How Hong Kong Can lead GBA’s green finance push

Overcoming the challenges imposed by climate change means green finance will become critical – and the Greater Bay Area presents Hong Kong with a golden opportunity

For all the talk about the Greater Bay Area of late, this much-discussed vision offers Hong Kong a golden opportunity to promote its excellence in financial services, in particular, as a centre for green finance. However, key challenges remain

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8 Nov 2018

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The Greater Bay Area (GBA) initiative, linking Guangzhou, Hong Kong and Macau with other cities in the Pearl River Delta, has come to the fore in recent months. For many leading figures in Hong Kong, this is a not-to-be-missed chance for the city to tap into the dynamism of the region.

The importance of Guangdong Province to the national economy cannot be overstated. The region contributes 10.7% in added value to China’s GDP, says Christine Loh, chief development strategist, division of environment and sustainability, Hong Kong University of Science and Technology in a recent Business Environment Council (BEC) conference.

The Pearl River Delta is the economic heart of Guangdong and it is set to be transformed by 2020 into a region for advanced manufacturing and logistics. The GBA will be a global hub for innovation, finance, shipping and trade.

Loh notes the huge potential for Hong Kong businesses to tap into this growth region due to the requirement for mainland China to clean up its environment as a consequence of rapid economic and infrastructural development. Environmental protection laws are in place to protect water, air and soil from further pollution. Guangdong itself is on the cusp of revolutionary technological changes in manufacturing that includes electrical vehicles, the sharing economy, public transportation and green buildings.

Hong Kong has, in the past, taken the lead in setting environmental standards for GBA and should continue to do so, Loh insists. Hong Kong set the ball rolling with tough rules to combat shipping emissions, which were ahead of the industry curve, and it can do so again. Furthermore, the GBA environmental standards can exceed any environmental standards set at national level.

According to Hannah Routh, partner at Deloitte China, driving forward Hong Kong into a leading international centre for green finance is an excellent vehicle for the city to maintain its competitive edge. Hong Kong has become a major Asian centre for green bonds over recent years.

“The Hong Kong government has committed to a HK$100 billion programme of green bond issuance,” Routh says during the BEC conference that focused on ‘The Greater Bay Area – Leveraging Opportunities for Hong Kong in the Transition towards Sustainability’.

Hong Kong Green Finance Association, a task force launched this year where Routh is a special adviser, can make policy recommendations, raise awareness, conduct research, collaborate with other major financial centres and facilitate green finance development.

Green finance is not only green bonds – it includes green loans; responsible investing; sustainable investing; environmental, social, governance (ESG) investing. The demand for this type of investing is driven by institutional investors and pensions funds.

Routh foresees great potential in the GBA as well as the Belt and Road Initiative (BRI) regions for Hong Kong’s ambitions to be a global player in green finance. BRI refers to China’s massive infrastructure programme along a trade route spanning Asia and Europe.

“Hong Kong should seize the opportunity. It’s now time to do deals,” Routh says.

The Hong Kong government should push deals through regular discussions with its counterpart in China. The Hong Kong Monetary Authority is a huge institutional investor – it should take up a leadership and advocacy role in ESG investing, she adds.

Crossing borders

A critical aspect to the GBA is the issue of borders – such a critical issue for many who cherish the one-country two-systems model in operation since the handover of Hong Kong to China in 1997. But the environment does not respect borders where pollution is concerned, notes Freuman Cheung, senior vice president, environment, Greater China, AECOM. Only by working across borders can regional environmental problems be solved, such as waste management, air and water pollution, more cost effectively. The GBA is a low lying river delta with an exacerbated flood risk, he adds.

“Integrated environmental protection schemes will be needed to manage and eliminate emissions, air quality, water, contaminated land and solid waste. Regional haze within the GBA, for instance, needs a coming together to effectively tackle this issue,” he says.

The effects of climate change are becoming a major consideration in the world’s top financial centres. Hong Kong, as a major financial and trade centre, has a number of key strengths to develop as a green financial centre in the light of the GBA vision, according to Stephen Wong, deputy executive director and head of public policy institute, Our Hong Kong Foundation.

Wong explains, “Hong Kong is a leading fund management centre and is a hub for IPOs (initial public offerings) of mainland firms. It is second to London in renminbi transactions. The number of traded debt securities has gone up steadily in recent years. Around 47% of asset management in Hong Kong was from mainland China and Hong Kong.”

Increased connectivity with the mainland market, such as through the Shanghai-Hong Kong stock connection is one of the key competitive strengths of the city.

These strengths can be leveraged to its advantage, especially as the impact of climate change become apparent through mechanisms such as risk modelling. Extreme weather events are examples of climate-related financial risks. Another is transition or policy risk. There has been a considerable upsurge in insured losses from global natural catastrophes over the last three decades: from around US$10 billion per annum in the 1980s to US$45 billion per annum this decade.

The Bank of England’s 2017 study shows that no action will lead to a 5.2°C temperature rise with huge consequences in terms of heatwaves, crop decline, flooding and water stress. This led the Governor of Bank of England, Mark Carney, to suggest a “Climate Minsky Moment” whereby financial stability is threatened by rapid system-wide adjustments.

The UN-ratified Paris Agreement calls for a limit on global temperature rise well below 2 °C above pre-industrial levels. This commitment requires investments approaching the multi-US dollar trillion level.

These considerations have altered the policy thinking at governmental level in China, says Wong. He pointed out the emphasis on “ecological conservation” has been adopted by China, which lays a marker for an acceptable balance between development and conservation to enable “green growth”. This is a new pattern of modernization in harmony with nature.

Five Pilot zones for green finance have been created in China investing in projects. Major Chinese offshore green bonds are in operation at different locations globally. Often there are rules in place that capital raised must flow back to the mainland.

The green projects include 69 green projects underway by 2018 in Guangzhou from electric vehicles to sewage treatment. Guangzhou, as well as the whole Guangdong, has a target of 30% of new buildings to be green by 2020. 

Hong Kong is ideally positioned as a green finance hub for the Chinese and world markets, and is developing a burgeoning reputation as a bond issuance centre. Swire Properties’ issuance of green bonds attracted substantial green investors.

Capital account key issue

Whether the capital account in China will loosen up or continue to be the status quo is a critical issue that could impact Hong Kong’s role as the green hub for the GBA. Currently several quota restrictions are imposed on capital flows within the region. 

China needs to utilize Hong Kong’s capital markets to plug funding shortfalls, say industry experts at the BEC event. Capital flows within the GBA should be facilitated with less restrictions, such that funding via issuance of green securities in Hong Kong can be directed to the green projects with minimal cost, they say.

Hong Kong can play a unique role in sourcing overseas capital for green projects in the GBA. Hong Kong has a great deal of money to invest, they add.

Furthermore the city has a unique role to play in supporting activities too, for example in setting environmental standards. The Hong Kong Quality Assurance Agency scheme is crucial in this endeavour and can help promote investor confidence.

Challenges

During the BEC event, industry leaders pointed out the mismatch between supply and demand. Despite having the projects to finance and capital availability, there is a mismatch partly due to lack of confidence and transparency in the use of proceeds of green issuance.

One of the most damaging situations would be “greenwashing” of bonds or the practice of making an unsubstantiated claim about the environmental benefits of a project tied to a green bond. Bond issuers must give investors assurances that the money raised from the sale of a green bond will be used for genuine green projects.

Hong Kong has a great financial ecosystem, but there’s scope for the territory to improve its ESG investing ecosystem, industry leaders note. The benefits of ESG investing are not discussed enough in the financial community and these critical screening practices need good information and reporting by companies.

There are a wide variety of factors involved in ESG reporting compared to financial reporting – the latter is only about money but the former involves a wide range of data that is interconnected.

In China, listed companies are required to do ESG reporting by 2020. However, the quality of the reporting is only as good as the data. It is critical that ESG data is dependable; the values derived need to be accurate, they note.

Another challenge is overcoming short-termism when investing in projects or considering risk or perceived risk. The constant pursuit of quarterly returns at the expense of innovation and long-term investment needs to be reconsidered.

There is also the issue of de-risking. The role of de-risking projects is currently played by multinational development banks. But risk and perceived risk relating to environmental infrastructure remain a problem. Using some form of guarantees may help de-risk projects, industry leaders say.

 

The Asset kindly acknowledges the support of the Business Environment Council (BEC) in the production of this article.

Date

8 Nov 2018

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