A CPI Report Donovan Escalante June Choi Neil Chin May 2020 Supported by the UK Government In collaboration with MRV System Design Recommendations for Chinese Green BondsCopyright 2019 Climate Policy Initiative www.climatepolicyinitiative.org All rights reserved. CPI welcomes the use of its material for noncommercial purposes, such as policy discussions or educational activities, under a Creative Commons Attribution-NonCommercial- ShareAlike 3.0 Unported License. For commercial use, please contact admincpisf.org. About CPI With deep expertise in finance and policy, CPI is an analysis and advisory organization that works to improve the most important energy and land use practices around the world. Our mission is to help governments, businesses, and financial institutions drive economic growth while addressing climate change. CPI has six offices around the world in Brazil, Kenya, India, Indonesia, the United Kingdom, and the United States. Descriptors Sector Climate finance Region China Keywords Green bonds, China, sustainable investing Related CPI Reports Contact June Choi june.choicpiclimatefinance.org Donovan Escalante donovan.escalantecpiclimatefinance.org Acknowledgements The authors of this report would like to acknowledge the financial support received from the UK PACT Programme which made this work possible and the contributions of Joyce Guo and Beibei Jiang UK Embassy China, Professor Tom Heller and Vincent Xia Stanford University, Mathias Lund Larsen, Zhiting Yun and Ying Cui IIGF/CUFE, Professors Yingzhe Shi and Wang Yao IIGF/CUFE, Wenhong Xie Climate Bonds Initiative and our colleagues Bella Tonkonogy, Elysha Davila, Josh Wheeling, Dario Abramskiehn, Julia Janicki and Alice Moi Climate Policy Initiative. 1 A CPI Report MRV System Design Recommendations for Chinese Green Bonds May 2020 cutive Summary This report details findings from an in-depth review of Monitoring Reporting and Verification MRV practices in China comparing them to international practices. The aim is to identify approaches to enhance the tracking and reporting of results. This can increase trust in the market, helping speed its development and increase environmental and financial impacts. Key findings The quality of reporting varied across different bond types, highlighting differences in regulatory regimes. A scoring system was used to assess key MRV criteria with the top score corresponding to the most stringent available standards. Financial bond issuances, on average, were accompanied by the highest average quality of reporting. Mid-term notes the most common non-financial corporate debt instrument had the second highest, while asset-backed securities ABS and corporate bonds displayed poor reporting quality. Enterprise bonds, which are not mandated to provide reporting, predictably showed lower quality of reporting. Offshore green bonds generally demonstrate higher transparency and granularity of reporting than onshore issuances. Average quality of reporting for offshore bonds was higher than onshore bonds. This suggests that Chinese issuers can increase the quality of reporting to meet the higher expectations of international investors. Publicly available ination is limited and difficult to access. Of the 387 issuances reviewed, 38 10 did not have any publicly available ination and only 32 out of 270 issuances prior to September 2018 provided both pre-issuance and post-issuance documents on the issuer’s website. Gathering data for the remaining issuances was challenging, with the need to draw from multiple sources including China Central Depository and Clearing CCDC, the Shanghai and Shenzhen Stock Exchanges, and the National Association of Financial Market Institutional Investors NAFMII. External reviews are not undertaken consistently across all issuance types. Financial bonds have the highest rate of external review and enterprise bonds the lowest, reflecting differences in regulatory requirements. Overall, ex-post verification tends to be relatively limited. 73 of onshore green bonds by value received external review pre-issuance. Post- issuance verification was available for 59 by value. There are many notable examples of best practice amongst Chinese issuers. These include ICBC, China Development Bank, Industrial Bank Co. Ltd., and Poten Environment. Each of these issuers published pre- and post-issuance reporting on their company website, provided project-level financial and environmental impact reporting, and underwent external review prior to issuing and throughout the entire post-issuance reporting process. Together, these findings indicate that there is a substantial opportunity to improve trust, transparency, and effectiveness in the market by improving the quality of MRV. Recommendations for improvement Regulatory authorities, including the People’s Bank of China, China Securities Regulatory Commission, the National Development and Re Commission, and the Ministry of Finance, could make several key improvements, including 1. Require mandatory environmental impact reporting and external and independent verifica- tion, both pre-issuance and post-issuance, for green bond issuers. Currently, these measures are encouraged by some key regulatory authorities at a high-level but are not mandatory. Without environ- mental impact reporting and external verification, it is difficult to maintain investors’ confidence in the quality of green bond issuances. 2. Establish a standard template for detailed post-is- suance reporting on use of proceeds and environ- mental impacts. Final allocation of proceeds must be detailed at the project level, indicating not just the project’s green bond category but also the status of the projects being financed, such as whether the project is new or existing. The template may also recommend common metrics and 2 A CPI Report MRV System Design Recommendations for Chinese Green Bonds May 2020 ologies for measuring impact in each sector. 3. Fully implement an official accreditation model for green bond label verification through the Green Bonds Standard Committee. This would harmonize the verification standards and raise the overall quality of third-party verifiers. 4. Establish a central plat to share data publicly and increase access to issuance reporting. The plat may serve as a depository of all bond ination, including issuance amounts, use of proceeds and environmental impact reporting, as well as verification documents. China Central Depository Guidelines for Supporting Green Bond Development 中國證監會 關于支持綠色債券發展的指引意見. China Securities Regulatory Commission 2017. 2 Guidelines for Supporting Green Bond Development 中國證監會關于支持綠色債券發展的指引意見. China Securities Regulatory Commission 2017. 3 PBoC Notice on Strengthening the Supervision and Administration of the Continuation Period of Green Financial Bonds 中國人民銀行關于加強綠色金融債 券存續期監督管理有關事宜的通知. People’s Bank of China 2018. 4 ibid 5 Guidelines for Supporting Green Bond Development 中國證監會關于支持綠色債券發展的指引意見. China Securities Regulatory Commission 2017 6 ibid 7 ibid Strong approaches to monitoring, reporting, and verification MRV can increase the trust and effectiveness of green bonds. This paper will first review the current regulations in place in China, comparing them to internationally accepted principles. Then it will provide a systematic review of the quality of reporting of Chinese green bond issuances to-date and finally, provide recommendations on how the design of the MRV system can be strengthened with the aim of increasing trust and effectiveness in the market. 1.1 Current MRV requirements Monitoring, reporting, and verification MRV practices in China, and internationally, focus on two key areas accounting for the use of proceeds and verifying environmental and climate impacts. In general, in China, there are some requirements for reporting on environmental impacts and obtaining external verification is encouraged. There are stricter requirements around the management and reporting on use of proceeds. An overview of requirements is provided below 1 One of the major barriers to transparency in China’s green bond market is the inconsistent requirements required by the regulatory authorities, which oversee different bond types in the market. Most notably, the National Development and Re Commission NDRC, which regulates enterprise bonds, has no requirement for issuers to report on use of proceeds and environmental impacts. The People’s Bank of China PBoC requires financial green bond issuers to report quarterly, whereas other regulators require reporting on an annual or biannual basis. All regulators encourage Monitoring Reporting Verification Separate accounts ringfencing are required for all non-enterprise issuers excluding government bonds to manage and track green bond proceeds 1 . There is no specific ology pertaining to monitoring of envi- ronmental impacts. There are no KPIs, benchmarks, or recommended measurement ologies Annual reporting of use of proceeds is required for all non-enterprise issuers 2 . Financial bond issuers are required to additionally provide quarterly reporting. 3 Other debt-instruments including Medium-term Note issuers must report twice a year. Reporting of environmental impacts is required for CSRC-regulated corporate issuers and green projects that surpass a certain threshold amount among financial bonds. 4 However there is no standard ology for calculating impact. 5 Third-party verification through external review is encouraged for all non-enterprise issuers. 6 Pre-issuance, issuers may obtain third party verification, or a green bond rating. Green bond frameworks from the issuer must disclose details on project eligibility, project screening and decision-making procedures, use of proceeds management, ination disclosure and reporting system, and expected environmental impacts if reported. 7 Post-issuance, ongoing verification ensures compliance with rules for project eligibility, use of proceeds, ina- tional disclosure and reporting, and that expected environmental benefits if reported are achieved. T able 1 Overview of MRV practices in China for green bonds 5 A CPI Report MRV System Design Recommendations for Chinese Green Bonds May 2020 third-party verification for pre-issuance and post- issuance of bonds, while the NDRC has no verification requirement. A detailed overview showing requirements for each type of bond and the responsible regulatory entity is available below. The lack of standardization in reporting requirements, inconsistent quality of green bond external review services, and the need for technical capabilities associated with monitoring environmental impacts all add to the time and cost of issuing green bonds. While local governments have introduced a variety of incentive programs to reduce the costs associated with successful issuance, including grants and subsidies for obtaining verification, these are generally minimal and not enough to encourage issuers to meet high MRV standards. An overview of these incentives is available in the annex. People’s Bank of China PBoC China Securities Regulatory Commission CSRC National Association of Financial Market Institutional Investors NAFMII National Development and Re Commission NDRC Bond Type Financial bond Corporate bond Non-Financial Corporate Debt Instrument Enterprise bond Allocation of Proceeds 100 of proceeds are required to be invested in green projects Issuers can use up to 30 of the bond proceeds to repay loans and invest in working capital. 100 of proceeds are required to be invested in green projects. Issuers can use up to 50 of the bond proceeds to repay bank loans and invest in working capital. Issuance Limits N/A N/A N/A Green bonds are mpt from quotas for bond issu- ance and granted special review process Use of Proceeds Monitoring Separate accounts Separate accounts Separate accounts No requirement Environmental Monitoring Required for reporting Required for reporting Required for reporting No requirement Use of Proceeds Reporting Quarterly disclosure Annual disclosure Biannual disclosure; Changes to use of proceeds announced publicly No requirement Environmental Reporting Required for green projects above a certain threshold amount T argets disclosed at issuance; reporting required T argets disclosed at issuance; reporting encouraged No requirement Standardized Reporting T emplate available Not available Not available Not available Pre-issuance Verification Encouraged Encouraged Encouraged No requirement Post-issuance Verification Encouraged Encouraged Encouraged No requirement T able 2 Different MRV requirements by regulatory authority