China finds itself in a position to lead as the developing world begins to invest in renewable projects.
CFOs and underwriters are eyeing a potentially colossal opportunity in debt issuance to fund environmentally friendly projects under China’s One Belt One Road (OBOR) infrastructure building plan.
In 2016, China became the prime mover in the burgeoning green bond asset class by issuing around RMB230 billion (US$36 billion) of paper, or almost 40% of the global tally. But issuance under the OBOR label can also emanate from any of the 65 countries lying along the OBOR route, also called the Silk Road, stretching from Central Asia through Western Europe and down to Africa.
Collectively, the Silk Road touches around 65% of the world’s population and about one-third of global GDP. Industrial and Commercial Bank of China demonstrated the potential of OBOR-related green bonds last October when it launched the asset class with a US$2.2 billion float denominated in US dollars and euros."
The proceeds will fund and refinance projects relating to—among other green projects—renewable energy, low emission transportation and sustainable water and wastewater management.
There have been questions raised in the environmentally-conscious investment community about just how “green” the ICBC paper really is in terms of internationally agreed standards and how compliant with those standards any future OBOR-related green bonds are likely to be.
“It is a common concern. The short answer is they’re not spotless, but as the ICBC issuance shows they are still investment grade and the Chinese authorities have played a positive role in increasing transparency in the green bond market out of China which otherwise wouldn’t exist,” said Fiona Reynolds, managing director of the London-based Principles for Responsible Investment, a United Nations-supported NGO which promotes environmental, social and governance-oriented investment among institutional asset managers globally.
Bank treasurers in Silk Road countries are keen to tap the rich liquidity of the green finance investor base and market deals under the OBOR banner.
“We are exploring the possibility of banks issuing in green format to fund OBOR-related projects,” a Singapore-based American banker tells Global Finance. “The effectiveness of marketing debt under the Silk Road banner was shown with Maybank’s deal, but so far no one has joined the two asset classes. It’s just a matter of time.”
Maybank last July issued RMB 1 billion in OBOR-related Panda bonds—paper issued in yuan by a non-China entity.
“According to the Asian Development Bank (ADB), US$22.6tn is required in Asia and the Pacific alone to meet all infrastructure needs through to 2030. China and the international finance community will be key to mobilising private investment in countries along the Belt and Road and green bonds will be one tool by which they can do this,” said the PRI’s Reynolds.
Malaysia is seen as the most likely issuer of OBOR-related green bonds, given not only the country’s enthusiasm for the infrastructure project but also the affinity of Islamic finance with environmentally-friendly fundraising.
Last year Malaysia printed the world’s first green shariah-compliant sukuk - a bond issued in accordance with Islamic law which pays returns based on profit generation rather than an interest rate - under the country’s Sustainable & Responsible Investment sukuk framework, established in 2014.
Multi-tranche paper, with tenors of between 2-16 years was issued by Tadau Energy last July to fund investment in a 50MW solar power project in Malaysia and investors jumped on the deal, which pulled in oversubscription of between 2.5 to 4 times across the various maturities.
A lingering concern with regard to OBOR-related green bond issuance is the need to standardize the definition of the term. At present there are at least three different sets of metrics, promulgated by the International Capital Market Association (ICMA), the Climate Bonds Initiative and the People’s Bank of China.
These competing guidelines create a measure of confusion which could undervalue the issues. The Green Finance Initiative has recommended the creation of an investor alliance to set harmonized standards, a monitoring body to carry out due diligence for the life of each green OBOR project and the relaxation of the 70% lower limit on Chinese bank participation in OBOR finance to open up project financing to a wider range of sponsors.
But there is optimism about the gradual use of international rather domestic standards in terms of green bond issuance out of China.
“What we have seen is that Chinese issuers are willing to use international green finance standards, such as the Climate Bonds Initiative, which has stricter criteria and safeguards than the PBOC guidelines,” said Reynolds.