hong kong: asia’s green finance hub€¦ · like hong kong to scale up green services across...

HONG KONG: ASIA’S GREEN FINANCE HUB How Hong Kong’s traditional strengths in fi nancial services are planting the seeds for a new, green fi nancial ecosystem.

Contents

HONG KONG: ASIA’S GREEN FINANCE HUB 2

3 Executive summary 4 Introduction 5 Cangreenfinancefundasustainablefuture?6 Climatechangerisksexposebusinesses7 HongKong:Thegreenfinancinghub8 Howstandardisedreportingallowsgreenfinancetoflourish10 Thegrowthofgreenfinancialinstruments11 Greenfinancialproducts:Supplyanddemand12 Greeningthefinancialsystem13 TappingintotheGlobal-Chinaconduit14 Fromglobalfinancialhub,togreenfinancehub


EXECUTIVESUMMARYIn this paper, we examine the rise of green and sustainable financing, a nascent field fuelled by the existential threat of climate change. Rising temperatures are triggering risks for business, especially transitional risks, as economies increasingly look to low-carbon models.

Central banks globally agree climate risks are financially material, and businesses can ill afford to ignore them. Asia is particularly at risk. A massive reallocation of capital is needed in the region to mitigate the impact of global warming. As Asia’s leading financial hub, Hong Kong is developing a green financing ecosystem that can address this need.

We spoke to experts from the private and public sectors in both Asia and Hong Kong on how Hong Kong is developing a green finance ecosystem and hub. The city is using its

financial and legal frameworks to develop green finance regulations, standards, reporting and certifications. Supported by government investment, public sector resources and private sector expertise, Hong Kong is developing a fast-growing suite of green products and services. These include green and sustainability-linked bonds, loans and funds, which are buoyed by market appetite from retail and institutional investors.

Hong Kong can also benefit from its geo-strategic location next door to Mainland China, which has emphasised a green economy and financial system.

The paper shows the reader the growth, scale and opportunity of green finance and its potential to offer boards and c-suites a way to lessen risk, lower funding costs, enhance returns, and boost competitiveness.


INTRODUCTION

THECLIMATEEMERGENCYCOSTSUSALLClimate change is a direct existential threat that is nearing the point of no return, warned United Nations Secretary-General António Guterres in 2018. The average global temperature has risen by about 1.1°C since the pre-industrial era and the ocean has warmed by half a degree. Increasing temperatures, rising sea levels and more severe and unpredictable weather patterns are triggering food security, water resources and human health concerns.

African and Asian countries are particularly vulnerable to climate change. In Asia, the Global Climate Risk Index identifies South and Southeast Asia as especially exposed, due to a combination of developing economies, geographic location, densely populated low-lying areas, and insufficient resilient infrastructure.

This is having a measureable impact on economic prosperity, development and growth. A 2016 report by the London School of Economics says the global financial value at risk from climate change could be as high as 17% of all assets, depending on how much temperatures

rise. In the Asia-Pacific, a 2019 report by the Economist Intelligence Unit forecast that climate change will cause the region’s economy to contract by 2.6% by 2050.

Environmental factors are also taking a toll on economies and societies. According to the Asian Development Bank (ADB), damage from natural disasters in the Asia-Pacific

reached an estimated US$76 billion a year in the past decade, more than double that of the previous decade. “Climate change poses challenges for Asia that have the potential of being even more severe than for Western developed countries, where climate risks get far more attention,” says Ashley Alder, the chief executive officer of Hong Kong’s Securities and Futures Commission (SFC).

US$1.7TRILLIONThe amount the ADB estimates will need to be spent each year until 2030 in Asia on infrastructure that maintains growth and responds to climate change.

Green and sustainable finance focuses on environmental and sustainable aspects, such as tackling climate change and scaling up investments that provide environmental benefits. This investment is urgent—to limit global warming, a massive reallocation of capital is required. The ADB estimates US$1.7 trillion will be needed each year until 2030 in Asia on infrastructure that maintains growth, tackles poverty and responds to climate change.

Along with the pressing need for green financing, climate change is fundamentally changing the way capital is raised, managed and assigned in Asia. “Climate change is having a real impact on the supply of capital, on the cost of capital, and on what future funding arrangements are likely to look like in the region,” says Mark Konyn, chief investment officer at the Hong Kong-based insurer AIA.

A key part of this transition involves shifting from the traditional financial model of creating value for shareholders, to a model that takes heed of non-financial factors, such as environmental, social criteria and good governance (ESG). While there has been some debate about how ESG investing affects returns, an analysis of over 2,000 academic studies carried out by the asset management firm DWS and the University of Hamburg showed ESG had an overwhelmingly positive impact on corporate financial performance, with only one in 10 studies finding a negative link. “Businesses have a broader responsibility to their stakeholders beyond just driving the bottom line to deliver the profits and the dividends that accrue to the shareholders,” says Mr Konyn.

To pursue this type of sustainable growth, companies will need to take into account emissions, resource use, waste management and biodiversity. Capital markets, particularly the bond market, will play a key role in financing this transition. According to a February 2019

report by the International Organization of Securities Commissions (IOSCO), there will be increased demand for innovative products, such as green bonds, renewable energy investments and sustainable funds to mitigate and adapt to a changing climate, and greater use and incorporation of ESG criteria when deciding on investments.


CANGREENFINANCE FUNDASUSTAINABLE FUTURE?

What’sinaname?Greenfinanceexplained

The terms green finance and sustainable finance are often used interchangeably. Broadly, sustainable finance aims to move money towards meeting the United Nation’s Sustainable Development Goals and takes ESG impacts into account. Green finance, which is often seen as a subset of sustainable finance, tackles climate change and focuses on investment with environmental benefits measured against a set of recognised standards.

“Climatechangeishavingarealimpactonthesupplyofcapital,onthecostofcapital,andonfuturefundingarrangements.”

Mark Konyn, chief investment officer, AIA


CLIMATECHANGE RISKSEXPOSEBUSINESSES

In Asia in general, and Hong Kong in particular, the risks created by climate change are becoming a key concern for businesses.

Companies have to manage the risks that stem from a changing climate, such as direct physical risks to property, people and business operations from extreme weather hazards and natural disasters. However, even

those companies that do act may also incur losses from transitional risks, as the economy re-values assets because of new policy, technology or market sentiment on the path to low-carbon growth. Hong Kong, as a major financial and commercial centre, is particularly exposed to complex transition risks that may involve policy and regulation, technology, market and reputation risks.

These risks need to be well managed, or it could ruin long-term returns. “People used to think about credit risk and market risk, but we are now forced to deal with climate risk,” says Darryl Chan, executive director (external) of the Hong Kong Monetary Authority (HKMA). “We have to look

at the way banks provide loans. What is the risk of physical damage to properties financed by bank loans because of natural disasters? Is there sufficient protection for banks if anything happens to properties financed by their loans? That’s the climate risk.”

For those companies that do not respond to the changing climate, the risk of inaction is even greater. “As a corporate entity, or as an investor, ultimately you’ll be left behind, you won’t be current. I think that’s the real risk,” says Mr Konyn.

While Asia faces considerable risks and vulnerabilities due to climate change, the continent also possesses the skills, capacity and investment to build, finance and develop a safer and cleaner future. At the UN Asia-Pacific Climate Week meeting in September 2019, participants agreed the Asia-Pacific region could lead the global transformation towards a low-carbon and resilient economy.

If this is to be successful, Asia will look to financial centres like Hong Kong to scale up green services across capital markets, banking, investment, fintech and insurance.

“Hong Kong, Asia’s key finance hub, must play a leading role to mobilise the private sector to fill the huge funding shortfall to finance the transformation to low-carbon economies,” says Mr Alder.

“Peopleusedtothinkaboutcreditriskandmarketrisk,butwearenowforcedtodealwithclimaterisk.”

Darryl Chan, executive director (external), Hong Kong Monetary Authority


HONGKONG: THEGREENFINANCINGHUB

Tackling climate change and moving to a low-carbon economy requires a drastic overhaul of the way markets and companies are shaped. “It takes resources, it takes planning, it takes policies, it takes the buy-in from senior executives and the board, and it takes administration. These are not things you can do overnight,” says Mr Konyn.

However, as the world’s third-most competitive financial centre, Hong Kong is well-positioned to build the sustainable finance ecosystem and become a key green financing hub.

The city has established, robust standards and reporting frameworks, and the institutions, talent and capabilities to expand and adapt these frameworks to new green products and standards. And, its geo-strategic location provides access to Mainland China—the world’s largest carbon market, and Asia-Pacific’s leading issuer of green bonds.

Finally, Hong Kong’s political administration and leadership sees green finance as a priority for the territory’s economic development, and its government provides top-down support and investment. Speaking at a 2018 seminar, Carrie Lam, chief executive of Hong Kong said, “The strong demand for green funding and for green investment opportunities have led to the exponential growth in global green finance, including in the issuance of green bonds. Hong Kong is ready to play our part in green financing.” Moreover, looking forward to the 6th Annual Climate Business Forum co-organised by HKMA and the International Finance Corporation of the World Bank Group next month, James Lau, Secretary for Financial Services and the Treasury, highlighted Hong Kong’s vision “to be a hub for thought leadership and international dialogue in green finance”.

“HongKongisreadytoplayour partingreenfinancing.”

Carrie Lam, chief executive, Hong Kong

“Weseektobeahubforthoughtleadershipandinternationaldialogueingreenfinance”.

James Lau, Secretary for Financial Services and the Treasury, Hong Kong


HOWSTANDARDISED REPORTINGALLOWSGREEN FINANCETOFLOURISH

Every financial system requires a robust framework of institutions, regulations, standards and reporting networks to ensure transparency, confidence and trust. As the risks associated with climate change become financially material to companies, investors demand

green products, and consumers demand that brands adopt sustainable practices. In turn, this leads to a corresponding demand for related regulations and reporting standards.

A report by HSBC in 2019 on sustainable finance and investing showed 86% of investors in Asia and

84% of issuers thought ESG factors were important. “Environmental issues are acting as a catalyst to motivate companies to start asking questions, to better understand [environmental] issues and hopefully move towards better disclosure and better governance around those disclosures,” says Mr Konyn. This is a view echoed by Pat-Nie Woo, a partner at KPMG China. “Boards and C-suites need to know that disclosure of ESG status is getting to that stage of being mission-critical. It’s not about just compliance with regulators’ demands. They are going to be asked [about ESG] by their bankers, their insurance providers, and their investors,” says Mr Woo.

Hong Kong is taking the lead on refining and developing a standardised reporting framework in Asia. In 2018, the SFC published its green finance strategic framework for developing the city’s green finance sector. One aspect of the framework was a focus

86% The percentage of investors in Asia who thought ESG factors were important, according to a 2019 report by HSBC.

on enhancing environmental and climate reporting, which took into account recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD is a transnational organisation of regulators and businesses that develops guidelines for companies on how to disclose their climate-related risks.

This ethos of transparency has been embraced by Hong Kong’s private sector. A 2018 report by the UN Sustainable Stock Exchanges Initiative showed the city ranks number one when it comes to its growth in disclosure. Businesses in Hong Kong realise that ESG risks are “more than just a corporate social

responsibility or a reputational issue”, says Mr Lau. By reporting on ESG, companies are showing they have strong management and long-term prospects, he added. Hong Kong also has around 300 groups signed up to the Global Reporting Initiative, an independent standards organisation that helps businesses work out their impact on climate change, human rights and corruption. “If you can encourage disclosure first, then you slowly build that sense of accountability longer term,” says Mr Konyn.

In line with the SFC framework, and following a 2019 consultation that supported stronger reporting, the Hong Kong Exchanges and Clearing Limited (HKEX) announced in December 2019 that it would strengthen ESG rules for the city’s listed companies. Starting 1 July 2020, it will be mandatory for boards to disclose how they consider ESG matters, and companies will need to disclose on how climate is impacting business. HKEX has also shortened publication deadlines for ESG reports. These changes reflect the exchange’s commitment to both enhance Hong Kong’s ESG regulatory framework and meet investor and stakeholder expectations, says Grace Hui, the chief operating officer from HKEX’s listing department.

This kind of standardised reporting, which is consistent, comparable and based on reliable datasets and methodology, allows investors to make decision-useful choices. “People on the ‘buy-side’, like asset managers, are asking for regulations because they want comparability,” says Mr Alder. A 2019 SFC survey of asset owners revealed all respondents were in agreement: more disclosure was needed to identify those firms with stronger ESG practices and reduce “greenwashing”—the practice of falsely or misleadingly portraying a company’s products as environmentally sound. The disclosures which asset owners find most useful go beyond marketing-style narratives of the ESG philosophy and policy statements. Asset owners look for outcomes and evidence of ESG impact in addition to financial performance, consistency between policies and practices, more supported analysis of asset-specific ESG risks, as well as the analytical tools used, results of corporate engagement and voting track records.


Public-private-academicpartnerships

One of the hallmarks of Hong Kong is the close collaboration between the public sector, private sector and academia. This is evident in the green finance sector also.

The HKMA has set up a one-stop Centre for Green Finance to help companies and banks better understand how to become green, especially when it comes to sustainable infrastructure and green developments. The Hong Kong Quality Assurance Agency (HKQAA) will train wealth and asset managers and executives, and is actively taking part in developing international standards for green debt instruments, green finance and sustainable finance.

Meanwhile, local universities, like The University of Hong Kong, are offering courses on corporate social responsibility. Hong Kong officials are also working beyond the city’s borders and contributing to thought leadership globally by collaborating with networks of central banks to develop green finance. The SFC, for one, is leading IOSCO’s Asia-Pacific regional committee in setting up a sustainable finance working group to coordinate regulatory and development efforts in the region.

TOPSPOTHKEX is ranked number one among 35 exchanges for its growth in disclosures, according to a 2018 report by the UN Sustainable Stock Exchanges Initiative.


THEGROWTHOFGREEN FINANCIALINSTRUMENTS

In October 2019, the research firm, BloombergNEF, reported that global sustainable debt had surpassed US$1 trillion. This sustainable debt market includes debt securities that incentivise a borrower’s sustainability performance, as well as green, sustainability and social bonds and loans.

The bulk of the growth in the sustainable debt market comes from green bonds. According to financial services firm Dealogic, issuance of green bonds in the Asia-Pacific region hit record levels in 2019. Green bond issuance in Asia-Pacific raised US$18.89 billion—with Mainland

China’s green bond market accounting for US$8.13 billion of this. Hong Kong played a significant role in this region-wide trend. In May 2019, the Hong Kong government raised US$1 billion from the sale of its inaugural green bond. It was the first bond to be issued under the city’s HK$100 billion (US$12.8 billion) green bond programme, one of the largest government-led green bond issuance programmes in the world.

Proceeds from green bonds are used to improve the environment, combat climate change and transition to a low-carbon economy. Among projects being considered in Hong Kong are those centred on renewable energy,

energy conservation, pollution control, nature conservation, biodiversity protection and clean transport. In total, green bonds arranged and issued in Hong Kong in 2018 reached US$10.8 billion, up from US$3.2 billion in 2017.

To encourage take-up, there are a number of incentives available. The Pilot Bond Grant Scheme subsidises the issuance costs (up to US$320,000) for first-time bond issuers in Hong Kong, including green bonds. Meanwhile, the Green Bond Grant Scheme subsidises the costs (up to US$102,000) that issuers incur obtaining certification under Hong Kong’s Green Finance Certification Scheme. This certification scheme was designed by the HKQAA, which is also offering certification for green funds in order to further encourage investors to support green projects.

Green loans and loans linked to the sustainability performance of the borrower have also surged. According to data from market research firm Debtwire, 2019 saw a sevenfold jump in the volume of these loans across Asia, excluding Japan. Hong Kong entered the sustainability-linked market in 2019, signing four such deals.

US$12.8BILLIONThe size of Hong Kong Government Green Bond Programme—one of the largest government-led green bond issuance programmes in the world.

Whataregreen,sustainability andsocialbondsandloans?

These are financial instruments specifically earmarked for projects with a positive environmental or social impact, such as funding a renewable energy project or waste management scheme, or financing affordable housing or access to essential services.


GREENFINANCIALPRODUCTS:SUPPLYANDDEMAND

Green bonds are one of the most visible green financial products, but Hong Kong plans to bring a variety of green and sustainability-linked financial instruments to market. The SFC is facilitating the development of a range of green-related investments, including listed green financial products and unlisted, exchange-traded and “over-the-counter” green financial products. The SFC is also working with HKEX on how it can develop and promote the listing and trading of green financial products, such as bonds, indices and derivatives.

This initiative is in line with public demand. A June 2019 survey by Hong Kong’s Investor and Financial Education Council showed one in four retail investors wanted to know more about green finance, with 7% saying they wanted to invest in green financial products over the coming year. One of the most popular green financial products is sustainability-linked loans—corporate loans where the interest rate is linked to sustainable key performance indicators, such as reduced carbon emissions.

Property developer Swire Properties was the first company in Hong Kong to take up such a loan, one that is benchmarked against its year-on-year ESG performance targets. In July 2019 it converted an existing HK$500 million loan (US$63.8 million) with Crédit Agricole CIB into a sustainability-linked loan. Under this new type of loan, Crédit Agricole agreed to reduce the interest rate each year if Swire Properties met two conditions. Firstly, the real estate developer had to retain its listing on the Dow Jones Sustainability World Index (DJSI World), and secondly it had to reduce its “energy use intensity” to a set target for its Hong Kong portfolio.

The loan is being used to finance green projects, such as new energy saving technologies and green buildings. It helps Swire Properties meet the ESG targets established under the company’s Sustainable Development 2030 strategy, and allows the organisation to save money. “The more we achieve the more we can save,” says Fanny Lung, finance director at Swire Properties. Staff working for the company can also see how meeting ESG targets translates into dollar savings. “This is a very powerful link because that gives us more incentive internally to drive more initiatives on the sustainable development front,” says Ms Lung.

Being known for taking a sustainable approach to financing has also enabled Swire Properties to enhance its brand reputation, retain staff, and attract the interest of bankers and investors. “You can monetarise the upside to differentiate yourself from the other competitors in the market,” says Ms Lung.

TheHongKong greenbondmarket

2015 2016 2017 2018

US$0.3 billion

US$1.6 billion

US$3.2 billion

US$10.8 billion


GREENING THEFINANCIALSYSTEM

There is a global consensus that central banks should take the lead in “greening” the financial system. In Hong Kong, the HKMA is the territory’s central banking institution. Aside from ensuring currency stability and regulating Hong Kong’s financial system, the HKMA also manages the Hong Kong Exchange Fund.

Valued at HK$4.2 trillion (US$539 billion), the Exchange Fund keeps the Hong Kong dollar linked to its American counterpart and helps ensure financial stability in the territory. To “green” the fund, the HKMA is incorporating ESG principles into its investment processes. Green and ESG investments in the fund are given priority—as long as the long-term risk-adjusted return is comparable to other investments.

This approach is part of the HKMA’s overall strategy to emphasise responsible investment and sustainable long-term performance. Other facets include sustainable investing in renewable energy and green buildings and incorporating ESG factors into the credit risk analysis of the bond portfolio. The HKMA asks external managers of its equities funds to follow established global ESG and responsible ownership guidelines, while external fund managers of its developed market equities portfolios are requested to adhere to internationally recognised ESG standards.

“When we do the evaluation of our external managers, when we look at investment opportunities in private equity, or all sorts of alternative asset sets, ESG is one of the things that’s on our checklist,” says Mr Chan. The agency also has plans to grow its green bond portfolio, create ESG-themed mandates in equity investment, and include green accreditation when considering investing in buildings.

The significance of the HKMA—Hong Kong’s largest asset owner—embracing responsible, sustainable investment practices has not been lost on the market. When the HKMA applies this kind of ESG lens to their fund, it sends a clear signal about the importance of managing money under ESG principles, says Mr Woo. Such principles are also being used in the city’s US$116 billion pension fund, the Mandatory Provident Fund.

On top of greening its funds, the HKMA is also targeting the city’s banks, since they are at the core of any green finance overhaul. The way banks operate will impact how climate risk is managed or reduced, the HKMA says. In the first phase, which is set to be complete in the first half of 2020, the HKMA is developing a framework to assess the “greenness baseline” of Hong Kong’s banks. Thereafter, “tangible deliverables” will be set to promote green and sustainable banking in a bid to address climate risk.


TAPPINGINTO THEGLOBAL-CHINACONDUIT

China has embraced green finance. Chinese President Xi Jinping has made environmental protection one of the country’s top three priorities and approved a far-reaching policy goal of establishing an “ecological civilisation” built on a green financial system. Aside from its massive issuance of green bonds, China has the world’s largest carbon trading exchange, has set up five pilot zones to test green finance innovations, and is aiming to introduce mandatory ESG reporting in 2020.

Hong Kong can help support China’s green finance aspirations by: • Leveraging the city’s traditional role as a conduit of trade,

capital and talent both to and from Mainland China• Acting as a catalyst to harmonise green standards

across China and Europe• Meeting Mainland China’s large appetite for green

financing, and matching it with a growing international supply of green capital

• Loaning capital to Mainland Chinese organisations via green bond issues and green bank loans, which allows Mainland banks to get cheaper financing

• Driving global capital into the Mainland’s green bond market via Bond Connect—a mutual market access scheme that allows investors from Mainland China and overseas to trade in each other’s respective bond markets

“With China being a key player in green finance initiatives, our proximity to the Mainland market, our well-established bond issuance infrastructure and our deep pool of liquidity means Hong Kong is well positioned as the go-to green and sustainable finance market,” says Christopher Hui, executive director of Hong Kong’s Financial Services Development Council.

There is also increased co-operation between Hong Kong and Mainland Chinese institutions around green finance and ESG. Hong Kong is helping streamline green financial product issuances and harmonise standards across the two markets, through its knowledge of both the local market and global green financial standards. Another example is the Green Finance Alliance. Launched by the Hong Kong Green Finance Association (HKGFA), along with its counterparts in Guangzhou, Shenzhen and Macao, the alliance will host research and fund green finance initiatives. This includes incubating green investment in Guangzhou’s supply chain and Shenzhen’s water treatment plants, as well as working on water risk analysis and green building schemes.

Finally, on a broader strategic level, Hong Kong can also support green financing under the The Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and the Silk

Road Economic Belt and the 21st-century Maritime Silk Road (shortened to the Belt and Road Initiative or BRI). Sustainable infrastructure projects that incorporate low-carbon and sustainable development practices are a key priority of the BRI. To support this, the HKGFA, which is made up of 113 financial groups and green businesses within Hong Kong, plans to launch a green project database for the BRI.

The Central Government has also designated Hong Kong as the green finance hub for the GBA. The green business potential of the GBA is expected to jump fivefold from US$90 billion in 2018 to US$450 billion in 2030. The majority of sustainability-linked investments in the GBA would go into renewable energy and transport projects.

WithChinabeingakeyplayeringreenfinanceinitiatives,ourproximitytotheMainland market,ourwell-establishedbondissuanceinfrastructureandourdeeppoolofliquiditymeansHongKongiswellpositionedasthego-togreenandsustainablefinancemarket.”

Christopher Hui, executive director, Financial Services Development Council, Hong Kong


CONCLUSION

FROMGLOBALFINANCIALHUB, TOGREENFINANCEHUBGreen finance will grow, but it needs the right ecosystem. Hong Kong’s biggest opportunity and challenge is to be a leader not just regionally, but globally, in the nascent area of green finance.

The city’s institutions, frameworks, capital, political leadership and geo-strategic location have equipped it with the capacity, skillset and resources to help steer global leadership of green finance.

However, challenges remain. The transitional risks will have to be managed. To succeed, Hong Kong will need to take a multifaceted, multi-stakeholder approach that factors in environmental and economic impacts.

The climate emergency is an existential one, particularly in the Asia-Pacific, and the region will need the kind of investments, products and solutions that Hong Kong is set to offer.

While every effort has been taken to verify the accuracy of this information, neither (E) BrandConnect or Hong Kong Information Services Department can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

This paper is produced on behalf of Hong Kong Information Services Department by (E) BrandConnect, a commercial arm of The Economist Group. (E) BrandConnect operates separately from the editorial staffs of The Economist and The Economist Intelligence Unit.

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