Legal risk management of green bonds

By Yin Yanhong, DOCVIT Law Firm

Agreen bond is a direct financing instrument of bond issuance to raise funds for investment in green projects or assets that meet certain conditions. According to the Guidelines on the Issuance of Green Bonds promulgated by National Development and Reform Commission (NDRC), the key areas allowed to use funds raised from green bonds are: Technological transformation for energy conservation and emission reduction; green urbanization; energy cleansing and efficient utilization; new energy development and utilization; circular economy development; water conservation and unconventional development and utilization; pollution prevention and control; ecological agriculture and forestry; energy conservation and environmental protection industry; low-carbon industry; ecological civilization trial and demonstration projects; low-carbon trial and demonstration projects; and other recycling and low-carbon development projects.

green bonds
Yin Yanhong
Senior partner

Compared with general bonds, the green bond issuance goes through green channels for approval process, with mostly lower interest rates and beyond the limitations of the bond index, and it has the characteristics of “low issuance cost, fast approval and low entry conditions”. Therefore, it has become an important direct financing tool for financial institutions, non-banking financial institutions, corporations and enterprises.

During the covid-19 pandemic, the green bond market is further regarded as a direct financing channel strongly supported by government policies for the sake of business reopening. Both the number and size of green bond issuances have increased on a year-on-year basis. In the first quarter of 2020, 53 green bonds were issued and the issuance size was RMB50.3 billion, demonstrating an increase of 26.19% and 0.64%, respectively, compared to the same period last year.

Since green bonds have some special traits, this article focuses on the risks that deserve attention throughout issuance.

Investment proportion

According to regulatory requirements, funds raised by green corporate bonds and overseen by the China Securities Regulatory Commission (CSRC) should be mainly used for the construction, operation or acquisition of a green project, or for the repayment of green project loans, accounting for no less than 70% of the total funds. The rest can be used to supplement the company’s working capital, or to repay loans. For green enterprise bonds, overseen by the NDRC, funds used for supplementing the enterprise’s working capital, or to repay loans, should be no more than 50% of the total funds.

Different from general bonds, for green enterprise bonds, the limit on the proportion of funds invested in the project to total investment has been lifted to 80% (except when there is a minimum capital requirement by the relevant provisions), and not more than 100% in principle for green corporate bonds.

Use and management

In order to ensure that the funds raised by green bonds can be used exclusively for green industry projects, regulators require that issuers should establish a sound management mechanism for green projects within the company, and formulate plans for the use of funds.

Issuers should establish a thorough system and refine its management on project category evaluation and selection, the project decision-making process, fund usage management, third-party verification, and information disclosure. Issuers should have a clear division of responsibilities for departments, establish a management mechanism and procedure, clarify the responsibilities and access of each department, and make sure that regulatory requirements are met throughout the project, and on the usage of funds.

Independent assessment

Regulators require that underwriters and intermediaries should give assessment opinions on disclosed information in the prospectus. Enterprises are encouraged to submit independent third-party certification and assessment opinions for green corporate bonds issuance, according to the Green Bond Endorsed Project Catalogue compiled by the Green Finance Committee of China Society of Finance and Banking, and the Notice on the Pilot Project of Green Corporate Bonds issued by the stock exchanges of Shanghai and Shenzhen.

Meanwhile, in accordance with the Green Bond Assessment and Certification Guidelines (Provisional), promulgated by People’s Bank of China and the CSRC, an assessment and certification agency should meet the following basic conditions: (1) it has established the organizational structure, working process, technical methods, charging standards, quality control, professional liability insurance and other related necessary regimes; (2) it is equipped with the qualifications of rating, certification and verification, and the professional qualifications in the fields of energy, climate or environment granted by the competent department; (3) it has professionals in accounting, auditing, finance, energy, climate or environment; and (4) there are no violations of laws or regulations, nor bad credit records in the past three years, or since its establishment.

Information disclosure

Information related to green bonds should be disclosed truthfully, accurately, fully and in a timely manner in accordance with the requirements of the regulatory authorities. When applying for the issuance of green bonds, in the prospectus, issuers are required to disclose matters such as the category of the proposed green project, verification basis or standards, the environmental benefit objectives, a usage plan of the raised funds, and the management regime.

At the same time, issuers should also provide a letter of commitment for investing in green projects with the funds to be raised. For the duration of green bonds, issuers should disclose the use of funds, project progress and the actual environmental beneficial effect in accordance with relevant rules or agreements, which mainly include regular reports, major events and follow-up credit rating reports.

Yin Yanhong is a senior partner at DOCVIT Law Firm

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