By Paul Davies, Aaron Franklin, and Andrew Westgate
The China Securities Regulatory Commission (CSRC) released new guidelines (the Guidelines) on the issuance of green bonds on March 2, 2017, marking an important step in the development of what is now the world’s largest green bond market, accounting for 39% of global issuances by principal amount issued during 2016 (after excluding green bonds that the Climate Bond Initiative considered did not qualify as green bonds). Key policies in the Guidelines include CSRC adopting the categories of projects eligible for funding with green bonds that were promulgated by the People’s Bank of China (PBoC) (which we have previously covered), a requirement to deliver a “commitment letter” to CSRC relating to the green attributes of the issuance, and a prohibition in principle on issuances of green bonds by non-green issuers (e.g., oil companies). Because this last prohibition is qualified by “in principle” in the text of the guidelines, the CSRC may grant exceptions in certain circumstances.
Regulation of green bonds in China is divided primarily on the basis of the type of issuer, with the PBoC regulating green bonds issued by financial entities and the National Development and Reform Commission (NDRC) regulating bonds issued by other corporates that do not have listed equity. Both of these agencies have previously issued their own green bond guidelines (PBoC in 2015 and NDRC in 2016). In addition, both the Shanghai and Shenzhen stock exchanges have issued pilot guidelines applying to bonds issued on their exchanges. Until now, “green” private placements and other non-listed securities were only required to be notified to the National Association of Financial Market Institutional Investors. Now, CSRC’s new Guidelines will apply to all green bonds other than those covered by the PBoC and NDRC guidelines, including those issued by non-financial corporate issuers with listed equity.
The Guidelines largely adopt the definitions of green bonds used and use of proceeds guidelines that were featured in the pilot guidelines adopted by the Shanghai and Shenzhen exchanges, including separated accounts for “green” funds and recommendations for third-party audit and certification, for which the Guidelines call for fast channel approval in the case of green bonds.
Unlike the PBoC, NDRC or exchange-promulgated guidelines, however, the Guidelines prohibit companies in industries that have high emissions or energy usage rates, or that are disfavoured by national industrial planning policy, from issuing green bonds. In addition, the Guidelines require detailed environmental disclosures from the issuer both during the application for issuance and throughout the life of the bonds, as well as submission of a commitment letter to CSRC, confirming the issuer’s intention to utilize funds raised through green bonds only for green projects conforming to the Guidelines. Finally, the Guidelines encourage rating agencies to evaluate and disclose an issuer’s past performance with respect to environmental issues in determining the issuer’s credit risk.
China took the world of green finance by storm in 2016, becoming the largest country of origin for green bonds with $30.5 billion issuances (according to the Climate Bond Initiative). This rapid growth is even more remarkable considering that the first Chinese green bond to be listed on an exchange was only issued in July 2015. As with so many aspects of China’s economy, regulators are sprinting to keep pace with rapid growth. With the addition of CSRC’s Guidelines to the existing framework begun by the PBoC and NDRC, regulation of green bonds in China has taken an important step forward. Issuers, both in China and around the world, are watching with interest as China develops a regulatory framework with Chinese characteristics.
This post was prepared with the assistance of YanYan Yang in the Washington office of Latham & Watkins.
*Latham & Watkins is not formally licensed to practice PRC law and regularly consults with local Chinese law firms on matters of PRC law.
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