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Chinese green bonds required to use 100% of funds for green purposes

To further unify China’s fragmented green bond market and align it with international standards, the inter-ministerial and multistakeholder Green Bond Standards Committee released the China Green Bond Principles on 29 July.

In accordance with international norms, such as the Green Bond Principles of the International Capital Market Association (ICMA) and the Climate Bonds Standard of the Climate Bonds Initiative (CBI), the new Principles define alignment based on four core elements: the use of funds, project assessment and selection, fund management, and information disclosure.

For the first time, the Principles require that 100% of funds raised by the four major types of green bond issued in China be used for green projects. In the past, the issuer could channel up to 50% of such funds for use in general operations. This has long been regarded as a “greenwashing” loophole discouraging international investors.

In a sign of further international alignment, the Principles allow the bonds issued by international issuers to follow the Common Ground Taxonomy, jointly developed by China and the EU, and the EU Taxonomy Climate Delegated Act. In contrast, bonds issued in China by domestic issuers should follow the Green Bond Endorsed Projects Catalogue (2021 Edition).

The Principles also recommend that issuers commission independent third-party bodies to carry out certification for bonds before they enter the market and disclose assessment reports prepared by such bodies during the bond’s life.

An analysis by the International Institute of Green Finance in Beijing says the role of third-party certifiers as “gatekeepers” of the green bond market will become increasingly important once the Principles are released, and the professionalisation of such certifiers will be key. The analysis also finds that while the Principles have put in place stricter rules for information disclosure, they haven’t laid out clear procedures for mitigating social and environmental risks, as done in the standards of ICMA and CBI.

Read China Dialogue’s earlier coverage of China’s developing green bond market