The Hong Kong Monetary Authority (HKMA) is increasingly investing its Exchange Fund along environmental, social and governance (ESG) principles and will soon sign up to the UN’s Principles for Responsible Investing (PRI).

Aside from what it can do to promote Hong Kong as a centre of green finance through its role as regulator and market-developer, the de facto central bank is also looking to set a direct example through its own actions as a major asset owner, according to Eddie Yue, its deputy chief executive. 

Answering questions from AsianInvestor at the HKMA’s Green Finance Forum on May 7, Yue said “we are signing up to UN PRI and it takes a process that we are ramping up to, and we are near signing”.

“We take quite an all-embracing approach [to ESG investing],” Yue said, citing a second $1 billion commitment that it made in March to the International Finance Corporation’s Managed Co-Lending Portfolio Program (MCPP) as part of its broader effort to invest more along ESG lines.

The IFC debt programme targets ESG-friendly infrastructure projects in emerging markets. It made its first such commitment in 2017

HKMA invests via its HK$4.17 trillion ($531.64 billion) Exchange Fund, which reported a strong first quarter for results for the first three months of 2019.

The fund is comprised of three distinct portfolios; a backing portfolio focused on liquid US dollar-denominated securities; an investment portfolio that primarily goes into equities and bonds issued by members of the Organisation for Economic Co-operation; and a long-term growth portfolio (LTGP) that seeks to enhance long-term returns by investing in private equity and real estate.

ESG ENGAGEMENT

Yue, who is also chief executive of the Exchange Fund Investment Office, said HKMA’s Exchange Fund investment teams are increasingly considering ESG across most asset areas.

“We already invest in green bonds and will invest more,” he said. “And we will design [and] structure  ESG mandates in our equities portfolios, not just for more passive mandates but also active managers that use ESG screens in their portfolios.”

Yue added that some recent HKMA research showed active managers using an ESG filter outperformed the general market.

He said the HKMA now wanted all of its external fund managers to show how they incorporate ESG into their investing approaches, including passive fund managers.

In that respect, he pointed to the fact most index providers have created ESG indexes that are similar to their main indices.

"In our view they have had similar performance to conventional indices ... we will select some indices and are in discussion with external managers." 

Separately, HKMA said in a press release that it has also incorporated ESG factors into its risk analysis of bond investments and intends to prioritise green accreditation of buildings in its real estate portfolio.

It also disclosed that it would consider a framework “for disclosing information on the Exchange Fund’s green and ESG investing efforts without arousing market sensitivity”.

Grace Lau, HKMA's executive director for risk and compliance and chief risk officer for the Exchange Fund Investment Office, declined to tell AsianInvestor what proportion of the Exchange Fund’s investments are invested according to ESG guidelines.

However, Yue said HKMA also requires its private asset managers to use an ESG filter when investing on its behalf. 

“On the private market side, we require all general partners to have established ESG processes,” he said. “And on the private side, especially the infrastructure side, we always engage ESG studies on direct or co-investment infrastructure projects.”

HKMA has invested into two wind farms already, one in Europe and another in South America. But Lau noted the Exchange Fund would not look to invest in environmental projects in Hong Kong, saying that doing so was against its investment mandate.

Despite the rising commitment to ESG in its investing, Yue admitted that pursuing such investments is not always straightforward.

“It’s not easy for us to push the investment teams to go for green investments. They say, ‘if we go for green bonds we might lose five to 10 basis points (in performance), can you take that off our [targeted] returns?’”