Caixin
Mar 19, 2021 09:08 PM
FINANCE

Interbank Regulator Says Proceeds From Carbon-Neutrality Bonds Must Be Spent on Green Projects

Issuers should use all of the proceeds raised from carbon-neutrality bonds to fund the construction, operation and acquisition of projects that can help reduce carbon emissions, a financial industry group says. Photo: VCG
Issuers should use all of the proceeds raised from carbon-neutrality bonds to fund the construction, operation and acquisition of projects that can help reduce carbon emissions, a financial industry group says. Photo: VCG

China’s interbank market regulator has told bond issuers that in principle they shouldn’t spend the proceeds of carbon-neutrality bonds on anything other than green projects.

The move shows how regulators are wielding their power to boost support for greener growth, as the country gears up to meet its bold pledges to peak carbon emission and achieve carbon neutrality.

Bond issuers should use all of the proceeds raised from carbon-neutrality bonds to fund the construction, operation and acquisition of projects that can help reduce carbon emissions, the National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory organization for the interbank market backed by China’s central bank, said in a notice (link in Chinese) released on Thursday.

According to the notice, eligible projects include wind power, hydropower, electric buses, and the renovation of buildings and industrial production lines to make them more energy efficient. Issuers are also allowed to use the bond proceeds to repay debt related to such projects, the notice said.

However, the notice added that the issuers can invest the “temporarily idle” portion of the bond proceeds in secure and highly liquid investments, such as government and policy bank bonds, if doing so does not impact their overall plans.

Carbon-neutrality bonds are a relatively new type of green bonds. On Feb. 9, Chinese companies issued a batch of carbon-neutrality bonds on the interbank bond market for the first time, with a total worth of 6.4 billion yuan ($992 million).

However, rules for such issuances are different on the country’s exchange bond market. China’s bond market is fragmented, which is overseen by two different regulators. The interbank bond market is regulated by the central bank, while the exchange bond market is supervised by the China Securities Regulatory Commission (CSRC).

Some issuers on the exchange bond market have planned to use some of the proceeds from their carbon-neutrality bonds to supplement their liquidity.

On Feb. 24, four state-owned enterprises issued carbon-neutrality bonds on the Shanghai exchange. Three of them — China Energy Investment Corp. Ltd., China Huaneng Group Co. Ltd., and China National Nuclear Corp. — said they will use no more than 30% of the proceeds to supplement liquidity. The CSRC hasn’t released any regulation that requires carbon-neutrality bond issuers to use all the proceeds for green-project related purposes.

The NAFMII’s Thursday notice also suggests that bond issuers recruit third-party professional institutions to measure the environmental benefits of their carbon-neutrality bonds, such as by quantifying the reduction in carbon dioxide emissions, and disclose the benefits in the bond prospectus.

 Read more  
Cover Story: The Green Finance Challenge Facing China’s Banks

China’s top leadership has set ambitious goals to address climate change. In September, President Xi Jinping pledged that the world’s biggest emitter of carbon dioxide — the chief greenhouse gas contributing to global warming — aims to top out such emissions before 2030 and achieve carbon neutrality by 2060. The target will require the transformation of the world’s second-largest economy.

To reach the 2060 goal, China will need to invest $16 trillion in new-energy and pollution-control projects over the next 20 years with backing from both the state and private sectors, according to Goldman Sachs.

Han Wei and Denise Jia contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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