Hong Kong is bidding to be the region’s green finance hub. Besides luring green bond issuances, experts have called for stringent measures to create a robust financing system. Oswald Chan reports from Hong Kong.
In November, the Hong Kong government set an ambitious target of turning the city into a carbon-neutral economy by 2050, without offering a road map.
But three months later, it unveiled a plan to promote electric vehicles in the special administrative region by halting the registration of new environmental-friendly petrol private cars by 2035 or earlier. It also pledged to update the government’s Clean Air Plan for Hong Kong by the middle of this year.
Locally-based environmental concern group Friends of the Earth (Hong Kong) wants the government to invest more in electric cars, low-carbon transport vehicles, waste recycling, energy-efficient smart grid facilities, renewable energy projects involving wind, natural gas or water, as well as programs to cut fossil-fuel energy consumption.
The decarbonization process calls for huge financing for the green business, and Hong Kong is setting the green bond issuance target to meet future demand.
The HKSAR government said in 2021-22 Budget it’ll double the borrowing ceiling to HK$200 billion (US$25.77 billion), allowing for further green bond issuances totaling HK$175.5 billion in the next five years—from HK$66 billion in the previous financial year.
Since 2019, two rounds of government green bonds aligned to world standards, such as the International Capital Market Association’s green bond principles, have been issued.
In January, the administration sold US$2.5 billion worth of green bonds, including a 30-year tranche. The 30-year tranche is the first 30-year green bond to be issued by an Asian government, and the longest-tenured to be issued by the SAR government. Issuing a 30-year tranche will help build a comprehensive benchmark curve for potential issuers in Hong Kong and the region. The city launched its first green bond issuance in 2019, amounting to US$1 billion.
“By doubling the size of green bond issuances, the government will give the HKMA greater flexibility in launching good green bonds with different tenors and currencies,”Hong Kong Monetary Authority Chief Executive Eddie Yue Wai-man said.
“Many European investors seek euro-denominated green bonds issued by Asian corporates or sovereigns. So we may consider issuing euro or Hong Kong dollar-denominated green bonds this year. We’ll also try to issue retail green bonds which are not common in many countries,”Yue said.
Issuing green bonds, however, is just one of the elements in creating a green financing ecosystem in Hong Kong, as the ecosystem requires stringent disclosures, standard harmonization, talent-capacity building, innovative green financing products and regional collaboration.
Hong Kong has brushed up its standard disclosure work in recent years to align itself with international reporting standards.
The Green and Sustainable Finance Cross-Agency Steering Group, set up by the SAR government last year, aims to standardize the use of taxonomy, banks’green business reporting standards, and listed companies’environmental, social and corporate governance disclosure standards.
Mandatory disclosure
Hong Kong financial institutions will follow the Common Ground Taxonomy in green investments between China and European Union when it’s available by mid-2021. The city’s financial institutions will also follow the International Financial Reporting Standards Foundation’s criteria on ESG matters once they’re ready this year.
Hong Kong is the first Asian city to require all locally-based financial institutions, including banks, asset managers, insurance companies and pension trustees, to strengthen mandatory disclosures of climate-related risks relating to their operations under the Task Force on Climate-related Financial Disclosures (TCFD) framework before 2025.
From July this year, the first batch of Hong Kong-listed companies will have to make their ESG disclosures based on the amendments of the ESG Guide and Listing Rules that went into effect a year ago. They’ll have to disclose how they manage climate risks.
The Securities and Futures Commission may also require asset managers to disclose how they manage climate risks through their governance, strategy, risk management practices and targets related to managing climate risks at the entity level. For large asset managers (those with assets under management of $500 million or more), they’ll have to disclose the weighted average carbon intensity of fund levels.
Friends of the Earth (Hong Kong) Board Governor and Green Finance Convener Anthony Cheung said the SAR must not be complacent as the TCFD road map is still unclear.“The United Kingdom has already produced the TCFD blueprint, expecting certain listed companies in some sectors, such as banks and building societies, to fulfill the TCFD requirements from 2021 to 2023. Hong Kong’s financial regulators should provide a similar road map setting a role model for the market.”
Mary Leung, head of advocacy, Asia Pacific, at the CFA Institute, is worried that small and medium-size listed enterprises are still grappling with ESG disclosures as the business environment remains tough amid the COVID-19 pandemic.
“The investor base of listed SMEs is rather narrow. So these companies may not find it beneficial having ESG. They see the issue just from a regulatory compliance angle and do not have a comprehensive framework to tackle ESG risks,”she said.
Harmonizing standards
Hong Kong also needs to harmonize existing ESG standards to guard against greenwashing—a communication and marketing strategy adopted by companies or organizations to forge an ecologically responsible image among the public.“When there’re no standards, we all claim to be green ourselves. Is it really green and no one knows about it? It doesn’t work! We don’t want Hong Kong to be a greenwashing center,”warns Serena Mak, board governor of Friends of the Earth (Hong Kong).
KPMG Partner and Global Co-Chair of Sustainable Finance Pat Woo said:“Market participants would like to see standardization of the methods for calculating carbon footprints and other ESG disclosure formats and guidance. Companies would like to see comparability of different ESG reporting formats even in one single industry for sector comparison purposes. Right now, that doesn’t exist. Comparability comes after standardization.”
Leung regards the concept of materiality as important in the process of standard harmonization.“What constitutes materiality in ESG disclosure? How can it be defined? What is it relevant to—climate materiality, financial materiality or time of horizon materiality?”
She said the standard of evaluating ESG assurances should also be unified when listed companies file their ESG information that’s verified by third-party auditor firms in their annual reports. The demand for ESG assurance services will rise as ESG report assurances may also be made mandatory in future.
The capacity-building of ESG talents is desperately needed. ESG professionals are predominately experts in the fields of engineering and climate sciences. Now these skill sets have to be integrated into the world of finance and data science. Besides lacking such expertise, Hong Kong is also not aggressive in recruiting ESG professionals. Financial regulators in Hong Kong do not come up with a clear strategy on recruiting ESG professionals.
According to Cheung, Hong Kong must develop structured upskilling programs that have international recognition. The Hong Kong government currently only grants subsidies for ESG-related courses designed by locally-based institutions, but the body of knowledge taught by these institutions is not up to international standard. This is a gap that needs to be addressed.
“Five years from now, ESG professionals should know how to find some other sources of alternative data, such as emissions, social media, water temperature, or atmospheric layers to perform ESG analysis. The ability to harness such data, for example by filtering and structuring, to make decisions useful, will be important,”said Leung.
Hong Kong financial regulators should encourage more innovative green financial products to attract global investors. Hong Kong is lagging behind in the development of green finance products although the Hong Kong Stock Exchange launched the Sustainable and Green Exchange—Asia’s first a central hub for data and information on sustainable and green-finance investments—last year. According to Cheung, the number of ESG-related exchange traded funds listed in Hong Kong is less than that in South Korea and Taiwan.
Hong Kong should brace for more green investment product innovations not only for the fixed-income market, but also for the equity market. Green mortgages, ESG-linked ETFs, green asset-backed securities, green REITs, funds or derivatives associated with green indices are some major lines for green financial product development.
The city’s financial regulators should also promote green finance literacy to sustain the city’s green financing business ecosystem. Universities and business schools are urged to explore the possibility of setting up academic programs of green finance. The Investor and Financial Education Council should take a more proactive role in promoting and educating the public on green finance.
Role of Greater Bay Area
The Guangdong-Hong Kong-Macao Greater Bay Area’s regional collaboration platform is also vital for fortifying Hong Kong’s green financing business ecosystem.
“With Hong Kong designated by the central government as the Greater Bay Area’s green financing hub, the HKMA is in discussions with the People’s Bank of China and other partners to see whether it’s possible to design some type of fast-track programs. Mainland companies requiring financing to switch to a carbon-zero economy may also get approval for issuing green bonds in Hong Kong,”said Yue.
The SAR government and financial regulators should study the city’s potential in the carbon trading business because both governments and corporations are trying to achieve carbon neutrality.
Global business auditing firm KPMG plans to reduce the carbon footprint of its offices worldwide with the aim of being carbon-neutral by 2030 by changing the business travel mode from air to rail, slashing international travel by substituting it with online meetings, retrofitting electricity in office premises, and utilizing green buildings.
As governments and businesses have to pay for those carbon offsets, buyers need to be guaranteed of the quality and pricing of these offsets. This will be a big area of development requiring market regulation and protection, driving the need for a global pricing model of carbon offsets to be developed.
“I expect the demand for and prices of carbon offsets to increase, enabling Hong Kong to play a role in carbon exchange and, perhaps, consider creating a‘carbon connect’program between the SAR government and the central government, as well as companies across the border,”Woo said.
Cheung is optimistic about green investment prospects, such as energy saving, pollution prevention, solar energy and green transport in the Greater Bay Area as the 11-city cluster has a mix of traditional manufacturing, and new data information industries. The central government too wants to develop the Greater Bay Area into a sustainable city-cluster.
