Green bond issuance: A new project financing channel

By Wang Jihong and Wu Anjing, Zhong Lun Law Firm

As China pays more attention to environmental protection, renewable energy and other green industries, it has made a line of policies since 2015 to encourage fundraising for eco-benefiting green projects by issuing green bonds. In 2018, China issued more than US$30 billion worth of green bonds, ranking among the top in the world.

What is a green bond?

Although authorities have not unified the definition of green bond, in general it refers to a bond for which proceeds are used for renewable energies, pollution control and prevention, and other green industries.

The green bonds now issued in China mainly include: green enterprise bonds, subject to National Development and Reform Commission (NDRC) regulation; green corporate bonds, subject to stock exchange/China Securities Regulatory Commission (CSRC) regulation; and green financial bonds, subject to People’s Bank of China (PBOC) regulation.

Wang Jihong
Zhong Lun Law Firm

In determining the eligibility of a project, the NDRC’s Guiding Catalogue of Green Industries (2019 edition) will apply to green enterprise bonds, while the Green Finance Committee of China Society of Finance and Banking’s (GFC) Green Bond Endorsed Project Catalogue (2015 edition) will apply to other types of green bonds.

The NDRC also encourages local authorities and competent departments to further intensify international and domestic exchange of experience, and push forward establishment of the mutual recognition mechanism of the NDRC catalogue and applicable international criteria of green projects. In future, China’s scope of green industries will gradually be aligned with international standards.

Characteristics of green bonds.

Green bond issuance has its advantages but is subject to stricter regulation. In comparison with general bonds, green bonds are advantageous in approval procedure and preferential treatments and subsidies. As long as the formalities are complete and the repayment guarantee measures are in place, the “expedited and simplified audit” procedures of the NDRC will apply.

Shanghai Stock Exchange and Shenzhen Stock Exchange also open a green channel, or arrange a specially assigned person to handle the application for, and approval of, green corporate bond issuance. Companies issuing green bonds may also be entitled to local preferential treatments and subsidies. For example, in 2019, the Shenzhen government provides that companies that successfully issue green bonds will each be granted a subsidy of 2% of the size of the bond, but not more than RMB500,000 (US$71,000) for each project.

In addition, green bonds are different from general bonds in green certification, information disclosure and capital account management. Green certification means that an independent third-party assessment and certification body backs the eligibility of a project by issuing a second opinion.

In comparison to general bonds, green bonds are subject to stricter requirements for information disclosure. In addition to other requirements, issuers are required to submit the letter of commitment for the green projects specified in the bond prospectus.

Wu Anjing
Wu Anjing
Zhong Lun Law Firm

As well as the contents of periodic reports of general bonds, issuers should disclose the use of the proceeds of green bonds, progress of the green project, and its environmental benefit. In terms of capital account management, both Shanghai and Shenzhen stock exchanges require a designated special account for receiving, storage, transfer, and payment of principal and interest of the proceeds of green corporate bonds.

Key points of green bond issuance.

First, the issuer should decide if the project is eligible according to the guiding catalogues, and determine the types of green bonds it may issue. When a company chooses the issuance channel, it is advised to refer to the NDRC and GFC catalogues with the assistance of a professional consultant.

For example, the NDRC catalogue includes manufacturing of nuclear power equipment, and construction and operation of nuclear power plants, but the GFC catalogue does not. Therefore, if a company intends to raise funds for its nuclear power project, green enterprise bonds are more feasible from the angle of green project recognition.

If the company intends to issue the bonds overseas, the project will be determined eligible with reference to the Green Bond Principles of the International Capital Market Association (ICMA).

Second, the company is advised to engage the assistance of an experienced legal consultant in the process of bond issuance. Especially in the case of overseas bond issuance, joint efforts are required of the lawyers from the jurisdictions where the issuer and guarantor are incorporated, and from where the major assets are located.

The lawyers will assist the company in establishing the bond issuance framework, determine the credit enhancement measures, analyze the approval and regulation processes in the country and abroad, assist in the preparation of application material for approval, conduct due diligence investigations, issue legal opinions, participate in drafting and revising the bond prospectus, and participate in drafting, reviewing and revising bond terms and conditions, and guarantee documents.

Finally, the company should properly utilize green certification to gain credence for its bond issuance. Green certification is different from the issuer rating and debt rating. Although it is not mandatory at present, it would be a plus, and should be submitted under specific circumstances.

For example, Shanghai Stock Exchange requires that, for projects that are outside of the GFC catalogue and the scope of eligible projects determined by other bodies it recognizes, if the green character is not easy for investors to identify, or the issuer deems it necessary to engage third-party assessment and certification, an independent professional assessment or certification body should be engaged to issue its assessment opinion or certification report. In the case of issuance on international markets, green certification is solid proof of the eligibility of the project.

As the concept of green bonds becomes popular, a number of Chinese companies have successfully issued them on stock exchanges in China and abroad. For example, the author recently assisted a real estate development company in issuing green bonds on the Swedish market. The authors believe that more Chinese companies will choose green bond issuance as one of their financing channels.

Wang Jihong is a partner and Wu Anjing is an associate at Zhong Lun Law Firm

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