China Leads Climate Investment
There are two indicators of China's commitment to managing carbon emissions: ratification of the Paris agreement and rising climate bond market.
US and China Join the Paris Agreement
Historically, one factor in the the US reluctance to commit to carbon reduction has been a concern that US competitiveness will be impacted if other large emitters don't also take significant steps. Recently China and the U.S. announced that they formally joined the Paris Agreement. This momentous announcement tips the balance towards a quick entry into force of the Agreement, by the end of 2016 — if not by the end of September. According to Four Twenty Seven, a carbon management consultancy, The Paris Agreement requires 55 percent of the 180 signatories to ratify or formally join, representing more than 55 percent of global emissions. The UNFCCC ratification status tracker, last updated as of Friday afternoon, counted 26 parties accounting for 39 percent of emissions.
This is an important step because China and the U.S. together are responsible for over 38 percent of global emissions, so their commitment pushed the emissions from signatories to 75 percent, well over the 55 percent threshold. Securing the missing 27 country signatures will be not a problem now that the U.S. and China have confirmed their commitment. The next wave of ratification is expected later this month, as countries gather in New York City for the annual General Assembly of the United Nations on September 19, 2016
As Four Twenty Seven reported, senate ratification (or lack thereof) had been the kiss of death for the Kyoto Protocol. However, the US climate negotiators are intent on avoiding involving the Republican-controlled Senate, which would undoubtedly oppose ratification. The accelerated procedure does, however, push the Paris Agreement on the next U.S. President. Hillary Clinton has committed to pursuing current efforts from the White House to reduce green house gas emissions and build resilience. Donald Trump has made contradictory statements about climate science and announced he would pull out of the Paris Agreement if elected. Given current polls and forecasts for the November 2016 elections, we expect the U.S. will likely stand by its commitment to the Paris Agreement for the next four years.
China is Becoming the Climate Bond Leader
The Climate Bonds Initiative has launched the Chinese Version of its 5th annual report ‘Bonds and Climate Change: State of the Market in 2016’ (SOtM) in Shanghai. The report reveals China is the largest country of issuance in the climate aligned universe. The issuance is dominated by China Railway Corporation, the largest with $194bn unlabeled issuance for their low-carbon initiatives. This figure highlights the significance of bonds within the transport sector and demonstrates the continuing importance they will play in raising finance for low-carbon transportation. China is also seen as a leader in the labeled green bond market and is the largest country of issuance in 2016 ytd.
What are Green Bonds: Using debt capital markets to fund climate solutions
Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for green projects but are backed by the issuer’s entire balance sheet. There have also been green "use of proceeds" revenue bonds, green project bonds and green securitized bonds. This includes bonds that are labeled as green as well as bonds that are financing climate solutions but do not carry a label.
Types of green bonds
This annual flagship report from the Climate Bonds Initiative discovers and quantifies bonds that are being used to finance low carbon and climate resilient infrastructure, including both labeled and unlabeled. Climate Bonds collaboration with entities such as the CCDC, CECEP, NAFMII and the Shanghai Stock Exchange helped identify unlabeled domestic bonds.
The report’s key findings include:
- $694bn, up 16% from 2015.
The climate-aligned bonds universe now stands at $694bn outstanding - A jump of $96bn (16%) from the 2015 figure. This total is comprised of unlabeled climate-aligned bonds at $576bn and labeled green bonds at $118bn.
- 3,590 bonds cover a range of green house gas emitters
The universe is made up of over 3,590 bonds (issued from Jan 2005 to May 2016) from 780 individual issuers across transport, energy, buildings and industry, water, waste and pollution and agriculture and forestry.
- China leads with $246bn
China leads the top 10 countries for climate aligned bonds with $246bn of total issuance (36%) followed by the US ($136bn/16%) then France and the United Kingdom ($64bn & $62bn, around 9% respectively).
- Chinese RMB dominant currency
The Chinese RMB is the dominant currency in the climate-aligned bond universe (with 35% of the total amount outstanding), followed by the US dollar (24%) and the Euro (16%).
- Transport leads unlabeled issuance at $464bn (67%)
Unlabeled issuance is dominated by China Railway Corporation (largest issuer with $194bn). This figure highlights the significance of bonds within the transport sector and demonstrates the continuing importance they will play in raising finance for low-carbon transportation. Low carbon transport was the largest single sector, accounting for $464bn (67%) of the total climate aligned universe, followed by clean energy at $130bn (19%)
- $97bn (14%) across diverse sectors
The remaining $97bn (14%) is drawn from Building and Industry, Agriculture and Forestry, Waste and Pollution, Water or Multi-Sector bonds; a small but welcomed indication towards more diversity in issuance.
- 78% investment grade
78% of the universe is investment grade; the majority of bonds have tenors of 10 years or more; the majority are also government-backed.
- Growth includes new and maturing
The $96bn increase on 2015 includes $94bn in new bonds from existing issuers, plus $85bn from new issuers minus $83bn of matured bonds and issuers that no longer meet our climate-aligned criteria.
“The report reflects the growing weight of Chinese green bond development and its global implications for markets and institutional investors. China is steadily progressing its green finance systems. This alignment of bond market activity with low emissions growth, climate and environmental goals will provide enormous opportunities for global investors," according to Sean Kidney, Climate Bonds CEO. “Green bond based capital to fund infrastructure and environment based projects are now an established model. As countries like China look to turn their INDC commitments into climate plans, the priority for international policy makers and regulators is to further develop and harmonize financial frameworks. This will assist the rapid and sustainable flow of global investment into climate resilient transport, greening cities, clean energy, environmental improvement, water and energy efficiency projects.”
Will It Be Enough?
These climate bonds coupled with government leadership could be a powerful combination. A University of Maryland and the Pacific Northwest National Lab joint study in December 2015 showed that a reason for a quick entry into force of the Paris Agreement would be the amount of adaptation finance it could help unlock. The Agreement sets a goal of mobilizing $100 billion a year between 2020-2025 in climate finance, both for mitigation and adaptation. This money is much needed to engage in ambitious adaptation projects in developing countries, where the impacts of climate change are expected to be most harmful.
As Emilie Mazzacurati, a founder of 427 said, "Climate policy remains high on the agenda for global leaders — from the Paris Agreement to the G20 statement this weekend, which ‘reaffirmed’ the G20 countries’ commitment to address climate change through emission reduction policies and climate finance. The announcement from the US and China paves the way for growing momentum ahead of the next Conference of the Parties (COP 22) in Marrakech, Morrocco, with a renewed focus on implementation and adaptation."