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Shanghai Stock Exchange unveils plan to support China’s decarbonization

MioTech Research2022-03-11

Covered Document: Shanghai Stock Exchange’s Carbon Peaking and Neutrality Action Plan of the 14th Five-year Plan Period

The Shanghai Stock Exchange, home to approximately 1,600 domestic companies’ listings, announced its action plan to support China's decarbonisation goals during the 14th Five-year Plan (2021-2025) period on March 1, 2022.

Green equity

  • The Exchange will support the listing of the companies with a focus on low carbon and core low carbon technologies on its STAR market (Science and Technology Innovation Board).
  • Enact appropriate restrictions for listings of companies with high energy consumption and high emissions.
  • Incorporate more transparent ESG disclosures in the Exchange’s digital platforms “SSE Infonet Ltd” and “SSE Info.”

There is a lot of potential for green / low carbon / low carbon technology companies to list on the STAR market. Currently, 14 companies out of 392 companies on STAR board, or 3.6% of total, are classified as environmental protection companies. They make up a total market cap of Rmb36bn / US$5.7bn, or less than 2% of STAR’s Rmb1.9tn / US$300bn as of March 9, 2022.

Green bonds, ABS, and REITs

  • The Exchange will support the development of green bonds with subsidies and tax exemptions and promote the securitisation of quality green assets and the receivables of energy-saving and emission reduction projects.
  • The Exchange will also support the issuance of green panda bonds, Chinese RMB-denominated bonds from a non-Chinese issuer sold in China.
  • The Exchange will also promote piloting REITs for projects with social benefits and REIT’s sustainable development.
  • The Exchange will also promote the development of green ABS and will increase their market impact through displaying both green bonds and green ABS on the exchange’s online dashboards.

The first batch of REITs were only issued in May 2021, with less than a year of history, leaving more room for the development of green REITs. A total of six REITs is currently trading on the Shanghai Stock Exchange.

Table: First Batch of REITs

Source: Publicly Available Information

China is the second-largest green bond market globally, with over Rmb1tr of green bonds outstanding. China is also the world’s second-largest ABS market in the world [1], and it is also leading the market of green ABS. According to the Climate Bonds Initiative, there were 82 trades of green ABS products as of September 2021, creating a total transaction value of Rmb115bn (US$18.2bn). ABS products backed by renewable energy assets accounted for Rmb40bn of assets, or 42% of the total green ABS market in China [2]. ABS products backed by low-carbon buildings and climate adaptation only accounted for 7% and 1% of the market respectively.

Figure: Underlying Assets of Green ABS Products in China

Source: Climate Bonds Initiative[2]

ESG ETFs and derivatives

  • The Exchange will also promote the ESG ETF products and derivatives of carbon emission or pollution discharge allowances.

ESG ETFs are popular in China in recent years and the Exchange is planning on supporting more ETFs as well as green indexes.

In 2021, The top three product launches in ESG ETFs by asset sizes in the Asia-ex Japan region were all Chinese equity ETFs: China Southern CSI Yangtze River Protection (Rmb2bn / US$320m), E Fund CSI Yangtze River Protection (Rmb2bn / US$320m), and GF CSI Fully Electronic Power. We expect this trend to accelerate with Shanghai Exchange’s new initiatives.

On the index side, China Securities Index has announced that a CSI500 ESG Selection Strategy Index will be launched on 21 March. Other indexes that focus on low carbon and the environment include Orient Securities Carbon Neutral Index. The Exchange will support to design a flagship green index.

Other exchanges that followed the low-carbon initiatives include the Hong Kong Exchange and Shenzhen Stock Exchange.

Hong Kong Exchange joined the Glasgow Financial Alliance for Net Zero (GFANZ) and the Net Zero Financial Service Providers Alliance (NZFSPA) as a part of its ongoing commitment to the long-term sustainable development of global financial markets. It also published the "Practical Net Zero Guide for Business" in December 2021 to help guide the Hong Kong listed companies to develop a pathway to decarbonise.

The Shenzhen Stock Exchange in September of last year released two "Carbon Tech" indices — Carbon Tech 60 and Carbon Tech 30. Carbon Tech 60 is jointly researched and compiled by SZSE and the Center for International Knowledge on Development (CIKD). Its full name is “CNI CIKD Carbon Neutral Technology Power Index”. Carbon Tech 30’s full name is “SZSE ChiNext Carbon Neutral Technology Power Index” and has 30 stocks on the ChiNext Board of SZSE as constituents.

Table: Overview of A-share and Hong Kong Stock Markets

*As of March 8, 2022 Source: Publicly Available Information

[1] BNP PARIBAS. Safe harbours: China’s ABS market comes of age [J/OL] 2020, https://cib.bnpparibas/safe-harbours-china-s-abs-market-comes-of-age/.
[2] CLIMATE BONDS INITIATIVE. 中国绿色资产证券化报告 2020 — 市场现状 [R]: Climate Bonds Initiative, 2021.