China Green Bond Principle expected to improve confidence, boost cross-border investments

THE recently-launched China Green Bond Principle (CGBP) is expected to improve stakeholders’ confidence in green bonds issued in the China onshore market and boost cross-border investments, according to a Monday (Sep 5) report by Morningstar.

China’s new principles require 100 per cent of its bond proceeds be used in projects identified in the green taxonomy, a move that is the first of its kind in the country. It previously allowed the issuer to channel up to half of such funds for use in general — a “greenwashing” loophole that many believe discouraged international investors.

Compared with International Capital Market Association’s Green Bond Principles, Morningstar thinks the CGBP is more stringent for issuers in the following aspects: the scope of green projects, clearly defined green projects, a required special account or a dedicated ledger for the fund management for issuers, and a detailed disclosure in reporting.

However, the former is a better reference for issuers for the disclosure of overarching objectives, strategies, policies and processes related to environmental sustainability, explanation of 4 core components in a readily accessible format, and external reviews available to the public, the research house added.

“As a comprehensive guidance for all types of green bonds issued in China, the CGBP reduces segregation in the market and provides a more unified standard to the issuers,” said Sophie Xu, commercialisation manager, Morningstar Sustainalytics.

At present, there are 5 sustainable bond funds offered to investors in China, including the Maxwealth Xinli Carbon Neutralization One-Year Regular Open Bond Initiating Fund, which has the largest fund size at approximately 2.6 billion yuan (S$526.8 million).

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Dean Wang, associate analyst, manager research at Morningstar China, said it would be hardly surprising if more of such sustainability-related products are launched in the future, given the government’s carbon emission and neutrality goal.

Wang thinks these products would best suit investors who seek returns growth over the medium to long term and who value the trend of transition towards a sustainable society.