on fund-raising management and use, which will help financial institutions to better understand the green industry, standardize business process of green finance and strengthen its capacity. In 2009, our bank established an institution specializing in green finance. Up till now, we have owned the largest green finance professional team in China with nearly 200 members of staff and achieved professional operation and management in green finance business. With long-term business basis, system and expertise, our bank has proved its professional abilities to recognize, control risk and manage raised funds for green industry projects.
In the course of green financial bonds issuance, it suggests that the regulator gives special attention to the approval process and efficiency, and shows that the regulator also adopts active and supportive attitudes. It is our responsibility and demand for business development to issue green financial bonds. As the first Equator bank in China, it is our duty and responsibility to be the industry’s leading figure in practicing social responsibility, promoting the uptake of green business models and maintaining sustainable development of the enterprise. From the perspective of business development, our financing balance in the field of green finance has taken up a high proportion of public financing balance, which reached 14.23%. In order to achieve sustainable development of green finance business, it’s necessary to actively expand sources of funds.
The issuance of green financial bonds involves three important parties: one is the issuer who raises funds, one is the investor who purchases bonds in the market, and the third is the target client who is the energy conservation and environmental protection enterprise with financial demand. The three parties have different demands on their own, but in hope of corresponding policies. For the financial institution, namely, the issuer, it hopes that preference is given to taxation, price of funds, required reserves and so on, of investment projects. The bond investor expects that support is provided for investment in the bonds and fiscal taxation of green finance. The energy-saving and environmental protection enterprise desires low-cost financing.
Besides green financial bonds, The National Development and Reform Commission of the People’s Republic of China (NDRC) and the Shanghai Stock Exchange (SSE) successively released bond issuance guidelines for enterprise green bonds and corporate green bonds. Furthermore, the guidance of green note(GN) issued by non-financial enterprise, a financial instrument registered in the National Association of Financial Market Institutional Investors (NAFMII), has been worked out for soliciting comments for a public release sometime later. We believe the development of the green bond market will bring the improvement of supporting policy systems.