Lenders give carbon finance innovation lift

Structured green deposits, special bonds all the rage as emissions trading nears

The imminent launch of a national carbon emissions trading scheme has prompted banks in China to strengthen innovation of certain financial products related to the theme of carbon neutrality.

Lenders have been doing that since the beginning of this year. For instance, HSBC China launched green deposits for its corporate clients in the Chinese mainland last week.

HSBC China's clients now have an opportunity to fulfill their sustainability goals by investing their surplus cash in environmentally friendly projects in sectors like renewable energy, sustainable waste management, energy efficiency and clean transportation.

"More and more companies are keen to identify opportunities to contribute to China's goals to peak its carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060. Green deposits can match the demand of companies with surplus cash for inclusion of sustainability agenda in their financial activities with the demand of those in need of funds to finance their green and low-carbon projects," said Mark Wang, president and chief executive officer of HSBC China.

"The development of green finance in China is accelerating in recent years, as regulators keep improving the top-level design and financial institutions actively innovate their products. The financial sector is playing an increasingly important role in China's transition to a low-carbon economy," Wang said.

Beijing-headquartered China CITIC Bank Corp Ltd announced in May it had launched the country's first structured deposit product linked to a green bond issued by the China Development Bank. It is a carbon-neutral green bond certified by the Climate Bonds Initiative.

A structured deposit is a combination of a deposit and an investment product, where the return is dependent on the performance of some underlying financial instrument.

China CITIC Bank said its structured deposit will enrich transaction varieties of interest rate derivatives while promoting the development of green finance, thus demonstrating that a financial instrument can support economic transition.

Earlier this year, BOC Wealth Management Co Ltd, a wholly-owned subsidiary of Bank of China, offered wealth management products under the theme of carbon emissions peaking and carbon neutrality, with focus on investment opportunities in leading companies in industry segments like energy saving, emissions reduction, new energy, environmental protection and green consumption.

Banks are also ramping up efforts to issue green bonds, especially carbon-neutral bonds, a subcategory of green debt financing instruments.

In the first five months of this year, 150 green bonds worth 192.5 billion yuan ($29.8 billion) were issued in China's bond market, up by 56.25 percent and 82.72 percent year-on-year, respectively.

The big growth came on the back of carbon-neutral bond issuances that became popular ever since the National Association of Financial Market Institutional Investors launched a trial program for this type of bonds in February.

Among the green bonds, 75 carbon-neutral bonds worth 119.97 billion yuan were issued in the first five months, according to Shanghai Brilliance Credit Rating& Investors Service Co Ltd.

Industrial Bank Co Ltd, a listed commercial lender based in Fuzhou, Fujian province, issued a three-year, 2-billion-yuan bond in March. It is China's first carbon-neutral bond specializing in raising funds for equity investments in companies that provide carbon reduction benefits.

The money raised will be used to buy equity stakes in seven new energy companies, involving 22 projects with total installed capacity of 1,350.5 megawatts.

It is estimated that the projects will reduce annual emissions of carbon dioxide equivalent of 1.53 million metric tons.

Once China's national carbon trading market is developed further, commercial banks will likely explore a series of financial products and services related to carbon emission reduction indicators and carbon emission quotas, said Qian Lihua, chief green finance analyst at CIB Research.

The scope for financial innovation in this field will enlarge further, ranging from financing products using carbon emission rights as collateral to various types of derivatives, experts said.