How Hong Kong can become a green finance hub
Hong Kong needs to clearly define the activities that could help conserve its environment to drive investments into green bonds and better compete with its regional peers in building a green finance hub, say market experts.
The city’s ambition to become a hub for green finance was most recently reiterated by Financial Secretary Paul Chan in his budget speech last month. The Hong Kong government will issue HK$66 billion ($8.5 billion) in green bonds in the coming five years, as part of its efforts to develop the city into a green finance hub, he said.
It's a lot; the city's total green bond issuance stood at $7.1 billion between 2016 and 2019. That formed a small part of the $672.4 billion in global green bonds, according to figures provided by Climate Bonds Initiative. Hong Kong issued its first green bond in 2016.
"Now there is growing recognition that to be a leading finance centre, you have to also be a leading green finance centre," Gabriel Wilson-Otto, head of stewardship for the Asia Pacific at BNP Paribas Asset Management, told AsianInvestor.
For Hong Kong to become one, it's critical to build a policy framework and a taxonomy that clearly says what activities are considered as sustainable actions. There's some work done by the Hong Kong Quality Assurance Agency (HKQAA) on what constitutes green, but there's room for certain refinement or development on that, he added.
The taxonomy can resemble those developed by the European Union (EU). The final report on EU taxonomy, which was released on March 9, sets out screening criteria for “green” economic activities, in essence, those that can substantially help to mitigate climate change.
For now, someone who wants to be a sustainable investor cannot be sure if he is one just because he invests in assets that have been labelled as green. That clarification, or a defined and measurable framework for assessment, is one thing that the investment community values, Wilson-Otto said.
Supply has been lower than demand in the green bond space due to a lack of clarity on project eligibility for some sectors, among other problems. Governmental initiatives that help to provide clarity on project eligibility should increase the supply of sustainable bonds over time, especially in more nascent markets, Matthew Kuchtyak, an analyst on environmental, social and governance (ESG) at Moody's Investors Service, told AsianInvestor.
However, when the Financial Services and Treasury Bureau (FSTB) was asked specifically about whether it is planning to produce such a taxonomy, its response was that it isn't a priority right now.
The concept of “green” is still evolving, and there is not a single set of universally accepted green standards or guidelines. The HKQAA has made reference to a number of international and national standards and launched the Green Finance Certification Scheme to provide third-party conformity assessments for issuers on their green debt instruments and green fund, an FSTB spokesman told AsianInvestor in an email.
A lot of other markets in the region are also competing to be leading green finance hubs, in part while investor demand for green products are expected to continue to be robust.
Institutional investors’ appetite for green assets is very strong; investors are increasingly concerned about environmental changes that could bring about disastrous outcomes, Sean Chang, Hong Kong-based head of fixed income at Ping An of China Asset Management, told AsianInvestor.
Globally, investor demand for green and sustainable investing products far outpaced the supply of such products. This strong investor demand will support the continued rise in sustainable bond issuance over time, Kuchtyak said.
Malaysia is set to become the first emerging market country to introduce a green taxonomy for banks to help tackle climate-related risks. The country’s Central bank, Bank Negara Malaysia (BNM), has published a consultation paper on its plans to launch a principle-based taxonomy – following in the footsteps of the EU and Canada.
Singapore, Hong Kong's long-standing rival in Asia, is also racing to become a green finance hub. The Monetary Authority of Singapore unveiled an action plan to develop itself into “a leading centre for green finance in Asia and globally” late last year. This ambition includes a green investment programme for asset managers who are committed to drive regional green efforts out of Singapore and support the action plan.
More broadly in the ESG area, Japan has been among the most prominent advocates. The country introduced a stewardship code in 2014, which aims to get investors to take their fiduciary and governance responsibilities seriously. In addition, the Government Pension Investment Fund, the world’s largest pension fund with ¥168.99 trillion ($1.54 trillion) in assets, is strongly engaged in ESG.
"So you see a lot of developments broadly across the region that goes very positive towards establishing green finance...Hong Kong is not operating in isolation when developing these green initiatives or green agenda," Wilson-Otto said.
“All of these markets are still in the developmental stage. I wouldn't argue that any one market is a clear leader within the region, but they are all moving in a positive direction towards establishing a green finance market,” he added.