A $300 Billion Bond Market Holds the Key to Solving the Climate Crisis

By Karoline Kan, Rebecca Choong Wilkins, Sheryl Tian Tong Lee and Adrian Leung

November 22, 2022, 7:00 PM EST

In less than a decade, China has built one of the world’s biggest green bond markets, with more potential than any other to alter the course of climate change.

But as the country’s pile of green debt swells beyond $300 billion, investors and regulators are confronting a troubling reality: It’s almost impossible to know how the money is being spent – or whether it’s having the intended impact.

The Communist Party has made the green bond market central to reducing emissions in the world’s biggest polluter, but an analysis by Bloomberg reveals important gaps in disclosure and transparency.

To try to understand where at least some of China’s green bond money is going, Bloomberg News examined 35 issues: Ten of the biggest overall, and five of the biggest in each of the five most popular categories by money raised.

Eight of the ten biggest green bonds issued by Chinese companies don’t provide specific details about their target projects. Some of the bond proceeds are earmarked for debts incurred years earlier. Others are designated for activities with plausible yet hard-to-pinpoint environmental benefits.

Notes: Multi-category bonds were excluded from the selection of the five bonds in each category.

China is hardly the only country with spotty green bond disclosures, but without recourse to impartial courts, watchdog journalists or outspoken short-sellers, China lacks some of the additional safeguards that tend to reassure and encourage investors. And nowhere else are the stakes so high: If President Xi Jinping’s government succeeds in meeting its targets for peak emissions by 2030 and net-zero by 2060, it would constitute the single biggest reduction in global warming projections, according to Climate Action Tracker.

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Reaching those goals will cost China more than $18 trillion, according to the nation’s top climate envoy, and the People’s Bank of China has called on investors to pony up. In theory, a rapacious global appetite for green instruments could help meet that target. But some international investors have been put off by the lack of transparency and concerns about how the proceeds will really be used, and domestic buyers have yet to show much enthusiasm for debt investments with net-zero mandates.

PBOC Governor Yi Gang has called on the market to fill the gaps in fundraising, and the government knows it has a lot of catching up to do. In a rare interview with a state broadcaster in June, Yi expressed concern about “moral hazards” and warned against the “greenwashing, low-cost fund arbitrage, and green project fraud” that’s grown as borrowers have rushed to meet the top-down environmental imperatives. The central bank released a transcript of his comments in English as well as Mandarin, a sign of appeal to an international audience.

“There aren’t enough regulations in China on how the green bonds are used, and whether the issuers allocate the money where they promised,” said Xie Wenhong, head of the China program at the Climate Bonds Initiative, a UK-based organization that sets international norms for green bonds. “There isn’t media scrutiny on misuse of green bonds in China, which means many bond issuers can say whatever they want without facing consequences.”

A 2019 green bond sale by Industrial Bank Co. – one of the ten biggest in China’s history at $2.9 billion – illustrates just how little can be disclosed. The money, the bank said, could be distributed among more than 220 projects, including recycling initiatives, energy-saving projects, and clean-energy endeavors. None were identified by name or location.

Industrial Bank Co. didn’t respond to requests for comment on the use of its green bonds. In an effort to learn more about how China is using the proceeds of its green bonds, Bloomberg contacted more than three dozen issuers, arrangers and third-party evaluators. Only one – HSBC Holdings Plc. – responded by email, with a link to the annual report of a company for which it had arranged green financing. In the report, the company listed some of the buildings it funded with the proceeds from green bonds.

The government has begun to make significant changes, albeit at a pace that’s frustrated some activists and investors. In July, a committee backed by the PBOC issued the China Green Bond Principles, its latest official attempt to align its standards with evolving global norms. To align with the new standard, issuers must use 100% of the proceeds to fund green projects.

Issuers that don’t choose to adopt the new guidelines can still use as much as half the proceeds of green bonds to fund non-green projects.

China is also working on a joint taxonomy with the EU, part of an effort to encourage more Chinese companies to issue green bonds in international markets.

Emissions rise from smokestacks and cooling towers in China. Photographer: Qilai Shen/Bloomberg

China’s regulators have made other incremental adjustments. Until early 2021, “clean coal” projects – investments in technologies that lessen pollution or energy use at coal plants – were acceptable for green bond funding. Now they’re eligible for “transition” funding. The change was necessary, the PBOC said at the time, “to make our green bond standards more standardized and strict, achieving consistency with international mainstream standards.”

Investors haven’t forgotten the side effects of Beijing’s enthusiasm for debt-fueled growth. In the wake of the global financial crisis, a national stimulus program helped energize the credit market, which ballooned to more than $10 trillion by 2018.

The national policy goals were met: provincial governments hit their ambitious GDP targets and millions of people migrated from impoverished rural areas to newly created megacities. At the same time, liberal access to credit and zealotry for the national agenda also led to massive waste. It created a booming construction industry, which eventually contributed more than one-third of the country’s emissions, worsening the problem policymakers are now trying to solve.

As China takes steps to rein in the excess, global creditors are getting burned. During the crackdown on property developers, at least $4 billion in green and sustainability bonds defaulted, with more to come as Beijing attempts to bring some order to the credit market.

And while Xi has championed environmental causes and green development, his vision is being tested by other pressing problems – a deepening economic slowdown, domestic coal shortages and tumult in global fuel markets. Xi struck a cautious tone on emissions goals at the party’s twice-a-decade congress in October, promising a slow and steady approach to meeting targets, with energy security taking top priority.

The following five projects illustrate the disconnect between green financing and emissions reductions. All meet China’s green bond standards. They also involve mass construction, generate huge amounts of emissions over their life cycle and sometimes damage forests and wetlands, all effects that the issuers fail to highlight in their documents to investors.

A $300 Billion Bond Market Holds the Key to Solving the Climate Crisis

A closer look at five key projects in China financed by green bonds 👆

More than 20 billion yuan was poured into these projects. But for some, the emission reduction capacity remains unclear.