Investing for a sustainable future

Nicky Burridge
Ester Zirilli

The rise of green finance in the city is poised to put Hong Kong on the sustainable investing map. Nicky Burridge speaks to professionals in the field about the increasing demand for sustainable financial products from investors, the initiatives driving this vital change, the need for better standards and transparency, and the role accountants can play in spearheading the city’s transition to a leader in green finance

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Nicky Burridge
Ester Zirilli


Financial secretary Paul Chan used his latest budget to announce plans for the government to issue HK$175.5 billion of green bonds in the next five years. The move also doubles to HK$200 billion the borrowing ceiling of the government’s green bond programme, which was first launched in 2018 to finance public work projects with environmental benefits.

For Edward Au, Southern Region Managing Partner, Deloitte China, and a member of the Hong Kong Institute of CPAs, the latest announcement highlights the government’s commitment to move Hong Kong towards a low-carbon, climate-resilient and sustainable economy. “It enhances Hong Kong’s position as a green and sustainable finance hub in the region, and creates a city-wide green finance ecosystem,” he says.

Mervyn Tang, Senior Director, Global Head of ESG Research, Sustainable Finance, Fitch (Hong Kong) Limited, agrees that the bond issuance is significant in terms of developing Hong Kong’s green finance market, pointing out that sovereign bonds increase liquidity and act as a benchmark for prices. “Sovereign bond issues are typically used as an anchor in the market,” he says. He adds that the 30-year green bond issued by the government in January – the first green bond of this duration from an Asian government – was also significant, as long-dated green bonds open up the market to different types of investors, such as insurers. “It also helps to expand the green yield curve, which, in turn, helps to expand the issuance of green bonds from other issuers in the Hong Kong market,” he says.

A growing ecosystem

The government has launched a number of initiatives to promote the development of Hong Kong as a green finance centre. Au points out that alongside its own issuance of green bonds, it has also launched the Green Bond Grant Scheme to subsidize eligible green bond issuers in obtaining relevant certification. The government has also worked with regulators to set up the Green and Sustainable Finance Cross-Agency Steering Group to accelerate the growth of green finance in Hong Kong and support climate-related strategies. In addition, the Hong Kong Quality Assurance Agency (HKQAA) has set up a Green Finance Certification Scheme to provide third-party conformity assessments for issuers. Alongside these developments, the Hong Kong Green Finance Association was launched in 2018 to bring together industry experts and stakeholders to make policy suggestions to the government and promote Hong Kong as a green finance hub. The initiatives have been welcomed by industry stakeholders.

Melissa Fung, Hong Kong Sustainability Leader, Deloitte China, an Institute member, and a member of the Institute’s Sustainability Committee, points out that the Green Finance Certification Scheme increases the transparency of how the proceeds from green bond issuances are used, which enhances investor confidence. “On the issuer side, it sets out clear requirements with reference to international standards that helps issuers better govern the funds raised and formalizes the monitoring and reporting processes,” she says.

Eric Nietsch, Head of ESG, Asia, Manulife Investment Management, says: “We sometimes hear from companies that a challenge to issuing a green bond can be increased costs with the transaction. The Green Bond Grant Scheme can be used to reimburse the expense of the HKQAA certification, which provides an incentive, especially for first-time issuers.” He adds that this is particularly important because companies often find that issuing a green bond helps them to enhance their sustainability strategy. Despite these initiatives, Au thinks more could still be done to promote Hong Kong as a green finance centre, such as requiring climate-related disclosures from public companies to be aligned with recommendations set out by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

Increasing transparency

Another significant development in the green finance ecosystem is Hong Kong Exchanges and Clearing’s (HKEX) Sustainable and Green Exchange (STAGE). Launched in December 2020, it is the first multi-asset sustainable finance online platform in Asia that connects issuers, investors and other stakeholders. The platform lists more than 45 sustainability-themed products from leading Asian corporates, as well as providing a repository of information on sustainability, green and social bonds, and environmental, social and governance (ESG)-related exchange traded products listed on the HKEX.

Grace Hui, Head of Green and Sustainable Finance at HKEX, and a member of the Institute’s Sustainability Committee, says: “To address investors’ concerns on greenwashing, issuers included on STAGE are required to designate the sustainability, green or social classification of the instruments to be displayed and state the international standards or principles that they adhere to.” Issuers must also provide additional voluntary disclosures on their sustainable investment products, such as the use of proceeds and annual post-issuance reports. Over time, HKEX plans to increase the scope of the product repository to include other asset classes and product types in Hong Kong and beyond. Hui adds that while it is still exploring what it might add, equities and derivative products that connect to climate-related metrics would be useful to help Hong Kong reach its carbon neutral coal.

STAGE also provides green and sustainable finance resources promoting market education, knowledge sharing and stakeholder engagement. Dr Nadira Lamrad, Director – Sustainability and ESG Advisory at the Business Environment Council, says STAGE is an important initiative as it shows the stock exchange is supportive of green issuances. She adds that it also addresses the concerns of those wanting to invest in green financial products, particularly those who may be doing so for the first time, such as family offices, by making it easier for them to access information.

“This reflects a strong pick-up in investor appetite for green financial products and demonstrates the significant opportunities and growth potential of green finance in the region.”

Growing demand

There is already significant investor demand for green bonds in Hong Kong. The five-year and 10-year tranches of the government’s US$2.5 billion issuance of US dollar bonds in January were five-times oversubscribed, while the 30-year tranche was seven-times oversubscribed. The deal attracted interest from both conventional and green investors, with Asian institutional investors accounting for 65 percent of the overall allocation, and investors in Europe and United States receiving an allocation of 20 percent and 15 percent respectively. Both European and U.S. investors showed a strong preference for the 30-year tranche.

Hui points out that demand for green financial products is increasing rapidly in Asia, with US$5 billion invested in sustainable funds in the region in the last four months of 2020 alone. “This reflects a strong pick-up in investor appetite for green financial products and demonstrates the significant opportunities and growth potential of green finance in the region,” she says. She points out that Hong Kong has played a significant role in this region-wide development in the past few years, with the cumulative amount of green and other sustainability-related bonds arranged and issued in the local market reaching almost HK$214 billion by the end of 2020. In 2020, the market raised HK$66.6 billion, up from just HK$2.4 billion in 2015. “In the first quarter of this year alone, 19 green and sustainability-related bonds were listed, surpassing the record number of 18 in 2020, raising a total of HK$51.5 billion,” Hui adds.

Lamrad has also observed an increase in investor demand. “There is a lot of capital moving in this direction. We are seeing a lot of oversubscriptions every time,” she says. Nietsch points out that Hong Kong is also seeing continued innovation in sustainable debt issuance, with emerging structures such blue bonds, under which the proceeds are used to finance ocean conservation, transition bonds, which finance the transition of companies to having a reduced environmental impact or lower carbon emissions, and sustainability key performance indicator-linked bonds, under which issuers commit to meeting certain ESG-related targets and make additional payments to bondholders if they fail to meet these targets. “A variety of potential financing options is important because it can encourage a wider variety of companies and projects. These emerging and innovative structures can provide additional ways for investors and companies to work towards achieving sustainability objectives,” he says.

Despite these developments, Fung points out that the green finance market in Hong Kong is still not as mature as those in Europe and the U.S. on both the supply side and the demand side and in terms of the number and variety of green financial products. She suggests regulators have a key role to play in this area, adding that they should reference international practices and set up a green finance framework under current regulations and guidelines. “In addition, regulators should also review their own enforcement roles to ensure implementation and compliance,” she says.

A lack of standardization

One of the biggest challenges investors who want to put money into green financial products face is a lack of standardization in the industry. Fung explains: “As the standards of what could be classified as ‘green’ remain fragmented and the governance and reporting requirements of green bonds are voluntary, investors may find it difficult to justify the actual environmental and social impact, and understand the risk behind such investments.” She adds that more policies need to be put in place to regulate the market, and issuers should be asked to disclose a comprehensive set of information to justify the environmental and social benefits of their products, with third party assurance and regular inspection by authorized organizations. Hui agrees: “Currently, the risks of greenwashing and the lack of comparable data create barriers to investing in green bonds and other ESG products.” Nietsch points out that the time and resources needed to develop green bond assessment capabilities can be a challenge for some investors. “This is where professional asset managers with a strong ESG framework and extensive credit research footprint across Asia can add value,” he says.

Lamrad explains that the frameworks and taxonomies that will define whether a product is actually sustainable are still being established. Hong Kong aims to adopt the Common Ground Taxonomy – which is being developed by the International Platform on Sustainable Finance (IPSF) Working Group on Taxonomies and co-led by Mainland China and the European Union – when it is finalized later this year. She adds that there is also a skill set shortage in the market when it comes to really understanding the data. “You need to understand what is behind the numbers. Is it part of a strategy or a one-off project? You need to take your time and develop that expertise and knowledge.” She points out that this lack of understanding not only increases the chances of greenwashing but also means that companies that are doing well but are not presenting their data in an investor-focused way, may face inaccurate outcomes such as lower ratings or under or overvaluations. She suggests one way to address this issue is for the finance industry to hire sustainability professionals, even if they are not from a finance background, as they have a wealth of expertise for understanding what is going on behind the data. Secondly, she suggests engagement needs to be part of investors’ approach, and they should not rely solely on quantitative-based strategies to understand a company’s performance and inform decision-making.

Tang points out that the development of a taxonomy is also important to distinguish why there are differences between green bonds in different regions. He gives the example of transition bonds, saying there are clear differences between the attitudes of European investors and investors in Asia-Pacific towards natural gas and whether it forms part of a low carbon transition. “APAC is a set of economies that have a much more carbon intensive starting point, so the substitution from coal to natural gas may make more sense than in Europe. Standards need to establish the rules without running the risk of greenwashing.”

A regional centre

With its deep capital markets, existing financial services infrastructure and strong government support, Hong Kong is well-positioned to act as a green finance centre for the region, creating significant opportunities. Hui points out that Hong Kong has been designated as the green financial hub for the Greater Bay Area (GBA) as part of the Guangdong-Hong Kong-Macau Greater Bay Area Green Finance Alliance. “In this region alone, the green business potential is expected to jump fivefold from US$90 billion in 2018 to US$450 billion in 2030, with investment concentrated in renewable energy and clean transportation projects.” She adds that if Mainland China is to reach its goal of being carbon neutral by 2060, it will require large amounts of capital. “We think much of the international investment in facilitating that transition is likely to come through Hong Kong. By leveraging its international expertise and best practices, existing infrastructure, and community of financial professionals who already speak the language of sustainable finance, Hong Kong is ready to drive sustainable finance in the GBA and beyond,” she says.

Au says that Hong Kong’s position as an international finance hub with a deep pool of liquidity not only enables it to meet the large appetite of enterprises in the GBA for green financing, but also those in Belt and Road Initiative countries. “Moreover, the Hong Kong government could work closely with the authorities within the GBA, as a catalyst for the development of a low-carbon market in the region,” he says, adding that initiatives in Hong Kong, such as the decision to adopt the Common Ground Taxonomy by mid-2021, also help to steer the development of green finance in the region. Nietsch agrees: “The latest developments in Hong Kong continue to fuel the momentum across Asia-Pacific green finance markets.” He adds that Singapore has committed to issuing green bonds to support more than US$14 billion of green infrastructure projects.

“Accountants could also support the proper disclosure and presentation of the financial and ESG information of financial products.”

The role of accountants

Accountants have a significant role to play in helping Hong Kong develop as a green finance centre. Lamrad points out that the profession has well-established frameworks, rules and guidelines on how to present information. “There is an opportunity for accountants to come in and share that knowledge and expertise with multiple stakeholders around the sustainable finance ecosystem,” she says. The International Financial Reporting Standards Foundation is currently working to set up a board to create global sustainability reporting standards. Nietsch says: “This is intended to build on existing initiatives to provide consistency that will support investors, companies, and green finance markets overall.”

Fung adds that they can also quantify the benefits of green finance for companies, the environment and society to help substantiate its value. “Monitoring and performance tracking are important aspects that accountants could play a role in enhancing the governance of financing and investment process. “Accountants could also support the proper disclosure and presentation of the financial and ESG information of financial products, and look at third party opinions issued by independent auditors on such information to enhance their credibility,” she says. Fung adds that they can also play a role in the assurance of data. “The main objective is to increase the creditability of the data disclosed. During the assurance process, besides checking the accuracy and completeness of the data, accountants also review the internal control procedures of the data collection process. This may also help the companies to identify opportunities for improvement,” Fung says.

Hui suggests accountants to develop their knowledge in this area in anticipation of future demand for related services, advice and expertise. “It is crucial for accountants to raise their awareness and understanding of sustainable business practices. Professionals who are well-equipped with ESG skills will help drive progress in building up a sustainable ecosystem for Hong Kong and the region,” she says.

Hong Kong has been designated as the green financial hub for the Greater Bay Area as part of the Guangdong-Hong Kong-Macau Greater Bay Area Green Finance Alliance.

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