Chinese utility green bonds could fund fossil fuels, says energy think tank

It comes as a first-of-its-kind Chinese ESG bond index is launched in Luxembourg

Investors in green bonds issued by Chinese utilities may be “inadvertently” funding fossil fuels due to loopholes in the rules which govern the bonds’ use-of-proceeds, according to new research.

According to an analysis by prominent think-tank the Institute for Energy Economics and Financial Analysis (IEEFA), 30% of proceeds from green bonds – also known as ‘carbon neutral’ bonds – issued by major state-owned utilities in 2021 were allocated towards the working capital of the issuers, whose coal-fired capacity makes up around 75% of their total power assets.

“The promise of green bonds is that they can help channel capital to energy transition investments,” said Christina Ng, IEEFA’s Research and Stakeholder Engagement Leader and author of the report.

“But potentially the proceeds raised by the state-owned enterprises from these bond deals could be spent on maintaining a steady – or growing – coal business, particularly as they have new coal assets in the pipeline. Regulators urgently need to look at tightening the rules on how high carbon state-owned enterprises use the proceeds from their green bonds.”

The IEEFA’s findings are based on a study of yuan-denominated carbon-neutral bonds issued this year by giant state-owned energy utilities, which include the China Energy Investment Corporation and the China Huaneng Group.

The so-called carbon neutral bonds designation refers to issuances aligned to the Chinese government’s Green Bond Endorsed Project Catalogue – a taxonomy of environmentally sustainable economic activities eligible for green bond funding.

In April, an update officially removed all fossil fuel-related projects – including ‘clean coal’ – from the Catalogue, addressing a key sticking point for investors. However, the updated Catalogue continues to allow for up to 50% of carbon neutral  bond proceeds to be allocated to working capital, the IEEFA noted.

Independent research by the Climate Policy Initiative found that around 47% of the average proceeds from carbon neutral bonds issued between 2016 and 2019 were allocated to working capital but could not conclusively identify the activities funded “due to the lack of a standard reporting framework and limited transparency in the Chinese green bond market”.

Separately, a first-of-its-kind Chinese ESG bond index has been launched and will be made available to international investors through the Luxembourg Stock Exchange.

The CCB-Wind-CUFE Green ESG Bond Index will evaluate and track the performance of labeled and unlabeled green bonds issued on the Shanghai Stock Exchange and the Shenzhen Stock Exchange every week.

The index was jointly developed by China Construction Bank Corp, Wind Information Technology Co, and the International Institute of Green Finance (IIGF), which is part of the Central University of Finance and Economics in Beijing.

“As the first cross-border synchronous display of Chinese green bond index series, the publication of the index series will help raise the international influence of China’s green finance, attract foreign investors to participate in the construction of China’s green financial system and promote the development of green industries in China," said IIGF Dean Weng Yao.