29 May 2020

Chinese regulators to exclude 'clean' fossil fuels from green bond standard

Chinese regulators propose to exclude controversial 'clean' fossil fuel projects from their list of eligible green bonds, which has been described as a "fantastic development" for greater international investment in the green bond market in the country.

The National Development and Reform Commission (NDRC) of the People's Bank of China (PBoC) and the China Securities Regulatory Commission (CSRC) published a draft of their 2020 version of the Green Bond-supported Project Catalogue for comments.

The draft catalogue will be the first revision since the last list was published in 2015.

The regulators propose to remove the "clean utilisation of fossil fuels" from the list in order to maintain "alignment with international relevant standards, and enhance China's international voice in the field of green bond standards."

The 2015 catalogue had allowed for green bonds raised to fund the "clean utilisation of coal," including the development of projects to wash coal and adopt technologies to treat pollution from coal power plants.

An acceptance of 'clean coal' in its earlier catalogue left China as an outlier in the global standards for green bonds.

The move marks an important about-turn for China, which had previously claimed that clean coal was justified because it needed fossil fuels such as coal to help develop its economy and bring people out of poverty.

Clean coal was the major point of difference between China's standards and the emerging EU green bond standard, for example.

Today's move effectively brings China's standards largely into line with the views of Western investors and increases the likelihood of achieving a global green bond standard.

The chief executive of the Climate Bonds Initiative, Sean Kidney, told Environmental Finance the proposal was a "fantastic development" that will make it "easier for international investors to participate in the growing Chinese green bond market".

"The consolidation of domestic green bond taxonomies has been an important reform goal for regulators for some time," Kidney added.

Under current rules, several different regulators in China are in charge of green bond issuers from specific sectors – resulting in several green bond-eligible catalogues in China. The PBoC is in charge of financial entities, the NDRC of government-controlled businesses, and the CSRC of publicly listed firms. 

The 2020 draft proposals will result in the consolidation of these multiple catalogues, with the NDRC also following this taxonomy for the green enterprise bonds issued by state-owned firms. 

"The changes in the Green Projects Catalogues will reduce confusion in the market, boosting growth prospects and help the commitment towards harmonisation of taxonomy between China and Europe, with implications for global markets. This reform can be linked to China's green stimulus plans, notably in their recently announced new infrastructure initiative, and complements the European Union's ambitious green recovery plans."

In late 2018, it was understood that the PBoC were intending to axe 'clean coal' from the central bank's next update.

The announcement comes amidst a growing global shift away from the thermal coal sector by financial firms.

For example, Intesa Sanpaolo and Natixis announced they had tightened their policy on coal sector financing earlier in May. This followed BNP Paribas accelerating its exit from coal and HSBC closing controversial loopholes for coal investment earlier in the month.