Hong Kong’s Green Finance Development [PT 1]: Regulatory Efforts and Recent Progress

Hong Kong is taking multiple measures to build a green finance ecosystem

The Hong Kong SAR government started exploring green finance in 2016, after PBoC and other six departments jointly released Guiding Opinions on Building a Green Finance System.

Three Major Organizations Supporting Green Finance in Hong Kong

A Timeline of Green Finance Events in Hong Kong

HKQAA first launches certification services to assess green bonds and other green finance instruments issued in Hong Kong

In compliance with the central government, HKQAA began research and development (R&D) of the Green Finance Certification Scheme (GFCS) in 2016 and officially launched services in March 2018. GFCS provides two type of certification services for the pre- and post-issuance of green finance instruments to evaluate green finance tools and investment projects, which, in reverse, could improve the reliability of green finance and investors’ confidence.

Following that, HKQAA rolled out the Green Bond Grant Scheme (GBGS) in June 2018, available for three years, to finance qualified green bond issuers to receive certificates via its GFCS. In detail, the GBGS covers all fees incurred within the GFCS, and issuers that release at least HKD500m worth of green bonds can apply and obtain up to HKD800,000 for every issuance. After completing the first certification via the GFCS in January 2018, HKQAA also began including green funds in September 2019, and then ESG funds in May 2020, further enhancing disclosure of ESG related information in Hong Kong.

Hong Kong SFC publishes its Strategic Framework for Green Finance in September 2018, aiming to enhance listed companies’ ESG performances and build Hong Kong into a green finance hub

SFC’s framework included three main topics:

Strengthening listed companies, fund managers, and investment products’ disclosure and assessment of ESG factors, especially environment and climate related risks
Promoting the development of green or ESG related investment products
Pushing Hong Kong to become an international green finance center

With the same aim of building an international green finance hub, in the same month, Hong Kong Green Finance Association (HKGFA) was established to facilitate green finance development in the city. HKGFA advises on green finance supporting policies to Hong Kong regulators, conducts R&D of green finance products, and provides information for financial institutions to participate in green investment and finance projects in Hong Kong, Mainland China, and the Belt and Road Initiative (BRI), etc.

As a part of the SFC’s strategic framework, the SFC, HKMA, Hong Kong Exchanges and Clearing Limited (HKEX) [0388:HK], and other departments founded the Green and Sustainable Finance Cross-Agency Steering Group on May 5, 2020. This group also supports green and sustainable finance in the city as well as the government’s climate related strategies.

In addition, complying with SFC, HKEX’s tightened third version of ESG disclosure requirements also took effect on July 1, which orders companies to reveal how they are affected by major climate events and environmental targets. Later, in November, HKEX proposed to build a Sustainable and Green Exchange (STAGE) as an information platform of sustainable assets and investment products for investors to participate in the Hong Kong markets.

HKMA is focusing on the promotion of green and sustainable banking, while helping with the issuance of government green bonds to facilitate development of the city’s green bond market

One year prior to the establishment of the joint group with SFC, HKMA released its major measures for sustainable banking and green finance on May 7, 2019. In its announcement, HKMA unveiled its plans to build a green and sustainable banking system in three phases, support Responsible Investment such as incorporating ESG factors in its credit risk analysis of bonds, and set up the Centre for Green Finance (CGF) under its Infrastructure Financing Facilitation Office (IFFO).

For Phase I, HKMA published the Common Assessment Framework on Green and Sustainable Banking on May 13 of this year. The framework aims to evaluate the Greenness Baseline of banks via collecting information categorized in six main factors, with a focus on how banks prepare for and cope with climate and environment related risks. Later, HKMA and International Finance Corporation (IFC) jointly set up a Green Commercial Banking Alliance this November, which also aimed to help the banking industry with green development.

Moreover, HKMA is assisting the Hong Kong SAR government on the phased issuance of the HKD100bn government green bonds. The government officially launched the issuance plan in March by releasing its Green Bond Framework. The Green Bond Framework clarifies that the government plans to invest the proceeds into projects regarding the city’s environment improvement, climate change solutions, and transmission to low-carbon economy. On the other hand, the Hong Kong government also intends to be an example by issuing government green bonds and attract more green bond issuances in the city.

Hong Kong is supporting its green bond market by issuing government bonds, while the green credit market is also developing

Link Asset Management’s Link Real Estate Investment Trust (REIT) issued Hong Kong’s first corporate green bonds in July 2016, which are fixed-rate bonds maturing in 2026 with a total size of USD500m and a coupon of 2.87%. Three years later, the Hong Kong SAR Government announced the issuance of the first batch of green bonds under its Government Green Bond Programme on May 22, 2019, worth a total of USD1bn with a five-year term and listed both on the HKEX and London Stock Exchange. The first batch of the government green bonds received over USD4bn worth of global subscriptions, implying the popularity of Hong Kong’s green bonds. Notably, these bonds also obtained the pre-issuance certificate from HKQAA’s GFCS and could be regarded as a new benchmark for future green bond issuers.

In 2019, the total amount of green bonds issued in Hong Kong was USD10bn, down 9.09% YoY, while as of the end of last year, the accumulated green bond issuing scale in the city reached USD26bn. Although it showed a slight decline compared to the USD11bn in 2018, the issuance scale still hit USD10bn last year, making Hong Kong one of the largest green bond markets in the world. To some extent, the decrease in 2019 is also because of such a sharp increase in 2018, from USD2.3bn in 2017. Moreover, the issuing entities in 2019 expanded to multiple types, including governments, loans, financial and non-financial institutions from Mainland China and overseas, while about 55% were new players taking part in the Hong Kong green bond market, signaling the city’s potential as an international green finance hub. Meanwhile, all green bond issuers last year accepted at least once external review, an increase from 90% in 2018. This shows how routine it is to receive a green bond certification in the city, thus, increasing the reliability of green bonds for investors.

Apart from green bonds, Hong Kong’s green credit market, which includes green loans and green financing projects, is also developing. In March 2018, Hong Kong’s New World Development [0017:HK] claimed to launch its green finance framework, based on which the company would invest funds in sustainable building projects through green bonds or loans. In the same year, the company had released its first green loan. Additionally, Hong Kong financial institutions are also speeding up the release of green loans in recent years, while some Chinese-funded banks showed faster growth of green loans than normal loans, with green loans accounting for 3% to 5% of total assets.

Reference:

https://www.sfc.hk/en/Green-and-sustainable-finance

https://research.hktdc.com/sc/article/NDM2NjM5OTk5

http://www.hkqaa.org/gb_certservice.php?catid=26

http://www.xinhuanet.com/2018-03/12/c_1122527104.htm

http://hm.people.com.cn/n1/2020/0515/c42272-31710225.html

https://www.hkgb.gov.hk/sc/greenbond/greenbondintroduction.html

http://www.hkqaa.org/gb_certservice.php?catid=26&id=50

https://www.hkma.gov.hk/gb_chi/key-functions/banking/banking-regulatory-and-supervisory-regime/green-and-sustainable-banking/

https://www.hkma.gov.hk/gb_chi/news-and-media/press-releases/2019/05/20190507-4

http://www.xinhuanet.com/fortune/2020-11/09/c_1126717748.htm

http://www.nbd.com.cn/articles/2019-12-19/1394686.html