Hong Kong's regulators and central bank need to introduce green finance rules and information requirements more assertively if they are to ensure that the world's global temperature only rises by two degrees Celsius or less, said environmental experts attending the first anniversary of the Hong Kong Green Finance Association (HKGFA).
The one-day event was held on September 23 and sought to underscore Hong Kong’s developing credentials as part of the Greater Bay Area, which China has designated as a leading place to push green finance development.
The mood at the first panel was fairly celebratory, with several Hong Kong and Guangdong government officials discussing what they bring to green finance in the Greater Bay Area around the Pearl River Delta.
“First we need to identify our complementary advantage,” said Joseph Chan, undersecretary for financial services in the Hong Kong government. “The position of Hong Kong is that we are the leading financial centre in Asia and the leading international financial centre for China and the Greater Bay Area as well.”
The tone concerned several attendees. They praised the efforts of the HKGFA to push the conversation forward but said that some officials don’t appear to be seriously considering the deep-seated reforms needed to spread green finance and environmental, social and governance (ESG) standards in the city.
“It felt a bit self-congratulatory, with [Hong Kong] government executives all saying what they’d done and not really having a conversation about what needs to be done,” one family office representative told AsianInvestor. “And it was slightly embarrassing to hear all the genuine changes that the Chinese officials had done, versus far less on the side of Hong Kong.”
NEED FOR REFORM
Attendees said that Hong Kong needs to move its green finance ambitions forward far faster for the city to lead, rather than follow more progressive regimes in China and Europe.
Hong Kong has, to date, placed a heavy emphasis on the issuance of green bonds, and is now increasingly looking to encourage green loans as well.
“It’s understandable why they did this; it’s low hanging fruit,” said the executive of an environmental organisation. “But it’s nowhere near enough; a lot more needs to be done if asset managers and banks and investors are seriously going to tackle the impact of a two-degree rise [the temperature increase target agreed to by almost all nations at the Paris Climate Agreement of 2015]. And Hong Kong doesn’t appear to be doing enough even to hit that.”
Ma Jun, chairman and president of the HKGFA, had some sympathy for this frustration. While he told AsianInvestor on the sidelines that he was encouraged by rising green bond issuance, he admitted that it has been China’s efforts to improve environmental disclosure for its listed companies that have pressurised Hong Kong to improve.
He noted, however, that building strong environmental oversight and enforcement takes time. “You have to lay the foundation for all this by building institutions, and listing requirements are part of that. Plus somebody needs to do the modelling and environmental risk modelling; all this needs to be built into the industry.”
The need to raise standards in Hong Kong led the Securities and Futures Commission (SFC), the territory’s financial regulator, to launch a survey with fund managers in March to discover how they engage with ESG and potentially to recommend new policies or guidance. It followed this shortly afterwards with a circular on how its unit trust and mutual fund code applies to green or ESG funds.
Ashley Alder, the chairman of the SFC, admitted that the need for regulators to implement higher ESG standards was growing.
“Usually companies discuss with us the need to cut regulation, but in this area, we have had [Hong Kong-listed] companies come to us and say, ‘we want you to tell us what we have to do and make it mandatory',” said Alder. “That way if they start to do it, they know they won’t have a first-mover disadvantage, because everybody has to do it.”
He believes that environmental disclosure standards will become mandatory at some point from the international route, while China's environmental standards will start applying to H-share companies from next year.
Alder added that the Bank of England and People’s Bank of China had played critical roles in pushing forward the concept of a potentially unified ESG taxonomy, which could form the basis for globally accepted green finance and fund management standards.
Both central banks were founding members of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), an association formed by reserve institutions in 2017 that pushes for the financial system to change to respond to a warming world.
Notably, the Hong Kong Monetary Authority only joined the NGFS in the past month or two. A bold move, Ma said, would be for Hong Kong’s de facto central bank to decrease the risk weighting of lending for green assets from 100% to 75%, while raising it for brown, or non-environmentally friendly projects, to recognise the damage these do to the climate.
“I made this proposal a year ago, but so far it’s not been used by any central bank,” Ma noted. “For the HKMA to do this they need to have a green taxonomy. But they don’t have a proper definition of green loans now. And they need to ensure that all banks have the same ideas of green loans and show that they have lower default rates than the average loan portfolio.”
It’s not easy, but Ma notes it is possible. “China did it,” he said. “They started in 2013.”
FOUR FUNDING AREAS
As part of its efforts to deepen green finance, the HKGFA has highlighted four areas around which it wants to encourage green finance in the Greater Bay Area: waste processing, water risk analysis, green building construction and green supply chain management.
“To be promoted these will require some private equity investment,” Ma said. “When new, projects in waste processing and water management are not typically financed by bank loans alone. That offers a space for private capital and investors.”
Tracy Wong Harris, deputy secretary-general for the HKGFA, added that the association hopes the initial project research will take about a year, with another 18 months after that assigned to raise financing.