Sources: China Will Propose New Measures to Fight "Greenwashing"

As part of its efforts to rein in 'greenwashing' in the world's second-largest climate fund market, China aims to tighten regulations on so-called green funds, according to sources with direct knowledge of the situation.

The new guidelines, which might be implemented in the first half of 2023, will represent a significant shift in a fast expanding segment of the Chinese funds business, where asset managers now have discretion over the scope of green investments.

The regulations could have an impact on some or the majority of the green funds that make up the majority of the 160 sustainable products currently available in China, requiring them to substantiate their green claims or drop the popular label, potentially slowing strong flows in a sector that has raised tens of billions of dollars in recent years.

Currently, China's green funds only operate within the 2018-implemented wide investment criteria and lack a mandatory labeling scheme. End of September, these funds had $34 billion in assets, according to data from Morningstar.

Asset Management Association of China (AMAC), the country's funds regulator, has drafted regulations requiring mutual funds and exchange-traded funds to have at least 60 percent of their assets in the defined green investments category in order to be eligible for sale as green products, according to sources.

Under the term 'greenwashing,' funders make inflated or unconfirmed sustainability claims.

The guidelines of AMAC would be subject to final approval by the China Securities Regulatory Commission (CSRC), according to unnamed sources who were not authorized to discuss the matter.

AMAC and CSRC did not respond to calls for comment from Reuters.

China's ambitions come at a time when regulators in the European Union, United States, and the United Kingdom are intensifying their scrutiny of asset managers that profit from the increasing demand for funds with environmental, social, and governance (ESG) credentials.

China, the world's largest producer of greenhouse gasses, has made climate transition a top priority. China's climate fund assets grew exponentially in 2020 and 2021 from a modest basis after President Xi Jinping declared that China will be "carbon neutral" by 2060.

Last year, China surpassed the United States to become the second largest climate fund market in the world, behind Europe, according to Morningstar, which gathers worldwide ESG fund statistics.

In the first nine months of this year, 43 climate-themed funds were introduced in China, a 30% increase from the end of 2020.

In the past two years, more than a handful of international asset managers, like BlackRock (NYSE:BLK) and Fidelity International, whose overseas funds are already compliant with green criteria, have entered China.

To identify green assets, AMAC's proposed guidelines borrow from the 2021 edition of China's green bond catalog, a quasi-classification scheme. Currently, the catalog is solely applicable to debt finance.

According to the proposed suggestions, investments in cataloged programmes, such as energy-saving and sustainable infrastructure projects, will be considered green investments.