The need for a common language in Green Finance: Towards a standard-neutral taxonomy for the environmental use of proceeds

Release time:2018-11-06

The need for a common language in Green Finance

Towards a standard-neutral taxonomy for the environmental use of proceeds


     China’s Green Bond Endorsed Project Catalogue and

The Common Principles for Climate Mitigation Finance Tracking

mapped and compared.




Summary


On the global scene, China and the EU are actively advocating for green finance to be included as a central

pillar of sustainable development. Under China’s presidency of the G20, green finance became a key

theme at the G20 agenda for the first time. The G20 Green Finance Study Group was launched as part of

this effort to support the G20’s goal of strong, sustainable, and balanced growth. This initiative has been

continued today through the latest G20 summit in Hamburg and may advance further towards 2018 under

the G20 framework.


This white paper, co-authored by China’s Green Finance Committee (CGFC,launched by the People’s

Bank of China in 2015) and the European Investment Bank, is focused on the case of green bonds, since

this market has achieved a scale and frequency of cross-border flows to make harmonization critical.

Internationally a number of green bond standards exist without a clear method for comparison. As a basis

for developing greater harmony, this paper aims to provide a scheme on the basis of which the Chinese

Green Bond Endorsed Project Catalogue, the project eligibility criteria of EIB’s Climate Awareness Bonds

(a sub-set of EIB’s lending criteria), and the MDB-IDFC Common Principles for Climate Mitigation Finance

Tracking become conceptually compatible, as these represent core applied standards for the classification

of activities underlying green bonds globally.

The present white paper serves this end by initiating a study on how to enhance comparability of green

bond standards in China and the EU. Announced in March 2017, the CGFC/EIB initiative aims to provide a

logical framework for initiatives that could create momentum for harmonizing green finance standards,

including proposals for a “translation device” or “Rosetta Stone” using a universal taxonomy of

environmental activities for the comparison of classifications and standards, starting with climate change

mitigation. Furthermore, a few ad hoc working groups of EU-China technical specialists may be established

to take this work forward in the other areas of green development (e.g. pollution prevention and control,

climate change adaptation, biodiversity loss, and natural resource depletion).


Regarding specifically the comparison of standards, the technical conclusions of the paper are:


1. The Chinese, MDB-IDFC, and EIB standards use different categories for the classification of the

underlying assets. While the Chinese green bond catalogue, which is largely consistent with the Green

Bond Principles, has a broader scope of green, covering “environmental protection” among others, the

MDB-IDFC and EIB standards are focused on climate change. However, both standards include areas not

included in the other. Therefore, direct comparison at the first stage of this study is taking place in the area

of climate mitigation.


2. Regarding the Chinese standard, within climate change mitigation, four categories are not included in the

MDB-IDFC standard, namely energy saving on greenfield facility construction for industries with national

energy consumption allowance, clean utilization of coal, ultra-high voltage grid infrastructure, as well as

urban underground pipeline projects. On the other hand, within the broader scope of the Chinese standard,

some items outside the MDB-IDFC standard are included namely environmental restoration projects, coal

washing and processing for the purpose of clean utilization of coal, cleaner gasoline and diesel, and a few

aspects of ecological protection and climate change adaptation. These differences are similar between the

Chinese and the EIB standard.


3. When it comes to the EIB standard, as climate change mitigation, i.e. “low carbon”, is the scope of both

the MDB-IDFC and the EIB standard, the difference between the two lies in what specific categories to

cover within such scope. Here the analysis finds that the EIB lending standard is different from the MDB-

IDFC standard in its inclusion of nuclear energy. This difference also exists towards the Chinese standard,

which does not include nuclear energy either.



4. The MDB-IDFC standard further includes a number of categories not included in the Chinese or EIB

standard. As opposed to the Chinese standard, the MDB-IDFC standard specifically includes renewable

energy power plant retrofits, wind-driven pumping systems, energy audits to end-users, carbon capture and

storage, non-motorized transport, projects producing low carbon components, as well as a number of

aspects of technical assistance. Lastly, the MDB-IDFC standard also includes categories not included in

the EIB standard, namely energy efficiency in thermal power stations (coal2).

This white paper recommends that a broader working group of China-EU technical specialists works further

on compatibility between the Chinese and MDB-IDFC standards. This includes potentially splitting and

rephrasing categories to enhance direct compatibility, extending the analysis beyond climate change

mitigation toward broader areas of “environmental protection”, and exploring ways to identify a “common

ground” that could serve as the basis for green bonds issued and/or sold by China in the overseas market

as well as by international issuers in the Chinese domestic market. This effort can also feed into the work of

the Green Bond Principles, and could create momentum for enhancing the consistency of green bond

standards globally.


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