Transition finance opportunity across GBA

Ahead of the institute’s annual forum that is set to take place this week, the HKGFA team shares its view of sustainability opportunity across HK and GBA.

At a media briefing last week (September 27), the Hong Kong Green Finance Association (HKGFA) team highlighted the importance of implementing a “harmonised taxonomy” to support the development of the special administrative region’s (SAR) a sustainable finance market; and exploration of emerging opportunities in the transition finance sector.

“Hong Kong absolutely needs a taxonomy to continue the journey towards high quality green finance services,” Jun Ma, chairman and president of HKGFA, told FinanceAsia during the discussion.

“As there exist various taxonomies already, the authority needs to tell institutions which one to adopt, so as to better measure performance, allocate incentives and perform greenlight procedures,” he motioned.

Founded in September 2018, the HKGFA draws upon policy suggestions from experts to inform the direction of green finance endeavours in the market. Tomorrow (October 4), the institution will hold its annual “Transition to Net Zero: From Ambition to Action” forum, where industry professionals and regulators will convene to discuss sustainability initiatives.

Chaoni Huang, executive vice president at HKGFA and head of Sustainable Capital Markets at BNP Paribas, said that promoting the adoption of a Common Ground Taxonomy (CGT) in Hong Kong has been one of the group’s priorities over the past year.

The CGT was proposed by a working group co-founded by the European Union (EU) and China, in July 2020. The set of standards aims to harmonise existing taxonomies in both markets, and to put forward new areas and initiatives that share aligned sustainability aims and relevant judging criteria.

In May, the Hong Kong Monetary Authority (HKMA) published a discussion paper outlining a prototype for a green classification framework. The paper highlighted the benefits of having an internationally harmonised taxonomy, and being one of the first jurisdictions to incorporate a CGT.

“On this basis, we are proposing an additional 21 green activities spanning from electricity to agriculture, due to their significant environmental benefits and high potential for cross-border green financing and investment opportunities,” Huang said.

“We have also made an attempt to define transition activities in three hardware-based sectors, including manufacturing of iron and steel; cement; and basic chemicals.”

In terms of regulation, Ma said that Hong Kong is likely to become one of the first markets to adopt a set of standards in line with the International Sustainability Standards Board (ISSB).

“This will not only bring huge implications for local companies in Hong Kong, but also for mainland companies listed on its bourse, helping enhance major Chinese companies’ capabilities to align with international disclosures,” Ma added.

“We look at Hong Kong as a super connector between mainland China and the rest of the world. Hong Kong definitely plays an instrumental role in supporting China's transition towards net zero in this sense,” Huang explained.

Transition finance opportunity

Transition finance is high on the agenda, said Tracy Wong Harris, executive vice president at HKGFA and Asia head of sustainable finance at Standard Chartered.

“The opportunity to continue to devote capital to drive transition finance is enormous,” she shared, citing a report from the association on opportunity for transition finance across the greater bay area (GBA), which has at least $2 trillion in funding needs.

The report identifies the three significant carbon-emitting sectors in the GBA that demonstrate great transition finance opportunity, as road transportation, building and manufacturing.

The current funding gap comprises $700 billion needed for the transport sector and over $300 billion for the building sector. Wong explained that while there are no specific statistics on manufacturing, an $800 billion funding gap exists in the power sector, which "lays the foundation for transition”.

Ma shared that the People’s Bank of China (PBOC) has started drafting a transition taxonomy for four different sectors which will be discussed in the central bank’s annual meeting late this year or in early 2024.

Meanwhile at the local level, Huzhou city in Zhejiang province updated its 2022-issued transition finance taxonomy to a second version in July, which covers 106 technical pathways across carbon-intensive industries, including textile and chemicals.

“Transition finance is no longer a concept, but something actually going on,” Ma said.

“Transition finance has the potential to involve more capital from the financial sector than pure green activities, as they will cover a much larger part of the economy.”

Innovative products, such as sustainability-linked loans (SLLs), could help the development of GBA’s transition finance to a wider extent, Wong said.

With such facilities, decarbonisation could be achieved through more diverse financing with environmental focusses as key performance indicators (KPIs).

“SLLs could help open up the market by moving away from where [green] capital has to be locked into certain projects or activities, to where it can be applied to a company’s working capital,” Wong explained.

The latest data from HKGFA reveals that SLLs take up over a third of the overall green and sustainable finance market, and are the second largest segment of Hong Kong’s local green finance market, after green bonds, she told FA reporter at the briefing.

“We have seen tremendous growth in this market,” she noted.

Wong also cited an example where SLLs are acquired to green retrofits in the building sector, helping developers decarbonise existing buildings through energy efficiency restorations. The team has also seen growth in SLL structures across shipping deals and the private equity sector, she shared.

A final trend that the team is seeing across Hong Kong and the GBA, is that more issuers are willing to apply penalties to such structures, compared to the predominant interest margin incentives previously witnessed.

“We have been increasingly seeing that issuers want to demonstrate their ambitions through two-way issuance. This is a journey of evolution, but we have been seeing an increased uptick.”

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