China has announced plans to tighten regulation on green funds, as part of its efforts to tackle ‘greenwashing’ in the world’s second-largest climate fund market, sources with direct knowledge of the matter said.
The new rules, which could be in place in the first half of 2023, will mark a major change in a rapidly growing fund industry in China, where asset managers currently have the leeway to determine the scope of green investments on their own.
The regulations could impact most of the green funds that make up the bulk of the 160 sustainable products now in China, forcing them to back up their green claims or drop the popular label, curbing strong flows in a sector that has raised tens of billions of dollars in the last few years.
At present, China’s green funds only operate within broad investment guidelines that came into effect in 2018 and do not have a mandatory labelling regime. Such funds had $34 billion in assets as of end-September, according to Morningstar data.
The country’s funds regulator, Asset Management Association of China (AMAC), has drafted regulations that will require mutual funds or exchange-traded funds to have at least 60% of their assets in the defined green investments category to be eligible to be sold as green products, the sources said.
Under so-called ‘greenwashing’ funds make sustainability claims which are exaggerated or unverified. AMAC’s rules will be subject to final approval of the China Securities Regulatory Commission (CSRC).
China’s plans come as regulators in the European Union gave the green light to the Corporate Sustainability Reporting Directive (CSRD) which will require more companies to publish detailed information about their impact on the environment.
Climate transition has become a pressing issue for China, the world’s biggest greenhouse gas emitter, which has also seen its climate fund assets soar in 2020 and 2021 from a small base as President Xi Jinping said China would reach “carbon neutrality” by 2060.
China overtook the United States last year to become the second-largest climate fund market globally after the European market. The two countries agreed to renew climate talks, ending months of silence due to geopolitical tensions at the G20 summit in Bali in November.
In the first nine months of this year, 43 climate-themed funds debuted in China, a 30% rise in the total number of products from end-2020.
AMAC’s draft rules borrow from the 2021 version of China’s green bond catalogue, a quasi-scheme of classification, to define green assets. The catalogue is currently only applied to debt financing.
Under the new proposals, investments in programmes listed in the catalogue, such as energy saving and sustainable infrastructure projects, will be considered green investments.
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