Hong Kong is making strides to build its green bond market, but to attract more investors the city needs to encourage more issuance and education and remove certain regulatory barriers, said speakers at a media briefing hosted by the Climate Bonds Initiative on Monday (February 25). Insurance firms, in particular, are seen as a key source of investment demand.
The briefing was the first held by the CBI to discuss the evolution of Hong Kong’s green bond market and took place at the headquarters of the Hong Kong Monetary Authority, one of the key promoters of green finance in the city.
“Globally green bonds are oversubscribed, but the problem is supply. Treasurers are not the fastest movers and don’t want to shake the tree,” said Sean Kidney, chief executive of CBI on the panel.
He also told the audience that an executive from Hong Kong-based insurer AIA had told him that very morning that “they can’t get enough of [green bonds]”.
Supply is certainly picking up in Hong Kong. An accompanying paper to the briefing said locally listed Link Reit issued the city’s first green bond in 2016, but the market really gained momentum last year, when green bond and loan issuance hit $2.3 billion, up from just $501 million in 2017. The market saw $2 billion of deal flow in 2016, the first year of issuance.
All-told, Hong Kong issuers have issued $4.9 billion in green bonds – whose proceeds are used to fund environment-friendly projects – while the global market is now about $500 billion in size.
Speakers said that’s just scratching the surface of investor interest.
The demand from investors is in large part testament to their growing anxiety over climate change on investments, both in terms of its impact and the likely effect of new regulations that are designed to prevent it.
“Investors have talked for the last 10 years about the need to match assets and liabilities 20 and 30 years out,” said Kidney, making potential environmental volatility an investment issue, not just a social one.
The briefing participants argued that the interest of investors offers Hong Kong a chance to build itself as a green finance hub. But Kidney said the city could do more to promote itself.
“In the Greater Bay area [of the Pearl River Delta] you can be working together [with other cities such as Guangzhou and Zhuhai] and have green investment fairs for Hong Kong once a year convened by the HKMA,” he suggested. “That would be powerful.
Plus the city’s regulators need to be on the same page. “You need to ensure there aren’t unnecessary barriers preventing insurance companies [from] investing,” said Kidney. “There’s an education process there, and you need to consult all sectors.”
Indeed, there are similar restrictions that prevent life insurers from investing more heavily in infrastructure funding, noted another panellist, Jonathan Drew, managing director of the infrastructure and real estate group at HSBC.
“There’s plenty of interest but some restrictions limit them and as a result, they tend to end up buying low yield, high-grade instruments,” he told AsianInvestor, adding that most of these constraints related to capital rules around assets that insurers can invest into.
GREEN BONDS TO ESG
Still, the growth of green bonds suggests that investors and issuers alike are considering environmental issues to a greater degree. In some senses, said Kidney, green bonds are an “entrance tool” for institutional investors.
“When you need to transition an economy from brown to green, you need existing companies in transition; you need [Hong Kong-based utility] China Light & Power to push green investments, and investors can help push this,” he added.
Investors who engage with green bonds can then look to more comprehensive environmental, social and governance (ESG) standards as a longer-term and more comprehensive overlay, argued Kidney.
“Over time all investors need to look to a better understanding of predictors of long-term value, which is ESG,” he said. “Regulators wanting to avoid [climate change-related] volatility will also be engaged on how to promote ESG factors.”
However, education among institutional investors in Asia varies greatly, noted Simon England-Brammer, head of Asia Pacific for asset manager Nuveen.
“Some [asset owners] are trying to understand what [ESG and green bonds] is and how to invest,” he told the audience. “Others are much more advanced in this journey. Our friends in Japan are really moving the dial and … they have put significant capital to work.”
He added that three challenges are preventing investors allocating more to these areas: “unclear boundaries, [a lack of green bond] issuance and the continued misnomer of [poor] performance [of green or ESG instruments versus traditional equivalents]. The latter is simply not the case, so it requires education internally.”
The willingness of companies to consider the future impact of climate change and regulation shifts to combat this is also something on the mind of major international institutional investors such as Norges Bank Investment Management, Norway’s NKr8.86 trillion ($1.03 trillion) sovereign wealth fund, and Japan’s even bigger Government Pension Investment Fund.
The sheer size of such funds means they have massive stock holdings, so they need to mitigate risk, Kidney noted. “There is a large discussion coming over how to manage these risks, the risks of transition and technological risks.”
Hiromichi Mizuno, GPIF’s chief investment officer, takes a similar view. Last year he told AsianInvestor that he sees ESG standards as an effective means of addressing potential capital market-spanning problems, which he sees as some of the key risks facing the world’s largest pension fund.