Although the pandemic has undoubtedly been the main focus of governments around the world over the past year, an even greater challenge lies on the horizon: climate change. It’s a challenge that Hong Kong is meeting head on, not only by setting stringent climate goals such as becoming carbon neutral by 2050, but also through innovative environmental, social and governance (ESG) strategies and green and sustainable finance initiatives introduced by the Hong Kong Monetary Authority (HKMA). To date, Hong Kong is the first Asian jurisdiction that has committed to align specifically with the recommendations of the Task Force on Climate-related Financial Disclosures by 2025 across relevant sectors.
“The HKMA seeks to make our contributions in this area by leveraging on our role as a regulator, a major investor, as well as an active participant in international financial forums,” says Eddie Yue, Chief Executive of the HKMA.
A Three-Pronged Strategy
Underpinning much of the HKMA’s strategy are three initiatives outlined as early as May 2019. The first initiative is to promote green and sustainable banking. The first phase of work to develop a common framework to assess the “Greenness Baseline” of individual banks has been completed. Currently, in the second phase, the HKMA, in consultation with the banking industry, is formulating supervisory requirements on managing climate-related risks. Meanwhile, the HKMA has also launched a pilot exercise on climate risk stress testing in early 2021 to assess the climate resilience of its banking sector. The third phase will be for banks to implement the finalized requirements.
The HKMA’s second initiative seeks to cultivate a responsible investment (RI) environment by weaving ESG factors into the investment process of the Exchange Fund (EF), as well as giving priority to ESG investments when long-term risk-adjusted returns are comparable to other investments. “As one of the largest reserves managers globally, we embrace responsible investing,” says Yue. “ESG principles are now an integral part of our investment criteria, processes and asset allocation.”
Some examples of the RI efforts are:
- Gradually building up EF’s investments in green bonds, ESG-themed equity mandates, and other green investments such as renewable energy and green buildings.
- Embedding ESG factors in the selection, appointment and monitoring of the HKMA’s external managers of public assets and examining ESG policies and practices of general partners as part of due diligence of private market investments.
- Incorporating ESG factors in the credit risk analysis of bond portfolios.
The HKMA’s third initiative is the launch of the Centre for Green Finance (CGF) to serve as a platform for technical support and experience sharing for the green development of the local banking and finance industry.
“As one of the largest reserves managers globally, we embrace responsible investing. ESG principles are now an integral part of our investment criteria, processes and asset allocation.”
–Eddie Yue, Chief Executive of the HKMA
Taking the Lead
In May 2020, the HKMA joined forces with the Securities and Futures Commission to initiate the Green and Sustainable Finance Cross-Agency Steering Group. The Steering Group has set out five near-term action points, including achieving mandatory climate-related financial disclosures by 2025 and adoption of the Common Ground Taxonomy now being developed by the International Platform on Sustainable Finance.
Building on its status as an international financial centre, Hong Kong has also been quick to take on regional leadership roles for green finance initiatives pushed by supranational bodies such as the World Bank. For example, the HKMA is a founding member and the first regional anchor for the Asia Chapter of the Alliance for Green Commercial Banks, a global scheme launched by the International Finance Corporation (IFC) that encourages commercial banks to adopt greener investment practices.
“The HKMA’s vision and continued progress toward making Hong Kong a prominent green finance hub for Asia makes it the ideal inaugural partner to mainstream green finance in [the region],” said Stephanie von Friedeburg, Senior Vice-President of Operations at IFC, in November 2020.
Funding the Transition
Another area of green and sustainable finance in which Hong Kong is leading the way is its green bond strategy. Quick to recognize the value of a global market that HKMA’s Yue highlights has grown from practically non-existent ten years ago to US$290 billion annual issuance in 2020, the city has been enhancing its role as a regional green and sustainable bond hub. This includes providing the necessary infrastructure and catalyst for market development, such as the Green and Sustainable Finance Grant Scheme to provide subsidies for eligible bond issuers and loan borrowers to cover their expenses on bond issuance and external review services, while supporting international initiatives and alignment. In 2020 alone, US$12 billion green debt were arranged and issued in Hong Kong, with one-third of the issuers being first time issuers in the city. This is in spite of the disruptions caused by the pandemic. By the end of 2020, cumulative green debt issuance in Hong Kong amounted to over US$38 billion.
Such strengths have also come about on the back of the highly successful Government Green Bond Programme, with issuances being well received by global institutional investors. This, Yue says, is a testament to investors’ confidence in Hong Kong’s credit strengths and economic fundamentals in the long term, as well as their support of its efforts in promoting sustainable development.
Demand for the latest US$2.5 billion issuance in February was huge, and the three tranches of five-, ten- and 30-year tenors helped set a comprehensive benchmark yield curve for potential green bond issuers in the region. The pricing achieved was well within the spread of other U.S. dollar-denominated comparables over U.S. Treasuries, reflecting strong investor interest in this green bond.
For more information, visit: www.hkma.gov.hk