China, the largest green bond issuer in the world, needs to make further improvements in market infrastructure by increasing private participation, developing an offshore market and aligning its domestic green bond issuance standards with international ones, experts said.
The country issued over $23 billion in green bonds in the first 10 months of 2017, representing 22 percent of total bond issuances of $106 billion in the same period, according to a global green bond research report by Bank of America Merrill Lynch. The current global green bond market comprises more than 550 issuers from 45 countries in 29 currencies.
Most of the recent green bond issuances have been driven by the People's Bank of China, the central bank, which published separate green bond standards and quotas in December 2015.
The domestic green bond market has also been maturing and gaining credibility, with third-party verification and ratings, as well as indices growing rapidly.
Bank of America Merrill Lynch expects China to require 2 to 4 trillion yuan ($315-630 billion) in green investments because the country has the incentive to avoid coal use so as to contribute to global emission savings.
Bloomberg estimates China will be the largest driver of renewables investment with $100 billion set to be invested annually in this sector. Through 2040, China is projected to account for $1 out of every $3 invested in renewables.
Despite the rosy market outlook, the country's green bond issuance market still has room for quality growth, financial analysts said.
Firstly, green bond issuance is largely driven by the PBOC in China. For promoting market diversification, the majority of investment must come from green financing and the private sector. Bank of America Merrill Lynch estimates the public sector can only contribute a maximum of 15 percent for the required 2 to 4 trillion yuan green investments.
"Any entity could issue green bonds as long as they can get a critical mass and have green projects in pipeline. Any entity coming from any sector is issuing green bonds and this brings much more diversification in investors' portfolios," said Ma Beijia, thematic investment strategist at Bank of America Merrill Lynch.
Second, China can mull forging an offshore green market to elicit more green bond issuances.
Currently the Chinese green bond issuance standards are a little bit different from international standards and this should be the third area of improvement.
Ma said it is difficult to say whether the Chinese green bond issuance standards will be aligned to the international standards soon, but added: "Most of the investors are doing their work to assess whether Chinese green bonds fit their frameworks. Chinese standards are more in line with local needs."
Bank of America Merrill Lynch expects up to $160 billion in green bonds will be issued this year, and green bonds have the potential to reach $1 trillion of annual issuance by 2020, playing a major role in boosting countries' commitments to tackle climate change.
