Sustainable debt has become a popular tool to fund green and sustainability-linked activities since it first emerged in the mid-2010s, providing a tailwind to clean energy investment. Global sustainable debt issuances have risen nearly tenfold since 2016, peaking at over USD 1.7 trillion in 2021. These instruments have been leveraged by governments to raise capital for green infrastructure, by financial institutions to facilitate green or sustainable lending, and by corporates to raise funds for their net-zero efforts. One driver of issuance has been the willingness of many investors to accept lower interest rates if a bond is classified as green or sustainable, a distinction often referred to as the “greenium.”
Sustainable debt issuances can take several forms. Green, social, sustainability and transition bonds are all considered “use of proceeds” bonds, whereby the funds raised are allocated to pre-defined activities or projects, often outlined in a guidance document known as a taxonomy. They also generally come with strict reporting and verification requirements. Green bonds are most common, accounting for nearly 40 percent of total sustainable debt issuances.
More recently, sustainability-linked bonds (SLBs) have emerged as a more flexible means to access the green debt market. SLBs have a unique structure whereby the interest paid to bondholders can vary based on the issuer’s achievement of certain sustainability targets, such as reducing emissions intensity or absolute emissions. Unlike use of proceeds bonds, they are not tied to specific activities or projects. This flexibility means they have been favoured by carbon-intensive industries that need to finance transition activities more broadly, as well as by sovereign issuers, since public finance management practices, sometimes enshrined in law, may preclude the use of funds for a specific purpose.
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The People’s Republic of China (hereafter China) has emerged as one of the fastest growing adopters of sustainable debt instruments. Most of the growth to date in the Chinese market has been driven by green instruments, which accounted for just under 70 percent of sustainable debt issuance in 2022. The vast majority of these issuances are bonds, which reached RMB 875 billion (USD 120 billion) last year. This makes China the world’s second largest market for green bonds behind the United States, a position it has held since 2021. And there is still substantial room for further growth. Labelled green bonds, for example, only account for only around 1.5 percent of the country’s total onshore bond market.1 By contrast, green loans, which reached around RMB 22 trillion (USD 3 trillion) in 2022, already constitute around 10 percent of the country’s total loan market.
The drivers of growth in China’s sustainable debt market, as well as the beneficiaries, look different than in OECD economies, where sustainable finance tends to be the domain of the private sector. In China, meanwhile, state-owned banks have facilitated much of the rapid expansion in the market, providing indirect financing for prominent firms across the energy, power and industrial sectors, many of which are state-owned. Banks in China account for 45 percent of activity across all sustainable debt categories, compared with only 20 percent in OECD economies.
Another notable difference is that in China’s onshore market, the “greenium” is largely absent, according to analysis from early 2023. This is likely the result of an oversupply of green opportunities. While policy banks and state-owned enterprises have driven the rapid rise in issuance to meet China’s carbon neutrality targets, this has not been met with rising interest for buyers, reducing pricing benefits.
There are broader lessons to take from the swift growth in China’s sustainable debt market, even with its unique characteristics. The lack of a “greenium,” for example, means robust government policy has played a major role in the market’s development – an important takeaway for other markets in which this trend emerges.
The Chinese government supported the launch of the domestic green bond market when the People’s Bank of China (PBOC) and six other government agencies issued the Guidelines for Establishing the Green Financial System in 2016. Since then, the development of the market for green, sustainable and transition finance instruments has been driven by strong policy support.
However, there are still challenges to overcome in the regulatory environment. Four regulators oversee the sustainable debt market in China: the PBOC, the China Securities Regulatory Commission (CSRC), the National Association of Financial Market Institutional Investors (NAFMII) and the National Development and Reform Commission (NDRC). An inter-governmental authority published the Green Bond Principles in July 2022 with the aim of harmonising these regulations, but the NDRC – which is responsible for bonds by state-owned enterprises – has not yet adopted them. Under the Principles, a bond can only be labelled as “green” if 100 percent of the capital raised is allocated for green activities, whereas the NDRC has a threshold of only 50 percent. Bonds by state-owned enterprises accounted for about half of onshore green issuances between 2019 and 2022, indicating the scale of this potential regulatory gap.
Source: IEA
