At the 75th session of the UN General Assembly in September 2020, President Xi Jinping pledged that China would “adopt more vigorous policies and measures” to ensure the nation’s carbon dioxide emissions peaked no later than 2030, and that it achieved carbon neutrality three decades after that. This was the first time that China had set a timetable for both targets.
It was against this background that the National Association of Financial Market Institutional Investors (NAFMII) in March 2021 issued the Notice on Specifying the Mechanism for Carbon Neutral Bonds. The notice said that the term “carbon neutral bonds” means debt financing instruments used to raise funds exclusively for green projects that have the effect of reducing carbon emissions. They must also satisfy four core requirements in regard to the purpose of the bond sale proceeds, project assessment and selection, management of the sale proceeds, and disclosure of information during the term of the debt.
Carbon neutral asset-backed notes (ABN) managed by NAFMII are a sub-category of green debt financial instruments.
DIFFERENCES FROM CARBON NEUTRAL ABS
Shanghai Stock Exchange issued Answers to Questions on the Asset Securitisation Business (2) in August 2018, setting out relatively clear guidelines for determining green asset-backed securities (ABS). It has not, however, updated the requirements or guidelines since Xi’s UN announcement.
According to the 2018 document, a security may be recognised as a green asset-backed security if it satisfies any one of the following conditions: The underlying assets are in the green industry sector; the proceeds derived from the transfer of the underlying assets are used in the green industry sector and the amount used on the green project is not less than 70% of the total proceeds derived from the transfer of the underlying assets; or the main business of the original beneficiary is in the green industry sector.
Looking at actual offerings of carbon neutral ABS, the author has been able to discern the following criteria and elements: The regulators of carbon neutral ABS are the China Securities Regulatory Commission (CSRC) and the stock exchange; at the time of disclosure of the latest regular report after the actual use of the offering proceeds, at least an assessment and certification report is disclosed simultaneously; information disclosure is carried out by issuing regular and interim reports; it needs to be expressly marked “GC” MEANING????? on the Shanghai Stock Exchange; not less than 70% of the total offering proceeds are to be used for a project that has the effect of reducing carbon emissions.
Use of offering proceeds. Under the NAFMII notice, all of the proceeds derived from an offering of carbon neutral bonds are to be used exclusively for the construction, operation or acquisition of a green project in areas that include clean energy, clean transportation, sustainable construction, industrial low-carbon transformation, or for repayment of interest-bearing debts of a green project. With respect to the recognition of green projects, the main reference documents include the Green Industry Guidance Catalogue (2019 edition), the Catalogue of Green Bond Supported Projects (2021) and the Green Bond Principles (June 2021) formulated by the International Capital Market Association.
Project assessment/certification. An issuer is required to disclose in the sale documents specific information on the project in which the proceeds from the offering of the carbon neutral bonds are to be invested, and to ensure that the offering proceeds are used in low-carbon and reduced-carbon emission sectors. The author would recommend that an issuer engage a third-party professional institution to issue an assessment and certification report that quantitatively measures the environmental effect and discloses such relevant information as the method of measuring the environmental effect and the reference basis.
Management of the offering proceeds. The opening of an escrow account is required for the offering proceeds, with the fund escrow institution responsible for managing the crediting of the money to the account, the funds deposit and payments, and such proceeds are to be used strictly for the purposes specified in the sale documents.
Information disclosure. An issuer is required to disclose by 30 April each year and by 31 August each year information on its use of the sale proceeds, progress on the project and the actual or expected carbon emission reduction effect of the project for the previous year and the first half of the year, respectively.
As an innovative product, NAFMII has explicitly proposed the opening of a green channel for the registration and evaluation of carbon neutral bonds and providing a series of convenient conditions for the recording and offering of carbon neutral products. Considering the strong support of regulators and the favourable reputational effect from offering carbon neutral bonds, issuers are quite enthusiastic about selling these products and the large majority of issuers whose offering proceeds fall within the carbon emissions reduction sector intend to label their products “carbon neutral”.
Issuers who are interested in offering carbon neutral bonds should refer to the core elements set out above. The authors would argue that the right to benefit from infrastructure charges will continue as the core of carbon neutral ABN products, including projects that utilise clean energy to generate electricity or provide heating, income from the lease of wind power, solar energy and other such clean energy projects. Subsidies for wind power, hydropower, photovoltaic and other such renewable energy pricing, may likewise become targets for carbon neutral ABN products.
Luan Jianhai is a partner at Commerce & Finance Law Offices. He can be contacted on +86 10 6563 7181 or by email at email@example.com