Hong Kong is leveraging its financial expertise to become a green finance hub. The United Nations’ Climate Report warns of tipping points when climate change becomes irreversible. Disastrous storms, floods and earthquakes are occurring with greater frequency. Sylvia Chang finds a renewed sense of urgency to green business.
(INFOGRAPHIC: DONG KAI, SYLVIA CHANG, MOK KWOK-CHEONG / CHINA DAILY)
What is green finance?
There is no clear, universally agreed definition of what “green” investment includes or excludes. It means different things to different governments, companies and industries. Green bonds are generally issued to finance projects which improve energy efficiency, reduce greenhouse gas emissions, and mitigate environmental degradation.
The Paris Agreement set the limit to global average temperature rise below 2 C by the end of this century. To meet the target, Planet Earth needs to drastically cut greenhouse gas emissions. The Global Commission on the Economy and Climate estimates a cumulative investment of about US$90 trillion will be needed.
“This year is the turning point for green bonds to develop in Hong Kong. Green bonds will have exponential growth in the near future,” said Dragon Tang Yongjun, professor of finance at the University of Hong Kong.
To qualify for the issuance of green bonds, companies need to explain how their green projects will reduce carbon emissions. Issuers have to undergo a more complicated vetting procedure than that required to issue conventional bonds. That adds financing costs which companies typically try to avoid.
The Hong Kong government launched the Green Bond Grant Scheme in June, to provide subsidies which cover the full cost of certification by the Hong Kong Quality Assurance Agency. The government plans a HK$100-billion fund for green projects this fiscal year.
“The government has great ambitions to establish Hong Kong as an international green finance hub. When the HK$100-billion fund is launched, a large pool of manpower will be needed,” said Tang, who will include green finance in the HKU Business School curriculum as an elective from 2019. Tang expects demand for green finance to rise over the next three to five years.
Regulatory bodies follow
On Sept 21, the Securities and Futures Commission, which regulates financial-asset management in Hong Kong, announced a strategic framework for the development of green bonds. It aims to improve listed companies’ disclosure of environmental information, focusing on climate-related risks and opportunities.
“What we’re talking about is disclosure of the potential impact of climate change on businesses in a relatively long term,” said SFC Chief Executive Officer Ashley Alder. The SFC has adopted the recommendations of the task force on climate-related disclosure, led by businessman Michael Bloomberg.
The underlying arguments for corporate greening are spelled out in two discourses: the potential risks arising from climate change on industries; and the benefits of transition to a low-carbon world.
“From a commercial perspective, asset managers are getting serious about incorporating environmental factors into their investment process,” said Alder. Within the new SFC framework, asset managers will clarify the integration and guide asset owners to make more informed decisions, he added.
As a bank regulator, the Hong Kong Monetary Authority is crafting a package of measures to sustain the momentum of green finance in Hong Kong. HKMA Executive Director Vincent Lee of said the authority is working on the regulations to define green investment, green products, and corporate disclosure.
To formulate the right incentives, “we need a clear case of how it would benefit banking and financial stability. I think the incorporation of green sustainability into banking is a clear case,” said Lee.
Lobby groups activate
In 2017, only US$616 million of green bonds were issued by Hong Kong enterprises, according to Ivy Lau, general manager of the China office of the Climate Bonds Initiative (CBI), a non-profit lobby group funded by, among others, HSBC and Bank of America. She says green finance development in Hong Kong has been “sluggish”.
Tang of the HKU Business School agrees that the government has been slow in providing support for green finance. He also faults the lack of enthusiasm among local businessmen on climate change.
Enterprises with green bonds tend to attract more international investors, said Lau of CBI. Tang of HKU said enterprises will have share-value benefits too. “An enterprise will see a rise in its stock after it issues green bonds, leading to an increase in the company’s value,” said Tang. According to his research, an enterprise’s stock rises by 1.7 percent during the issuance period. That could mean tens of billions, or even trillions in value.
From January to June 2018, green bonds issued in Hong Kong total US$6.2 billion, against US$2.6 billion in full-year 2017, according to the HKMA.
“Despite the enormous increase in the issuance of green bonds, we’re still likely to account for less than 5 percent of the global issuance in 2018,” Tim Freshwater, advisory director of private bank Goldman Sachs Asia, said at a green finance forum in September.
Freshwater is also honorary adviser to the Hong Kong Green Finance Association, another lobby group launched in September by senior executives from major financial institutions “to advise the government to develop green finance policies and to promote the adoption of green finance”. Freshwater added that global green bond issuance is estimated at US$210 billion. The green finance industry is growing hugely worldwide.
Local companies go green
In July 2016, Link Real Estate Investment Trust (Link REIT) issued US$500 million of green bonds in Hong Kong. The company uses the proceeds for “green building” development, renovation of existing buildings, and energy efficiency projects. It was followed by the MTR Corp, which issued US$600 million of green bonds in October 2016 for the development of the Kwun Tong Line Extension and South Island Line (East).
The MTR Corp’s 2017 Green Bond Report indicates its new green initiatives avoid 42,000 tons of CO2 emissions and save about 31 gigawatt-hours of electricity annually with a regenerative braking and trackside energy storage system.
In January, Swire Properties issued US$500-million green bonds to fund the company’s green building development, energy efficiency, and renewable energy. In July, Hang Lung Properties issued its first Green Panda Bond to finance the construction of two shopping malls on the mainland.
In September, Leo Paper Group, a paper products manufacturing company in Hong Kong, signed a US$45-million green loan. Multinational development banks, such as the World Bank and the Asian Development Bank, also issued green bonds this year.
High-yield green bond
Tang of HKU cited the collaboration of French asset manager Amundi and the International Finance Corp to create a high-yield green bond market through a US$1.42-billion fund. IFC guarantees investors low-risk access to emerging market investment. As most current green bonds offer low yields, this high-yield green bond fund would attract emerging market issuers, said Jean-Marie Masse, chief investment officer at IFC.
• In providing a HK$100-billion fund for a green-bond hub, is Hong Kong itself able to adopt green governance?
• Should “environmentalism” be embedded as policy through all govt departments?
• Can property developers be mandated to install energy-saving and water-saving designs in residences and commercial buildings?
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