Green Finance: Hong Kong’s Next Opportunity

Hong Kong government should act fast to catch up with the megatrends of developing green finance markets

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

As different environmental problems, such as air pollution and climate change, are posing an increasing threat to the planet and our lives, the demand for green finance has been growing around the world.

China is currently the largest green house gas emitter. In the Paris Climate Change Conference in December 2015, China has pledged that it will peak its carbon emissions and reduce its carbon intensity by 60 to 65 percent of 2005 levels by 2030. The ambitions around environmental improvements and carbon reduction are also captured in China’s 13th Five Year Plan from 2016 to 2020.

It is estimated that an annual investment of at least RMB 2 trillion (USD 290 billion) will be needed for the environmental targets in the remaining period of 13th Five Year Plan. However, the Chinese Central Government can only provide 15% of the required green investments.

To that end, green bond can serve as a “major tool” to channel capital from both private and public sectors to finance green projects such as energy efficiency and low-carbon projects, which was the central topic of discussion in the seminar “Landscape Study for Strategic Development of Green Bond Market in Hong Kong” organized by Our Hong Kong Foundation (OHKF) in October 2017.

The seminar invited four panelists to offer their insights, including Mr. James Lau, Secretary for Financial Services and the Treasury; Mrs. Laura Cha, Chairman of the Financial Services Development Council; Prof. Lawrence Lau, Ralph and Claire Landau Professor of Economics of The Chinese University of Hong Kong; and Prof. Kalok Chan, Dean of The Chinese University of Hong Kong Business School and Wei Lun Professor of Finance.

Mr. James Lau started by saying that at the G20 Summit in Hangzhou in 2016, world leaders recognized the importance of green finance in addressing environmental issues and promoting sustainable development globally. Particularly in China, the investment opportunities in low-carbon infrastructure, green transportation and clean energy are huge and only an estimated 15 percent of the demand met by government finances.

“Given the importance of green finance, Hong Kong shouldn’t miss out such an opportunity. It is necessary to scale up green finance,” said Mr. Lau.

He added that “Hong Kong has the perfect conditions to develop green finance markets” as the gateway to mainland China, Hong Kong has a sound legal and regulatory system, well-developed capital markets underpinned by robust market infrastructure, and a wealth of financial intermediaries and talents.

He believes that Hong Kong is ready to unleash its potential capacity in developing green finance.

“According to the 2017 Policy Address, to promote such market in Hong Kong, Hong Kong

Government will take the lead in arranging the issuance of a green bond in the next financial year. Through this initiative, the government aims to encourage investors in the Mainland and along the Belt and Road as well as international investors to arrange the finance of their green projects through our capital markets,” he said.

On the other hand, Mrs. Laura Cha thinks that more concrete green finance developmental strategies are needed from the government, business community and academics.

“Green finance is a relatively new concept, even some international ratings agencies have just started to develop it. There is still room for Hong Kong,” she commented, adding that the city can play a role in establishing a qualifying green bond scheme by recognizing qualified parties for external review.

A green bond differs from a traditional bond with its external review process to ensure the use of proceeds on green projects. Therefore, it is important for the government to set official standards for the definition of green financial products and projects to make sure all projects financed by green bonds are truly environmentally friendly.

To attract more investments in green finance, Prof. Lawrence Lau added that the government should consider providing more incentives to green bonds issuers and investors, such as offering subsidy on costs of external review and verification to issuers whose bonds have been successfully verified and eliminating certain of taxes for green bonds investors.

“Issuing green bonds currently incurs monetary costs for external review, which would hold potential issuers back. So the government should come up with solutions to lower the verification cost to incentivize green bond issues and encourage more companies to enter the market,” he commented.

Concurring with Prof. Lau’s view, Prof. Kalok Chan believes that developing the green finance market is a megatrend in today’s global economy and Hong Kong should act fast to catch up with the trend.

“In terms of enhancing global investors’ confidence in our market, Hong Kong still has a lot to do,” he said, citing Luxembourg as a good example.

Luxembourg has been a pioneer in the development of green bonds. In 2016, Luxembourg Green Exchange (LGX) was launched and is now the world’s largest exchange for green bonds. It has a number of restrictions on listed green bonds. For example, bond proceeds must be 100 percent used for financing or refinancing green projects and post-issuance reporting must be conducted at least once a year after the issuance.

When it comes to nurturing local talents specializing in green finance, Prof. Chan pointed out that the talent pool for green finance resembles that of finance and Hong Kong has its traditional advantage.

“We can leverage on the resources of universities and professional institutions in Hong Kong, so as to ensure that there is a sufficient supply of green finance talents,” he remarked. “At the end of the day, as the green finance markets grow, students will be increasingly recognizing the importance of green finance.”