China Firms Shy Away From ESG Loans Holding Them to Account

(Bloomberg) -- Chinese firms are lagging their regional peers in a key funding method to meet sustainability goals, even as the world’s second-biggest economy pushes to become carbon neutral by 2060.

So-called sustainability-linked loans usually offer creditors extra margins if borrowers fail to meet their environmental goals, giving firms an incentive to make an extra effort. While the volume of such debt has climbed at a record pace in the rest of Asia Pacific, few deals are being done in China. 

Borrowers are instead taking out more and more green loans that finance environmental projects. China is leading in other types of sustainable debt deals such as green bonds, of which it’s the biggest issuer in Asia and only Germany has sold more in the world so far this year.

The volume of sustainability-linked loans is floundering in China partly because, in a market that’s keenly focused on official pronouncements, policy makers have said little about them even while encouraging other forms of sustainable financing. Guidelines for environmental lending by the People’s Bank of China released in late May emphasized green borrowings, for example, while not mentioning sustainability-linked debt.

Chinese borrowers may also be reluctant to risk harming their green reputation by missing targets specified by the loans.

Still, while ESG disclosure is a relatively emerging topic for the Chinese market, it is already gaining a lot of momentum in recent years, according to Carmen Tsang, head of sustainable banking for greater China at Crédit Agricole CIB. The bank is optimistic about the outlook for Chinese borrowers’ sustainability-linked loans in the second half of this year and into next year. 

“A high level of quality ESG reporting amongst Chinese corporates would be fundamental to support market development of sustainability-linked loans (SLLs), which require corporates to set quantitative targets on corporate-wise ESG key performance indicators,” Tsang said. “It may not be enough of an incentive for a borrower to go through the internal efforts to set high-level ESG targets just for one single transaction.” 

Chinese borrowers have gotten $300 million of SLLs so far this year, after receiving none in the same period in 2020 and $2.3 billion in 2019, according to Bloomberg-compiled data. That compares with a 154% jump in deals in the rest of Asia Pacific this year to $11.9 billion.

Some investors have expressed skepticism toward sustainability-liked debt, questioning whether it’s ethical to be rewarded for a borrower missing a green target. But others say the stringent requirements needed for the borrowings will encourage companies to be more transparent in carrying out their ESG commitments as they race to meet net zero carbon goals.

Read more: Brave New World of ESG Bonds Can Sometimes Leave Investors Cold

“The ultimate goal of sustainability-linked debt is to drive the sustainable development of a company, not just to issue a label,” said Patrick Jin, associate director at ESG research firm Sustainalytics. Jin said some companies which consulted with his firm and disclosed they have no green assets wanted to use a sustainability-linked debt label to demonstrate carbon-reduction steps. But they found such borrowing has stringent requirement. 

Jin’s firm hopes to promote sustainability-linked borrowing, saying, “Companies shouldn’t think they can achieve carbon neutrality just by issuing green bonds or by borrowing green loans.” 

©2021 Bloomberg L.P.