In recent years we have witnessed unprecedented storms, record temperature highs and lows, melting glaciers and raging fires. In just the past few months, Asia has seen severe environmental events including drought in Taiwan and cyclones in India – on top of the ongoing Covid-19 pandemic. It is now widely accepted that the need to tackle climate change has reached a point of urgency, which has raised the profile of sustainable finance at the same time.
The global commitment to cut carbon emissions as part of the Paris Agreement, signed in 2015, means that major changes are ahead for businesses. Green finance has a crucial part to play in raising funds for sustainable projects, protecting against climate risk, and helping companies to upgrade.
Ashley Alder, CEO of the Securities and Futures Commission (SFC), said that the Covid-19 pandemic had changed a remote risk into a reality.
“The whole area of sustainable finance, in particular climate, has transformed from a peripheral concern of regulators only 12 to 18 months ago, to something that is increasing central,” he said. “This is happening at a global level, and also increasingly in Hong Kong.”
Alder was speaking at the Chamber’s recent seminar titled, “Putting Hong Kong on the Map for Green and Sustainable Finance.”
Also speaking at the event was Eddie Yue, CEO of the Hong Kong Monetary Authority. He agreed that sustainable finance had become increasingly topical as recent events highlight the fragility of the balance between science and nature.
“Climate change is arguably the most serious challenge facing the world today,” Yue said.
The Chamber’s Chairman Peter Wong noted the urgency of responding to the threat of climate change, and that efforts to mitigate the impact could also open up new markets and opportunities for businesses in the city.
“In Hong Kong’s case, we have the advantage of being the gateway to the Mainland, where the Central Government has committed to ambitious climate goals of its own,” he told the audience. “It is important that we position ourselves to become an agent for change, as well as to seize the opportunities that are arising.”
Businesses and investors are now increasingly aware of the potential impact on their assets from extreme weather events. Around US$35 trillion of assets worldwide is exposed to climate risk, for example, with island nations like the Maldives and Mauritius threatened by rising seas.
Transition ahead
But besides the physical impact, businesses must also consider transition risk, Yue added. New policies are being rolled out around the globe to encourage carbon reduction, for example more stringent supervision and reporting rules. There are likely to be outright bans on certain polluting products and industries, like those involving fossil fuels.
Virtually all companies will have to look at their operations and find ways to reduce their environmental impact, and will be seeking green finance products to help them evolve.
A shift in the outlook of investors is also driving the current interest in sustainable finance – which broadly refers to investments that include ESG (environmental, social and governance) considerations. This can include cleaner transport and energy, sustainable agriculture, green buildings and also social investments like healthcare and education.
“We have seen growing awareness in both the public and private sectors on climate and ESG issues as well as demand for sustainable financing solutions, as evident in the rising number of client conversations and financing activities in the ESG space,” said Angel Ng, CEO of Citi Hong Kong and Macao.
“Sustainability is also firmly established as high priority issues for institutional investors, with 57% in the Asia-Pacific region expecting to have incorporated ESG issues into their investment analysis and decision-making processes ‘completely’ or ‘to a large extent’ by the end of 2021,” she added.
Jonathan Drew, Managing Director and Global Head of ESG Solutions Group for HSBC, based in Hong Kong, said that having robust ESG credentials, and demonstrating credible transition plans, are no longer optional for businesses.
“Governments and regulators are setting high expectations and we are now seeing legal action being taken against entities not setting ambition high enough,” he said.
“There’s also a lot of attention from banks and investors on making sure capital is deployed in a way that helps tackle the climate crisis and that business does no significant harm across a broad consideration of sustainability issues. So if businesses aren’t actively thinking about sustainability, they need to start doing so right away.”
A report from the Hong Kong Green Finance Association released in May noted that addressing climate change requires fundamental transformation across all sectors of the economy.
“The question is no longer why or whether the global economy needs to move towards a low carbon, climate adapted, sustainable model, but rather how rapidly the required transition can be financed and operationalized,” the report said.
However, exactly how this transition will be financed is not yet clear. “Hong Kong could play a crucial role in lending a voice of support and contemplating how regulation could assist in incentivizing the Asian market to scale.”
The green finance sector is not without challenges. As Alder from the SFC noted, a key issue is the lack of standardization around the subject.
“The problem we have been dealing with, internationally and locally, is the multiplicity of voluntary standards against which corporates are able to disclose.”
A lack of consistency can create the perception that there is also a lack of transparency, which can lead to accusations of greenwashing. However, there has been encouraging progress in this area, Alder added, with frameworks from the International Organization of Securities Commissions, International Financial Reporting Standards and the Task Force on Climate-Related Financial Disclosures being amalgamated to create a prototype.
To help Hong Kong in its ambition to be a global green finance hub, we should embrace the emerging global standard, he said. “We need to be ambitious, and we need to demonstrate to the world that we are the real deal, and that there is no content deficit.”
Potential for growth
Hong Kong has had its eye on the sector as a growth driver for some time. In her Policy Address delivered in November, Chief Executive Carrie Lam said that Hong Kong would strive to achieve carbon neutrality by 2050.
“We will develop green finance to boost investments conducive to reducing carbon emissions, build a low-carbon economy which is more resilient to climate change, and enhance public education and publicity,” the Chief Executive said.
Delivering on this promise, earlier this year, the Government launched green bonds valued at US$2.5 billion, available in five, 10 and 30 year tranches. HKMA’s Yue noted that this is among the largest in the world, and will be expanded in the coming years.
Undoubtedly, this is a market with great potential. If the signatories of the Paris Agreement are to meet their goals, an estimated annual investment of US$3 trillion to $5 trillion globally will be needed. Hong Kong’s long experience as a financial hub means that it is in prime position connect investors, businesses and projects.
And although sustainable finance has grown rapidly in recent years, it is still a small part of the overall market, meaning there is considerable potential for it to increase its share further.
Mainland China has also committed to significantly cutting its carbon emissions, which is likely to create further opportunities for Hong Kong, particularly in the Greater Bay Area (GBA). In September last year, the GBA Green Finance Alliance was launched, and is already supporting six projects in areas including solar energy, waste disposal and supply chain.
Ng from Citi said that Hong Kong is well-positioned to become a regional ESG finance hub, and to capitalize on the enormous green financing opportunities presented by the GBA.
“Proper governance and transparency are of utmost importance to the success of any ESG strategy,” she said, “and Hong Kong offers the highest quality professional services – including legal, audit and accounting, rating agency – in the region.”
In addition, the many major global institutional investors that count Hong Kong as their regional headquarters, an internationally-recognized exchange, and the depth of capital markets, will serve Hong Kong very well as a regional ESG finance centre, Ng added.
Drew from HSBC agreed that, in many respects, Hong Kong is already a global ESG financing hub, with a diverse and growing volume of sustainable financing being arranged here.
“The Government has been hugely supportive in terms of education, incentivisation and leading the way with its own green bond issuance,” he said.
“And there is fantastic collaboration across financial services, law firms, media, public institutions and academia in building a comprehensive ecosystem to facilitate sustainable financing from across Asia and the globe. That said, when considering the amount to be done, the journey has barely started.”
Investor Opportunities
The first panel at the Chamber’s webinar “Putting Hong Kong on the Map for Green and Sustainable Finance” on 12 May discussed the opportunities and challenges for this growing segment.
Ellie Tang, Head of Sustainability at New World Development, explained that besides ensuring that their developments are built and operated in a sustainable way, the company also offers investors a range of green finance options. NWD issued its first green bond in 2018, and earlier this year was the first real estate firm globally to issue a US-dollar Sustainability-Linked Bond.
“These instruments help us enhance our ESG disclosures,” Tang said. “The enhanced transparency around our efforts in the sustainability area are important for investors.”
Robert Barker, Chief Sustainable Business Officer at BNP Paribas, noted the growing interest in green bonds. Globally, utilities make up 40% of green bonds and real estate 21%, he said, and the market has been broadening to include social sectors like healthcare and education. In Hong Kong, property dominants, but there is potential for growth in infrastructure, transport and waste management – not just in Hong Kong but also across the border.
“Policy developments in terms of support in Hong Kong and the Greater Bay Area are now in place as well as the regulatory side,” Barker said. “So the carrot and the stick are now in place.”
Grace Hui, Head of Green and Sustainable Finance of the Markets Division at Hong Kong Exchanges and Clearing, introduced HKEx’s Sustainable & Green Exchange (STAGE) platform that was launched in December. It is an online product depository that now includes more than 50 sustainable investment products.
“The purpose of STAGE is to ask issuers to provide additional information. This will help alleviate investors’ concerns about greenwashing,” she explained.
Hui noted that, globally, around US$100 trillion of investment will be needed to enable businesses to become carbon neutral, providing a huge opportunity for Hong Kong as the financial connector.
Nishad Majmudar, Assistant Vice President and Analyst of Sovereign Risk Group at Moody’s Investors Service, remarked that of the green bonds issued in 2020, about 12% were sovereign funds. But this is changing and Hong Kong is leading the way in Asia, with US$2.5 billion issued under the Government Green Bond Programme earlier this year.
“As an issuer, Hong Kong has come bursting out of the gates in setting a market where there wasn’t one previously,” Majmudar said.
He added that sovereign funds hope to access new investor bases through their sustainable finance offerings, another reason why the market is expected to grow.
Investor Perspectives
The second panel discussion at the Chamber’s Sustainable Finance summit offered insights from insurance, data and wealth management viewpoints.
“The green financing element doesn’t end once the project is finished,” said Dylan Bryant, Co-chair of the Insurance Working Group at the Hong Kong Green Finance Association. “There will always be ongoing insurance needs and these can be met using sustainable goals.”
Climate change impacts, including rising sea levels, pollution and storms, mean some assets will become more expensive to insure, or even uninsurable. Investors and asset owners need to have proper risk management and loss prevention in place to support their projects.
In Hong Kong, the insurance sector is a crucial part of the ecosystem, Bryant said. “If we are truly going to be a global green financial centre, insurance has to be a part of that.”
David Day, Head of North Asia of Data & Analytics at the London Stock Exchange Group, said that the Covid pandemic had accelerated digitization and use of data in the financial services sector.
“There is a tremendous amount of data and the demand for data has increased as well,” he said. “But one of the biggest challenges is, how do you find the signal in the noise?”
Another issue is that there are no universal standards for sustainability – while other ratings are tied to a fixed outcome, it is not so easy with ESG. However, Day added, the Task Force on Climate-Related Financial Disclosures (TCFD) provided a useful framework.
Amy Lo, Chairman of the Executive Committee of the Private Wealth Management Association, said that ESG has seen a surge in investor demand.
“The next generation are taking control of the family businesses, and they have more focus on sustainability,” she said. “They want to align their values with their investments and build a better world.”
Another reason is the robustness of ESG investments. Even two or three years ago, clients thought sustainable investment was just about philanthropy, Lo said. Now, they are seeing the strong performance as well.
Almost three-quarters of family offices have at least some sustainable investments, but Lo said that more investor education is needed to develop the space further.