Insight & Analysis

China turns to sustainability-linked bonds to fund ESG ambitions

Published: Jul 2023

A new study shows Chinese companies are now embracing ESG, with 93% of surveyed Chinese firms expect to have published an annual ESG report by 2026. The demand for sustainability-linked bonds is growing as China’s zero carbon ambitions need a growing amount of capital. While this is obviously good news, implementing ESG policies in an economy dominated by state-owned companies (SOEs) is not going to be straightforward.

Sustainability-linked bonds (SLBs) and transition bonds have emerged to meet Chinese issuers’ growing need for capital in the onshore market. Following fresh regulatory guidelines from the National Association of Financial Market Institutional Investors (NAFMII) and Shanghai Stock Exchange in 2021 and 2022, issuance of SLBs has seen a sharp growth, rising by CNY33.3bn over the first three quarters of 2022, according to Jingwei Jia, Associate Director of ESG research at Sustainable Fitch. Previous research by Sustainable Fitch points to a growing role for SLBs globally. For the Chinese onshore market, SLB issuers are heavily concentrated in large state-owned utilities, materials, industrials and energy sectors.

“We have helped our corporate clients use a variety of ESG-linked derivatives that include tools like currency hedges. The structure comprises an ESG commitment against the pricing of a hedge, and it’s a very effective tool,” said Kamran Khan, Managing Director, Head of ESG for Asia Pacific at Deutsche Bank Group. “The pricing is instantaneous so if a company doesn’t reach the ESG target, they pay the price immediately. We have seen that the trading side of a corporate treasury division is very sensitive to losing money in this way, and corporate reputations can quickly get damaged. So, the instruments commit the issuers in very meaningful way.”

While it is good news Chinese companies are moving toward ESG, implementing it in an economy with such a high rate of SOEs adds another complication. A new report for Fidelity International, “ESG priorities in China: How companies in China are approaching ESG”, shows a clear divergence in approach to ESG between SOEs and privately owned companies. For SOEs, the role of ESG strategy is in improving operational efficiency and financial performance. Private-owned organisations, by contrast, are more focused on risk management, and managing customer and investor expectations.

ESG has now become part of the Chinese corporate language, with 93% of surveyed Chinese firms expected to have published an annual ESG report by 2026. The survey also found over half of the surveyed Chinese companies plan to invest in building technological and data capabilities to improve the efficiency in ESG data collection over the next 12 months. A big stumbling block for Chinese corporate treasury is the difficultly in collecting the data required for ESG disclosure. Like their international counterparts, Chinese ESG reporting is hampered by a lack of standardised data, reporting formats and verification. They also struggle with a skills gap, like their international counterparts. The most popular approach among surveyed companies is to hire individuals for roles dedicated to developing and implementing the organisation’s ESG strategy (71%). This is especially true for organisations with a large headcount (more than 8,000 employees) and high annual revenue (RMB20bn and above).

While Chinese corporates might differ on their cultural approach to ESG, the fact it is now part of treasury’s language is bringing the business community closer to true global ESG compliance. Chinese participation will finally prove the promise of ESG.

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