As Hong Kong moves to cement its status as the region’s green financial pivot, the private sector and banks have been urged to play a bigger role in pushing green bonds, leveraging the road map and incentives laid down under the Bay Area’s development blueprint. Oswald Chan reports from Hong Kong.

Hong Kong’s bid to turn itself into Asia’s green financial hub has strong credentials, backed by favorable government initiatives, as well as solid expertise and a strong investor base that have lured many new issuers to the market.

The push is also driven by the mega Guangdong-Hong Kong-Macao Greater Bay Area’s development blueprint that designates Hong Kong as the region’s green financial hub, providing the stimulus for the sector’s advance.

But, last year, green bonds worth just US$10 billion were issued in Hong Kong, down 9 percent from a year earlier, while cumulative green bond issuances amounted to US$26 billion, according to Climate Bonds Initiative — a not-for-profit investor organization promoting green financing business.

Total issuances by Hong Kong-domiciled entities were also down slightly to US$2.6 billion, a decrease of 5 percent over 2018, offset by increasing diversification of issuer types and project categories. Cumulative green bond issuances by Hong Kong-based entities reached US$7.1 billion by the end of 2019, with more than 55 percent of the issuers being first-time issuers.

The HKSAR government, however, is determined to fast-track the green bond industry. In the 2020-2021 Budget delivered in February, it said green bonds worth HK$66 billion (US$8.52 billion) will be issued within the next five years.

Although the global green bond market saw rapid growth with cumulative issuances exceeding US$700 billion last year, it has seen contributions from a relatively limited pool of investment grade issuers, mostly government-related entities, financial corporates and utility companies.

In Hong Kong, last year’s green bond market was boosted by the SAR government’s continued support, notably the inaugural government green bonds, coupled with measures from the city’s financial regulators.

In May last year, the government’s inaugural green bonds of US$1 billion and a five-year tenor under the Government Green Bond Program met with a favorable response from more than 100 global institutional investors, attracting subscriptions more than four times the issuance size. 

The SAR government also undertook one major initiative, underscoring its determination to develop the city into a green financing pivot for the region.

It signed the Green Bond Pledge and became the first signatory in Asia. By signing the pledge, the administration agrees that all infrastructure and capital projects will have to be climate resilient and, where relevant, support the reduction of greenhouse gas emissions. Signatories of the pledge agreed to back the rapid growth of a green bonds market consistent with global best practices.

Leader in the region 

“In order to drive the sustainability agenda forward, the private sector needs to avail itself of the policies in place and make it front and center to capture these opportunities. Hong Kong is primed to be a leader in the region and take center stage in green and sustainable finance,” Pat Woo, KPMG China partner and Hong Kong head of sustainable finance, said.

Financial institutions contributed almost half of Hong Kong’s green bond issuances last year, including two of the Chinese mainland’s “Big Four” lenders — Industrial and Commercial Bank of China and China Construction Bank.

Corporations were the second largest issuers, accounting for 36 percent of the total, including real estate and energy enterprises. The other issuers came from the government, as well as development and policy banks.

Besides green bonds, Hong Kong financial institutions are also active in other green financing businesses. As of April last year, green loans acquired by Hong Kong banks amounted to US$2.56 billion, while green assets owned by Hong Kong banks reached US$7.82 billion in the same period, according to a survey by the Hong Kong Monetary Authority in 2019.

Hong Kong-listed Link REIT — the SAR’s first real estate investment trust and currently Asia’s largest in terms of market capitalization — has signed a five-year sustainability-linked loan of HK$1 billion with Singapore-based OCBC Bank, marking the company’s first sustainability-linked loan transaction in Hong Kong dollars. Proceeds of the loan will be used for general working capital and corporate funding purposes.

To incentivize Link REIT’s sustainability performance, OCBC Bank will offer interest-rate reductions on a tiered basis, subject to the former’s environmental, social and governance performance.

“Green financing, as part of our capital management strategy, is an integral part of our vision,” Link REIT’s Chief Financial Officer Ng Kok-siong said.

“At OCBC, we, too, believe that businesses can do well by doing good. So, we’re proud to support Link REIT’s green financing endeavors, which will go a long way in mitigating the impact of climate change,” Tan Wing Ming, regional general manager for North East Asia at OCBC Bank, said.

In August, the Singaporean lender also sealed a five-year green loan deal of HK$1 billion with Hong Kong’s Swire Properties to fund its environmentally-friendly building initiatives.

The HKMA is adopting a three-phased approach in promoting green and sustainable banking. In the initial phase, it will develop with the banking sector a common framework for green baseline assessment to examine the environmental risk of banks’ lending and other businesses. It will subsequently focus on deliverable setting, implementation, monitoring and evaluation.

The Morningstar Sustainability Atlas found that big Asian markets, generally, score poorly on sustainability. However, Hong Kong has the best sustainability profile of any non-European market.

This report examines the sustainability profiles of Morningstar’s 48 equity indexes by the Morningstar Portfolio Sustainability Score — an asset-weighted average of Sustainalytics’ company level ESG Risk Rating, measuring the degree to which a company’s economic value may be at risk driven by ESG issues.

“Generally, Hong Kong performed better in our model than mainland equities, thanks to better disclosure. The Hong Kong Stock Exchange was one of the first in the world to implement guidelines and incentives for companies to provide ESG information and, in fact, mandated this as part of the listing requirements,” Doug Morrow, director and head of portfolio research at Sustainalytics, reckoned. The independent ESG research company is part of US-based investment research company Morningstar.

“Sustainability is a key area of focus for boards, investors and the public. We see that Hong Kong has been quick to take action compared to other international markets in the region. We also see a rise in the number of companies that are taking ESG factors into account in their investments,” Andrew Weir, chairman of the Pacific Basin Economic Council and vice-chairman of KPMG China, noted.

Looking ahead, Hong Kong will have to rely on improving disclosures, the pace of transition to the green economy, and the Bay Area vision.

Enhancing the climate-related risk and financial disclosures of companies has been gathering momentum across the globe since the Task Force on Climate-Related Financial Disclosures published its recommendations in mid-2017. In Hong Kong, companies like Swire Pacific and New World Development have started reporting on the TCFD recommendations, in which green bond issuance forms a part of the narrative when it comes to disclosure of a company’s climate change mitigation strategy — one of the four pillars of the TCFD framework.

Collaboration facilitator

As financial regulators on the mainland and in Hong Kong ramp up efforts to improve listed companies’ ESG reporting, with the SAR’s Securities and Futures Commission supporting the TCFD recommendations and Hong Kong Exchanges and Clearing enhancing ESG disclosure requirements, it’s expected that more and more companies will revisit their existing businesses. 

The pace of the green economy transition also matters. Green finance plays a pivotal role in enabling the decarbonization strategies of those companies that strive to achieve net zero carbon targets.

Transition bonds, key performance indicator-linked bonds and loans can play an important part in ensuring financial support for companies seeking a brown-to-green transition of their businesses. Investors are showing growing appetite for fixed income products that reflect the transition toward sustainability. A broader range of issuers, a wider credit spectrum and expanded use of proceeds can cater to investor demand to enhance yield and sector diversification within their sustainable investment portfolios.

For Hong Kong to support this outcome, the government can act as a facilitator for collaboration between the local and mainland authorities to bring about a brown-to-green transition in a number of sectors that are vital for the future low carbon economy. Clear commitments in the city’s 2050 decarbonization strategy will add incentives to the private sector to seek green and transition-aligned investment opportunities.

The Bay Area blueprint will also provide key impetus for the growth of the green financing businesses in Hong Kong. The road map aims to turn Hong Kong into the designated green finance pivot, while Macao and Guangzhou are tasked with building a renminbi-denominated green finance platform and developing a pilot green finance innovation zone, respectively.

The Greater Bay Area Green Finance Alliance is due to be launched this year, while the new business alliance will promote business projects that will benefit the Bay Area and leverage the vast green investment demand in Guangdong province, along with the green finance capacities of Hong Kong and Macao.

In Woo’s view, the Bay Area’s decarbonization blueprint will add impetus to Hong Kong’s aspiration to be a green financing hub in the 11-city cluster. “Hong Kong can attract long-term and high-quality capital by exhibiting trust and transparency in the ESG front,” he said.

In addition to Hong Kong’s green deals, Guangdong-based issuers launched US$2.9 billion worth of green bonds last year. The total volume of green bonds from Bay Area domiciled issuers reached US$6.4 billion in 2019 ­— a whopping 54 percent increase year-on-year, CBI data showed.

Contact the writer at Oswald@chinadailyhk.com