More Chinese local government financing vehicles are issuing ESG-themed offshore bonds this year, incentivised by government subsidies, the urge to fall in line with government initiatives and the hope to gain a first mover advantage. But bankers say that, so far, investors care more about the issuers' credit risks and pricing premiums than their ESG frameworks.
Between November 25 and December 2, at least four LGFVs issued ESG-labelled offshore bonds. They included a three-year US$350m 7% sustainability note sold by Deyang Development Holding Group, a US$120m 7.9% sustainability bond due in 2025 issued by Shangrao Investment Holding Group, a US$40m 6.8% three-year sustainability bond by Guilin ETDZ Investment Holding, as well as a three-year US$253m 8.5% green note by Kunming Rail Transit Group, according to IFR records.
The deals added to a growing trend of LGFVs joining other Chinese names in the ESG bond universe. Chinese issuers sold around US$23.6bn-equivalent of US dollar, euro and offshore renminbi ESG-related notes as of December 7 this year, according to Refinitiv data. The amount is less than the US$31.3bn raised in the same currencies during the same period in 2021, but it represents an increase from the US$17.1bn issued in 2020.
However, as this year's total supply of offshore Chinese bonds has plunged, the proportion of ESG notes has risen from around 17% of all offshore Chinese notes in the three currencies in 2021 to around 26% as of December 7 this year, according to Refinitiv data.
A Hong Kong-based DCM banker estimated that there have been more than 30 offshore LGFV-issued bonds this year as of December 2, including the four aforementioned deals, compared with 10 such deals for the full year of 2021. Some LGFV deals are not listed on exchanges or marketed widely, making it hard to know the full extent of issuance.
The direction of government policy is a major motivation for LGFVs to sell ESG bonds, with a focus on the green and sustainability labels.
“For local governments it is very natural for them to issue in green format. The [de]carbonisation goal is there. There will be immense investment needs for them to [build] green assets,” said an ESG banker.
China has vowed to reach carbon neutrality by 2060, which would require more than Rmb100trn (US$14trn) of investments in projects including renewable energy, according to Hainan Green Finance Institute, a Chinese research organisation.
Some LGFVs are also very keen to explore ESG labels because they want to steal a march on the competition and draw investor attention, said a syndicate banker.
Subsidies from governments in places like Hong Kong for ESG-related bond issuances are another important incentive, bankers said. The Hong Kong government has grant programmes that can give as much as HK$2.5m (US$321,144) in subsidies to eligible ESG issuers. The money can be used to cover costs for hiring auditors and legal advisers.
But the LGFVs that have come offshore this year tend to have weaker credit quality than issuers in previous years. Many of the borrowers have opaque corporate structures and few revenue streams, making them difficult for investors to assess their creditworthiness, even ignoring the ESG considerations. Green or sustainable uses of proceeds can be similarly hidden in a black box.
So far, no one has accused LGFVs of greenwashing, but that may be in part because LGFVs rarely court international investors. The borrowers face little scrutiny from their Chinese investors over their ESG claims, bankers said.
"LGFV investors don't really look at their ESG frameworks that closely; they don't really care," said the DCM banker.
Instead, the major focuses of LGFV investors are still the entities’ credit risks and the premium paid for the notes, said the syndicate banker.
On the regulatory front, LGFVs, like other ESG bond issuers, do not face extra scrutiny when they list in places like Hong Kong, where the listing requirements for an ESG bond are the same as those for a conventional bond. But if the issuer chooses to list on Hong Kong's Sustainable & Green Exchange, a platform dedicated to listings of ESG products, it would need to have certain credentials such as external reviews, said the ESG banker.
Since disclosures and transparency are the chief principles behind ESG bonds, issuers need to give investors access to quality information, or else such issuances will end up being just "one-off exercises", said the banker.