China's Net-Zero Transition Spurs Financing Growth
China's ambitious climate pledges are galvanising a clean energy transformation across its industries and companies, with many increasingly keen on becoming climate-aligned and tapping green financing solutions.
Companies that comply with robust reporting and disclosure standards for green financing are likely to be rewarded for their decarbonisation efforts with more attractive bond pricing, said panellists at a Mandarin-speaking webinar organised by DBS China.
With President Xi Jinping's pledge that China will peak carbon emissions by 2030 and reach net zero by 2060, the country's climate envoy Xie Zhenhua projected required investments of RMB136 trillion (around US$21 trillion) over the next few decades.
"This is an extremely huge figure. Besides government funding, capital markets - especially green bonds and sustainability-linked financing instruments - will serve an increasingly important role," remarked Mr Alvin Zhan, DBS Bank Executive Director, Fixed Income Origination, in his welcome address.
Speaking to a Chinese audience at the webinar, titled Realising China's Carbon Neutrality Ambition, he added: "China's green and sustainable debt markets are among the most active (in the world)."
Echoing this sentiment, Blackrock Credit Research Analyst Chloe Su observed: "Capital markets are...a very effective bridge for bringing green finance investors and issuers together."
Investors, she added, are pushing for greater transparency and disclosure from companies about their sustainability efforts. Blackrock, for instance, asks companies it invests in to report in line with the Task Force on Climate-related Financial Disclosures.
Stepping up on decarbonisation
There is also growing investor pressure for companies in China and the world to do more to align with the Paris Agreement's goals of limiting global warming, pointed out Ms Xiaoshu Wang, MSCI Executive Director and Head of its MSCI ESG & Climate Research Asia-Pacific.
MSCI's Net-Zero Tracker in September 2021 showed that less than half of public companies in its quarterly gauge of climate change progress were aligned with a 2°C temperature rise threshold.
" China, it is a similar situation...there is a deep need for companies to step up their efforts to decarbonise," she noted.
Meanwhile, China's reporting standards on carbon emissions and disclosure rules for green finance are gradually being raised and aligned with international ones, said Mr Wang Weichao, Deputy General Manager, Financial Institution Department of CPI Ronghe Financial Leasing1.
This means issuers will benefit from issuing labelled green bonds. There are already clear advantages for issuers who offer labelled carbon-neutral bonds, which “can have interest rates about 5 to 10 basis points lower than unlabelled climate-aligned bonds of the same tenure", he explained.
Growing opportunities for climate finance
Climate-aligned bonds finance climate-related activities or projects, but are not explicitly labelled green by the issuer, according to Climate Bonds Initiative (CBI's) 2021 flagship report on "Climate Investment Opportunities: Climate-Aligned Bonds & Issuers".
China leads global issuance of climate-aligned outstanding bonds, issuing 36 per cent of the overall climate-aligned universe, said Mr Wenhong Xie, CBI China Programme Manager.
He highlighted opportunities for climate-aligned issuers, such as those in the transport and energy sectors which account for the largest share of unlabelled bond issuances, to refinance their debt with labelled green bonds in coming years. The CBI report found that more than half of China's outstanding climate-aligned bonds will mature by 2024.
For instance, the Hong Kong Monetary Authority (HKMA) is offering subsidies for eligible issuers and loan borrowers to cover their expenses on bond issuance and external review services, said Mr Oscar Pang, HKMA Senior Manager, Market Development Division.
The HKMA's scheme includes coverage of issuers' full cost of eligible expenses paid to recognised external reviewers, capped at HK$800,000 per bond issuance or loan, he said.
Helping businesses go green
Yet, some companies may hold back from issuing green bonds as they baulk at the more onerous reporting and review requirements, acknowledged Mr Feng Hu, DBS Bank Vice President, Credit & ESG Advisory Origination.
While there is clear direction from the top as well as investor support for green bonds, certain sectors “need to speed up their steps” towards carbon-neutrality – and DBS is on hand to help, added Mr Hu who was also the panel moderator.
As Asia's leading provider of green and sustainable financing solutions, DBS is the first commercial bank to publish a Sustainable and Transition Finance Framework and Taxonomy to help clients transition towards net zero, said Mr Sang Lye See, Executive Director, Institutional Banking Group, DBS Bank China.
DBS recently became the first Singapore bank to become a signatory of the Net-Zero Banking Alliance, whose 87 members represent more than 40 per cent of global banking assets. "Joining this alliance reflects the high level of importance that DBS has placed on the climate transition (to net zero) and sustainable finance", he said, adding that the bank’s commitments include making a transition in operational and attributable emissions from its lending and investment portfolios to align with pathways to net zero by 2050 or sooner.
Wrapping up the webinar, Ms Cindy Kwan, Managing Director, Fixed Income Head of DBS Mainland China & Hong Kong, noted that Asia has progressed from being a laggard in green financing initiatives to one of the most active markets for green and climate-aligned issuances today - with China as a key pillar supporting the region’s green transformation.
"DBS will continue to strengthen efforts and deepen cooperation with governments, companies and investors...to advance China's and Asia's sustainable development and decarbonisation," she said.
Watch the webinar.
Find out more about Climate-aligned Bonds.
1 CPI Ronghe is a financial leasing company affiliated to the State Power Investment Corporation Group.