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The green bond movement has been going strong for over a decade. Since the green bond market first opened in 2007, more than USD$1 trillion worth of green bonds have been issued globally as investors have started to see a sustainable future as a profitable one. You’d think a global pandemic – that has led to the loss of 400 million full-time jobs and the worst stock market crash since 1987 – would halt it in its tracks. However, green bonds have defied the odds. Since the beginning of 2020, a total of 366 green bonds issuances have been launched globally, with a total of $168.2 billion raised by companies, financial institutions and governments, according to a new analysis by global law firm Linklaters. With the door open for the next green bonds hub to emerge, Hong Kong might be the first one through. 

Admittedly, its growth rate is expected to slow – particularly in the APAC region where China’s green bond issuing market experienced a 63% dip from 2019 to 2020 – due to investors’ shift towards social bonds that sustain projects addressing COVID-19 (i.e. investment in public healthcare). However, this doesn’t change the fact that green bonds – capturing debt capital in the market to finance sustainable projects – are highly capable of transforming the global economy by driving long-term growth and enabling long-term environmental sustainability. 

Oversubscription – where demand has exceeded the number of green bonds available – has become the norm for green bond issuances, due to its expected market growth as sustained investment in climate projects (estimated to reach $90 trillion by 2030) increases as part of nations’ efforts to achieve carbon reduction targets set in the Paris Agreement. In other words, with climate change firmly on the global agenda, the use of green bonds will continue to be an active instrument for governments and private sectors to consistently invest in eco-friendly projects ranging from energy efficiency and pollution prevention to clean transportation and implementation of new green technologies. 

However, to further advance the green agenda, the green bonds market necessitates a hub that can facilitate its global transactions across a diverse set of investor markets.

Figure 1. Primary market for green bonds and geographical diversification worldwide 

green bond hong kong

(Alonso-Conde and Rojo-Suarez, 2020)

The above indicates trends in the primary green bond market up to 2019, as well as geographical diversification worldwide, where (a) shows both new issues and market size ($billion), while (b) shows the geographical distribution of green bond issuers world (currency in USD). There is a notable increase both in terms of the expansion of the green bond market as well as the diversification across various regions spanning Europe, North America and Asia. With a rapidly expanding investor base, it becomes important to establish a platform capable of accommodating investors’ diverse set of needs and requirements. 

What better place to create a green international finance centre than Hong Kong, an already-international financial one? 

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green bond hong kong

Hong Kong at night. 

Hong Kong is set on becoming the future hub for green finance. In August 2020 during his budget speech, Financial Secretary Paul Chan announced that the HK government would be issuing HKD$66 billion (USD$8.5 billion) in green bonds in the coming 5 years. That is a staggering amount, considering the fact that between 2016 – when the city issued its first green bond – and 2019, the city’s total green bond issuance stood at a mere USD$7.1 billion of a USD$672.4 billion global green bonds market, according to Climate Bonds Initiative

Widespread acceptance of green bonds in Hong Kong hasn’t happened quickly. In fact, Hong Kong has launched several initiatives for the past few years to advocate for the green bonds cause. 

From launching a green bond scheme in November 2018 with a borrowing ceiling of HKD$100 billion (the first issuance of sovereign green bonds across Asia) that would attract domestic and overseas entities from both public and private sectors, and becoming the first signatory in Asia of the Green Bond Pledge in 2019 (in support of green bond issuances for infrastructure), to establishing increasing levels of internationally compatible certification and disclosure standards for its green bond issuances, Hong Kong has made its intentions clear: it wants to become a leader of green bonds in the APAC region and a key role model for the region moving forward. 

Other countries aren’t far behind. For instance, Malaysia is set to become the first emerging market country to introduce a green principle-based taxonomy for banks to help tackle climate-related risks. On the other hand, Hong Kong’s “rival” Singapore has already unveiled an ambitious action plan which includes a green investment programme for asset managers that aims to foster a strong foundation for green bond trading. With investor demand for green products projected to remain robust moving forward, a lot of other markets in the region will also be competing to become the next leading green finance hub. Needless to say, Hong Kong will have its hands full for the coming years. 

So what exactly makes it stand out more across its other competitors? One reason is its unique political and regional location in connection to the Greater Bay Area (GBA). Located at the heart of Asia, Hong Kong thrives as an extensively networked, financial integrated centre predicated on a sound legal system, low and simple tax regime, free flow of capital, full range of financial products and a large pool of financial talents. But it is also the fact that Hong Kong has close financial integration with Mainland China that provides an indication of its future green success. With its strong ties to China, Hong Kong in the past few decades has essentially acted as an intermediary between China and the international community. 

Despite recent political turmoil, Hong Kong remains a strong bridge to China primarily due its compatibility with the Belt and Road Initiative. Infrastructure construction is a major component of the Belt and Road Initiative. Appropriately, green bonds are ideal instruments for financing the construction of sustainable infrastructure, given its characteristics of sizable financing amount with long maturity, and taking into account the protection of ecosystem and livelihood. With its ideal geographical location within the Greater Bay Area, Hong Kong has a great potential for attracting green bond issuance to support infrastructure projects along the Belt and Road, which would be beneficial to market development in the long run. 

As it stands, the Hong Kong Stock Exchange is Asia’s third-largest capital market and has been the top initial public offerings market in seven of the past 11 years. Projects in the Greater Bay Area, which comprises Hong Kong, Macau and nine mainland cities, can use Hong Kong to tap funds for green projects, such as making buildings more energy efficient and mitigating flood risks arising from climate change. Furthermore, attractions for mainland firms issuing green bonds in Hong Kong include lower dollar and euro financing costs and more flexibility in timing and size of issuance. Additionally, with mainland authorities relaxing policies to allow green bond issuers to ­convert foreign-currency proceeds into yuan and remit them to the mainland when they wish, this facilitates even greater convenience that may lead to rapid transactions between HK and the Greater Bay Area. Under these robust circumstances, as one of the most competitive financial systems globally, Hong Kong has the opportunity to capitalise on its robust institutional environment and strategic location in Asia to establish its position as a financial hub capable of meeting green investment needs across the region. 

Of course, there are still many steps that need to be taken before we begin proclaiming Hong Kong’s ascension to the green finance throne. For Hong Kong to attain this status, it will be critical for the government to build a policy framework and taxonomy that clearly outlines what activities are considered as sustainable actions. As of now, there is no industry-wide standard that justifies all investments, which can lead to greenwashing. It also results in supply becoming lower than demand in the green bond space due to a lack of clarity on project eligibility for some sectors, among other problems. While some work has been done by the Hong Kong Quality Assurance Agency (HKQAA) and the Securities and Futures Commission (SFC) on what constitutes as a green investment, most of these standards remain fragmented and voluntary which leaves room for organisational exemption. It will be the Hong Kong government’s responsibility to push through a global standard for green bonds that is sustainably acceptable and can increase the supply of sustainable bonds over time. The HKEX’s mandatory disclosure standards for corporations, effective as of July 1 2020, and its decision to create Asia’s first sustainable financial information platform – named STAGE – is a good start. Further, to push through these changes from an operations standpoint, the government will have to consider allocating more funds to green asset managers to help them grow, either through the Hong Kong Monetary Authority’s Exchange Fund or provident funds. 

The fight for the most viable green hub will be a tight and fiercely contested battle across the APAC region. But if Hong Kong is able to maintain its status as a financial hub, while extending its regulations so that it is compatible with both the GBA and the EU taxonomy, it might have the greatest chance in advancing the green bond agenda of the future. 

A UN-backed investor network report has warned that policies to tackle the climate crisis will result in ‘dramatic changes’ to the corporate value of companies by 2025, with the biggest polluters hardest hit and the greenest companies boosted. 

According to the forecast by the Principles for Responsible Investment (PRI) investor network, the 100 most carbon-intensive companies could stand to lose up to 43% of their corporate value, totalling USD $1.4 trillion, while the 100 best performers will gain up to 33% of their corporate value, totalling $0.7 trillion. 

According to the forecast, the best performing 10% of companies in the energy sector who invest heavily in renewables will see their valuations more than double, while the worst performing 10%, with minimal share of green minerals sales, will see their corporate values halve. Car manufacturers with the highest level of investment in electric vehicles could see their corporate value increase by 108%.

Firms investing heavily in beef cattle are also expected to lose up to 15% of their corporate value, while those investing in meat substitutes are expected to gain at least 10%. Major beef producers in at-risk jurisdictions like Indonesia and Brazil could lose almost half their corporate value because of dwindling markets and legal exposure to lawsuits over environmental impacts, including deforestation. 

The PRI says that the policies believed to have the greatest financial impact over the forecast period include bans on internal combustion engines by 2035 which lead to a reduced demand for fossil fuels, carbon pricing which will be crippling for higher emitters, a disruption in the utilities sector amid 93% of total power generation coming from low carbon sources by 2050 and zero deforestation policies by 2030 that crack down on commodity supply chains. 

The total value of global sustainable investments in 2018 stood at US$ 30.7 trillion- growth of 34% over two years- which is a little under the combined GDP for the US and China at the time.

As per a report by the Global Sustainable Investment Alliance (GSIA), Europe has the highest value of sustainable investing assets, with nearly half of the total global assets from the region, closely followed by the US. Additionally, green funds are now bearing improved returns from a decade ago, when a 2012 study concluded that they ‘underperformed on a risk-adjusted basis’ compared to traditional funds.

An important part of encouraging green financing is to better manage environmental and social risks, pursue opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability. 

Benefits of Moving to a Green Economy

Green financing reduces downside risks associated with the climate crisis, such as desertification, water scarcity and loss of ecosystem services, as well as the impacts of local air, soil and water pollution. It should help reduce energy poverty through the provision of low-cost distributed renewable energy systems.

Low, middle and high-skilled job creation is another benefit; it aids in poverty reduction, particularly through improvements of agricultural productivity of rural smallholders. Other opportunities available to governments include the improved health and well-being of the population, leading to higher levels of productivity and reducing the costs of health care, the overarching effect being an economy attractive to investment opportunities.

Investing in sustainable projects leads to not only improved energy security, but it is also a vehicle for innovation. There are growing opportunities for investment in the building, transport, energy and waste sectors in particular, as well as in manufacturing, agriculture and others. The services sector support that is needed in many of these sectors will also be an important part of the green economy.

Another advantage of green financing is the opening up of new export markets, including for biofuels, solar panels and wind turbines. With this, sustainable development-related standards and codes will no doubt be implemented and enforced. Governments can focus on enabling exporters to meet such standards, working with the private sector to communicate the content of the regulations and to help firms identify, acquire and assimilate the technologies needed. Secondly, governments can work on developing and enforcing domestic standards that are not too far from those required internationally. Such standards are important in building up private sector capacity to successfully export to demanding key markets.

How Can Companies and States Make the Transition? 

In a UN-sponsored report by a panel of experts, strategies were discussed to be adopted by states and companies in transitioning to a greener agenda. 

The report states that developed countries have to take the lead in changing their production and consumption patterns while developing countries should maintain their development goals but adopt sustainable practices while doing so. Much of the move towards a green economy will require international collaboration to assist developing countries. Efforts where this international support could be important include: helping exporters meet stringent international environmental and social standards, both private and public, setting appropriate and ambitious targets for clean energy provision, accompanied by incentives such as feed-in tariffs or quotas, removing subsidies for polluting energy sources and technologies, strengthening social systems to help cushion and facilitate the transition with minimal negative social impacts, investing in education and training, supporting research and development, linking public research and private sector users and identifying and dismantling non-tariff barriers to imports of environmental goods and services such as wind turbines, efficient light bulbs and environmental engineering. 

Beyond supporting developing countries, there are ways in which international collaboration is needed to allow the global community to move towards green economic growth, including: reducing or eliminating tariff and non-tariff barriers and working to get new technologies more quickly to market through international research and development cooperation, support for financing, etc. 

Investment is crucial for the green economy and more broadly, sustainable development. The report estimates that in just the area of energy, an average incremental investment (over the baseline case) of more than USD $1 trillion per year is needed up until 2050 to achieve even the minimum required mitigation as described by the IPCC, with two-thirds of this investment needed in developing countries. 

Institutional improvements may facilitate a move to a green economy. The UN Environment Programme (UNEP) argues that in some countries this shift will involve improved governance, and adds that transparency and accountability will contribute to this end, which will reduce the probability of misallocation of resources. 

Through its resource efficiency programme, the UNEP endeavours to offer countries the service of reviewing their policy and regulatory environment for the financing system and developing sustainable finance roadmaps. It also aims to assist central banks and regulators on how to best improve the regulatory framework of domestic financial markets to support and encourage green finance initiatives, and work with policy makers and private sector leaders to connect to green economy initiatives and catalyse the policy action that inspires and informs both public and private investors. 

It is imperative that companies shift their policies towards a more green future or risk closure. In the world of renewable and sustainable technology, there is space and opportunity for every firm and state to be winners. The capital that is allocated today will shape the ecosystems and the production and consumption patterns of tomorrow. 

This piece was written as part of an editorial partnership with Impakter.

Sustainable finance has gone through a spectacular growth trajectory over the past decade – its adoption as a standard practice by most major asset managers and banks has served to perpetuate this boom as a transformative force in the financial sector. While tremendous progress has undoubtedly been made, major gaps still exist in financing a global transition to a sustainable development pathway. What barriers remain, and how can these be addressed?

From an obscure niche market over a decade ago, sustainable or ‘green’ finance has grown tremendously in recent years. Valued at USD$30.7 trillion as of early 2018, global sustainable investment had approached the combined GDP volume of China and the EU.

Spurred by rising consumer demand, alongside external pressure by civil groups and public institutions, ESG functions (functions that stress the importance of environmental, social and government factors) have proliferated across the financial sector to provide a more holistic assessment of loans and investments, especially in pension funds which are averse to reputational risks. These efforts are occasionally criticised for their alleged inadequacy, evidenced recently in TCI’s (an investment management firm) allegations of BlackRock’s ‘greenwashing’ for not leveraging its public equity investments to prompt greenhouse gas emissions disclosures. Despite present shortcomings, several major asset managers are setting ambitious goals for the near future. Schroders has committed to full ESG investment integration by 2020, while BlackRock aims to double its offerings of sustainability-focused exchange traded funds to 150, alongside increasing its sustainable assets 10-fold from USD$90 billion today to USD$1 trillion within 10 years. Action is also taking place on the selling side of the industry, with bulge-bracket bank Goldman Sachs pledging USD$750 billion for climate transition projects in the coming decade, a sum exceeding the size of Switzerland’s economy today. Given the size and credibility of these financial institutions, the impact of these statements backed by tangible actions should not be underestimated, as they create strong signals that environmental sustainability will continue growing as a key focus in the years to come.

Without neglecting the benefits of these commitments, it is important to bear in mind that mitigating the detrimental effects of climate change is an inherently hefty expenditure, even before  considering how to reverse it. A 2013 study by the World Economic Forum forecasted that mitigation in the Global South alone will incur expenses of  more than US$600 billion annually, whilst stabilising worldwide GHGs to 450ppm of CO2 necessitates annual green infrastructural investments of  about USD$5.7 trillion. Fortunately, these grand challenges also generate opportunities for value-creation, with climate investments projected to open up about USD$23 trillion of opportunities in emerging markets alone. Despite commendable institutional progress made through the Green Climate Fund (GCF), even its target pledge of US$100 billion per year from 2020 falls short of addressing these financing needs, by orders of magnitude. Fiscal constraints inhibit the ability of governments to take on the sole responsibility in funding this transition to a more sustainable developmental pathway, necessitating the need for private sector involvement.

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The finance industry takes a stand for the environment
Global Sustainable Investing Asset Allocation 2018 (Source: GSIA). 

Whilst essential, an accelerating growth of sustainable finance alone would be insufficient in combating climate change without undertaking further structural changes. Even in the Global North, over half of sustainable investment assets take the form of public equities, with a far smaller proportion being directly allocated to infrastructural development- though the latter may grow to be increasingly lucrative with looming macroeconomic conditions of low interest rates and reduced returns on stocks

More vital, however, is to cease provision of loans and services to environmentally destructive companies, which many major banks are still involved in. These banks frequently adopt contradictory policies; for instance, whilst Goldman Sachs recently became the first major American bank to cease direct financing for Arctic oil exploration alongside thermal coal mines and plants around the globe, this did not exclude other fossil fuel operations such as fracking and tar sands. Indeed, Goldman Sachs has been selected as one of the banks to lead the initial public offering (IPO) of state-owned oil giant Saudi Aramco, alongside its bulge-bracket counterparts of JPMorgan and Morgan Stanley. In view of the present-day profitability and entrenched interests in favour of fossil-fuels, it is unsurprising that global investment in renewable energy still lags far behind, with similar trends being observed in industries such as mining or chemicals. Ultimately, sustainable finance remains but a means to a greater end goal, which cannot be realised without extensive policy action.

This is part of an editorial partnership with Impakter for its Green Finance series. 

In November 2019, the activist hedge fund TCI Fund Management released their Environmental, Social and Governance (ESG) Investment Policy statement on publicly traded equities in a push for disclosure of greenhouse gas (GHG) emissions and low-carbon transition plans. TCI believes its activist investor approach facilitates more sustainable business procedures, while reducing exposure of investments to climate change-related risks. Could these measures prompt wider climate action in the finance industry? 

Over the past decade, major controversies like the Volkswagen emissions scandal or BP Deepwater Horizon spill were followed by significant declines in stock prices, alerting investors and the public on the importance of considering the societal and environmental impacts of these companies beyond their short-term profits. ESG consideration has hence begun to take off, fuelled by the desire of investors to reduce volatility of returns by mitigating climate and reputational risks, alongside humanitarian considerations of financing improvements in society. From a niche term in the finance industry, ESG has grown to form the basis of the UK’s new Green Finance Strategy, mandating that publicly listed companies and large asset owners must disclose how their operations are affected by climate change risk by 2022, with the wider goal of reducing GHG emissions to net zero by 2050.

Earth.Org Finance Industry takes a stand for the environment
Growth of ESG measured in assets under management (AUM) and Principles for Responsible Investment (PRI) signatories (Source: ETF Research Insights). 

However, the Green Finance Strategy has been criticised as being ‘too little and too late’. This sentiment was shared by private-sector representatives such as TCI Managing Partner and Portfolio Manager Sir Christopher Hohn, who believes that investors should play a leading role in forcing GHG emissions disclosure, given that government policies are not far-reaching enough. 

True to these views, TCI released its updated ESG Investment Policy in late 2019, asserting that it will vote against all directors of companies which lack both a public disclosure of GHG emissions and credible plans for their reduction, as well as auditors whose Annual Report and Accounts fail to report material climate risks. By exerting pressure on its portfolio companies to adopt more environmentally-friendly business operations, TCI aims to reduce their susceptibility to climate change-related risks arising from future regulatory, litigation or physical asset impairment costs, while preserving long-term brand reputation and competitiveness. TCI currently manages more than $28 billion in assets. 

The total value of global sustainable investments in 2018 stood at US$ 30.7 trillion- growth of 34% over two years- which is a little under the combined GDP for the US and China at the time.

As per a report by the Global Sustainable Investment Alliance (GSIA), Europe has the highest value of sustainable investing assets, with nearly half of the total global assets from the region, closely followed by the US. Additionally, green funds are now bearing improved returns from a decade ago, when a 2012 study concluded that they ‘underperformed on a risk-adjusted basis’ compared to traditional funds.

While TCI’s actions mark the latest steps forward for ESG amongst investment firms, much more work remains to be done. Notably, Hohn has criticised BlackRock– the world’s largest asset manager- of ‘greenwashing’ (making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice), as it does not mandate GHG emissions disclosures from portfolio companies. Without discounting TCI’s efforts, a wider paradigm shift in the finance industry remains necessary to effectively combat the ensuing climate crisis.

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