The world’s most popular green bond market lacks ‘Greeniums’, for now

(Bloomberg) — Compared to the rest of the world, China’s green bonds are for sale.

Demand has not kept pace with a torrent of issuance, leaving borrowers unable to control the price premium, or “greenium,” that companies in other parts of the world enjoy as a reward for green initiatives. environment.

But investors may not have the upper hand for long, said Martin Dropkin, director of Asian fixed income at Fidelity International. “We believe the days without greenium are numbered,” he wrote in a research note. “China’s green debt space pays to be early.”

China is rapidly developing one of the world’s largest green bond markets, although its definitions of “green” do not necessarily match those of other countries. Chinese companies have issued the equivalent of $21 billion in green bonds on land so far this year, more than any other nation, according to data compiled by Bloomberg. Last year, $59 billion of green bonds were issued on land, a nearly six-fold increase from 2020.

Without enough buyers to absorb the supply, the state-owned entities that dominate the market, such as Industrial & Commercial Bank of China Ltd., do not benefit from any green discount, according to research by Fidelity International. It found that borrowers elsewhere typically save 5 to 15 basis points when selling green bonds relative to simple notes.

Greeniums have been “virtually nonexistent” in China, according to the money manager, which analyzed thousands of domestic bond issues over four years. Part of the reason is that private funds in China are more focused on returns and credit quality than making green investments, the firm found. As such, they are unwilling to accept the lower yield typically seen on such debt.

Green bonds have also been hit by the drop in global debt, as central banks raise interest rates to curb inflation. The Bloomberg MSCI Global Green Bond Index has plunged 9.3% this year, more than the 7.1% drop in a global benchmark for corporate and government debt.

ESG factors

Disclosures and ratings are less strong in China’s green bond market compared to equities, with environmental, social and governance investment strategies still in early stages, said Zhang Chi, head of credit research at China Asset Management Co. .

“If we want to practice ESG investing in the mainland market, green bonds are a target we cannot avoid,” said Zhang.

Many green bond standards focus only on climate change, but China’s rules are broader. They cover pollution, conservation and biodiversity, making it difficult for investors to distinguish green from regular debt.

“Green bonds don’t necessarily have green attributes, but those with green attributes are not necessarily green bonds,” said Lv Xiulei, director of credit research at Bosera Asset Management Co.

Investors may also be wary of rules for the use of proceeds from debt sales. Companies that issue green bonds in China can spend up to half of the money on loans or working capital. The international standard set by the Climate Bonds Initiative is that all proceeds go to green projects. About half of Chinese green values ​​meet global standards for what is considered green, Xie Wenhong, head of the initiative’s China program, estimated last year.

“This leaves loopholes for potential misuse of funds in the Chinese market,” analysts at Fidelity International said.

For example, proceeds from a 500 million yuan ($79 million) bill issued last year by Sichuan Province Airport Group Co. were used for a terminal and runway at a new airport. CrossBorder Environment Concern Association, a nonprofit organization based in Guangzhou, has argued that using money for airports is questionable for a carbon-neutral bond.

China is taking steps to harmonize its rules with foreign markets, which could reassure investors. Unifying the rules among the three national regulators that govern the market would also help, said Xuan Sheng Ou Yang, an analyst at BNP Paribas Asset Management.

“That’s just a natural part of the journey that any country, any regulator or any type of market will take as it matures,” said Fidelity’s Dropkin. “In fact, I am quite optimistic about the direction of green bonds and sustainability within China.”

©2022 Bloomberg LP

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