With Hong Kong’s announcement last year that it would seek to become a hub for environmentally aware financial instruments, A Plus reports on how the stage is set for CPAs to help define the standards for a rapidly growing financial marketplace, and encourage investments into energy efficiency, low-carbon projects and other key technology sectors
Illustrations by Gianfranco Bonadies
To John Ho, Chief Financial Officer of the Hong Kong & China Gas Company, and a Hong Kong Institute of CPAs member, it seemed appropriate to fund the company’s innovative technology that turns waste into energy with a similarly innovative financial structure.
The result was Towngas’s first “green bond,” issued in November 2017, with money raised earmarked for projects that reduce greenhouse gas emissions and consumption of natural resources. More broadly speaking, there isn’t a set definition of what a “green bond” is, however, a broad definition commonly accepted by companies, trade bodies and international organizations is bonds where the proceeds of the debt are invested in projects or assets that generate an environmental benefit.
For bond issuers such as Towngas in Hong Kong, that could include wastewater treatment projects, the manufacture of biofuels, or turning landfill gases into synthetic natural gas. “Green finance benefits not only the environment but also the issuer,” says Ho. “By highlighting environmentally and socially beneficial initiatives that will be financed by the proceeds of green bonds, an issuer can... communicate its key sustainability goals and objectives to the investors or even the wider community.”
Globally, green bonds are one of the fastest-growing segments of the fixed-income market. According to the London-based Global Green Finance Council, an international financial-services sector trade body established last year, more than €100 billion (HK$882 billion) in green bonds were issued in the first 11 months of 2017, compared with €11 billion in all of 2013.
China’s first green bond was issued in 2015 through wind energy company Xinjiang Goldwind’s wholly owned Hong Kong-based subsidiary. In Hong Kong, Link Real Estate Investment Trust and the Mass Transit Railway Corporation issued their first green bond in 2016. Towngas raised HK$600 million and ¥2 billion (HK$140 million) from its 10-year green bond, the first such bond issued by a Hong Kong-based utility company.
For Institute members, green finance could present an encouraging new business line. “Our members can get involved in aspects of finance raising,” points out Chris Joy, the Institute’s Executive Director for Standards and Regulation. “One aspect, which some firms are already looking at and could become a wider opportunity, is providing assurance around the green credentials of green bonds.”
“The establishment of a [green bank] would position Hong Kong in the forefront of this increasingly important area of finance in Asia.”
Hong Kong action
To be sure, there has so far been modest progress in green financing in Hong Kong compared with other regions. Hong Kong Exchanges and Clearing (HKEX) data show that only nine green bonds have been issued.
Supporters note that the government has placed increased emphasis on this topic, as demonstrated by the mention in the 2017-2018 budget speech and in the Financial Services Development Council’s report, Hong Kong as a Regional Green Finance Hub, issued in May 2016.
Hong Kong Chief Executive Carrie Lam’s policy address last year stated that green financing would be a key plank of the special administrative region’s financial services policy. “I would... emphasize such fast-rising areas as financial technology, green finance and infrastructure financing,” Lam told graduates at the Financial Services Development Council Career Day in October 2017.
Some stakeholders are urging further development. The European Chamber of Commerce in Hong Kong last year advocated the establishment of a green investment bank in Hong Kong. “Green finance is a rapidly advancing sector that capitalizes on opportunities created by the increasing convergence of economic and environmental factors driving global growth,” the chamber noted in a report. “The establishment of a [green bank] would position Hong Kong in the forefront of this increasingly important area of finance in Asia.”
Meanwhile, the United Kingdom-China Green Finance Task Force, a joint venture between the City of London’s Green Finance Initiative and the China Society for Finance and Banking’s Green Finance Committee, has urged HKEX to build a database that would encourage international investors to invest in Chinese green bonds through the Bond Connect programme.
The British and Chinese governments issued an upbeat joint report on green financing in November 2017. A key recommendation, supported by the People’s Bank of China, is the formation of a Green Belt and Road Investor Alliance, made up of representatives involved in the Belt and Road Initiative.
“With Belt and Road a major driver for the region, this is likely to lead to more demand for green bonds and green-related financing, project financing and supply chain financing,” says Andrew Weir, Regional Senior Partner at KPMG Hong Kong and a fellow of the Institute.
Green hubs sprouting
Hong Kong can expect to face competition as it seeks to be a green finance hub. One emerging leader is the Luxembourg Stock Exchange which, since its first green bond listing in 2007 for €600 million by the European Investment Bank, has become by far the leading market for such instruments. Today, the exchange hosts 100 green bonds listed in 20 currencies by 20 issuers.
Meanwhile, London’s interest in green finance dates back even further: see A green history below. Today, the city is a world leader in environmentally aware financial products: it was the site of the first yuan-denominated green bond issue, and it will be keen to develop new services to ensure it remains a global financial centre after Britain’s scheduled departure from the European Union in 2019.
Closer to home, Singapore’s financial sector last year funded an examination of the island republic’s green finance capabilities to identify opportunities for growth. In March 2017, the Monetary Authority of Singapore announced that it would offer a grant of up to S$100,000 (HK$565,000) per issue to offset expenses incurred in obtaining an external review of green bonds as part of plans to promote sustainability- orientated benchmarks, funds and products.
In November 2017, the Singapore Institute of International Affairs (SIIA), a think tank, issued a report, Collaborative Initiative for Green Finance in Singapore: Singapore as a Green Finance Hub for ASEAN and Asia. “Pursuing green finance is a logical, attainable and necessary next step for Singapore, both as a financial hub and for our contribution to the global environmental challenges,” says SIIA Chairman Simon Tay.
DBS, a major Singapore-based regional bank, launched its first green bond in July 2017 with a US$500 million (HK$3.9 billion) offering. “The issuance of our first green bond is a milestone for DBS [and] offers our investors an opportunity to engage in our journey towards sustainable finance,” says Mikkel Larsen, Managing Director of DBS and Co-Chair of the DBS Sustainability Council.
Green finance has captured the imagination of multilateral policymakers. The World Bank has been issuing The World Bank Green Bonds since 2008. Meanwhile, the G20 group launched the Green Finance Study Group in 2016. Last year, the group developed a set of options on how to enhance the ability of the financial system to mobilize private capital for green investment.
The recommendations include, among others, providing strategic policy signals and frameworks; promoting voluntary principles for green finance; expanding learning networks for capacity building; and supporting the development of local green bond markets.
The European Union is also strongly supporting the transition to a low-carbon and sustainable economy. It established a High-Level Expert Group on Sustainable Finance in 2016 to provide advice on developing a comprehensive EU strategy.
In China, the focus on green finance took root in the 13th Five-Year Plan covering 2016-2020. In June 2017, five green finance pilot zones were created in Guangdong, Guizhou, Jiangxi, Xinjiang and Zhejiang. Banks in those zones are encouraged to lend to environmentally friendly sectors as part of the government’s efforts to reduce carbon emissions and pollution through regulatory action.
“China’s strong policy support to build a green finance system has created a diversi- fied environment for different financial products to blossom such as green bonds, green bond indices, green funds and green loans,” says Maria Cheng, Partner and Head of Business Reporting and Sustainability at KPMG China and an Institute member.
Serving the customers
Ultimately, green finance will be driven by consumer demand. Aside from government and public projects, there are at least 15 private-sector initiatives worldwide on sustainable finance created by banks, issuers, investors and infrastructure providers who have also jointly set standardized reporting and disclosure guidelines, according to the Green Finance Initiative.
Investment banks such as UBS say customers are increasingly seeking financial instruments in which the proceeds are earmarked specifically for projects with environmental value, such as bonds that target renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity, low-emission transport and water conservation. Increasingly, investors are viewing these environmentally friendly bonds not only as investments with a conscience, but also as important parts of balanced portfolios.
“We believe one could expect diversified green bond exposure to generate returns comparable to a mix of traditional government and investment-grade corporate bonds,” says Mike Ryan, Chief Investment Officer for the Americas at UBS in New York.
Green financial instruments are becoming more transparent. In April 2017, S&P Global Ratings launched its Green Evaluation service to measure the sustainability of asset classes. Such evaluations, which are separate from traditional credit ratings, can be used to assess the green impact of a variety of securities and are independent of credit characteristics.
Accounting professionals in Hong Kong can do their part to help create and apply a consistent framework. “Green finance is not really a defined product or service that fits into a neat regulatory bucket,” points out Joy. “All regulators involved in the market will have to consider implications in an area that could encompass all types of financing and financial and investment decision-making.”
Services that CPAs can provide green bond issuers include assurance services, conducted in line with professional standards; consultation on the evaluation, use and management of proceeds; and reporting of bond performances. This would help meet the demands of investors who are increasingly seeking to balance financial returns with sustainability benefits.
Whether it’s by guiding issuers in designing their green bond criteria and processes, or helping them rethink their corporate social responsibility strategies, CPAs can help companies demonstrate to investors their credentials as sustainable and responsible organizations.
In 2017, Chinese institutions issued 185 green bonds raising a total of 277 billion yuan, (HK$320 billion) up 123 percent and 32 percent respectively year on year, according to a report by the Xinhuarun Economic Information Daily.
A green history
The idea of a financial product not built on pure profit is not new. Sir Thomas White, Lord Mayor of London in 1553, and a prominent cloth merchant, founded a charity in 1542 to offer cheap financing to the start-ups of the day. It still operates 465 years later, offering nine-year interest-free business and education loans to people aged from 18 to 35.
In subsequent centuries, mutual insurance companies, building societies and co-operatives cemented a tradition in the United Kingdom of “common good” financing. “There’s a deep history [in London] of financing structures which had objectives beyond making profits,” says Tessa Tennant, Director of the UK Green Investment Bank.
Tennant can’t quite trace her involvement back to the Renaissance, but there’s no doubting her pioneer credentials. “My own involvement began in 1986 when I first heard about ethical investment funds in the U.K. and socially responsible investment funds in the United States,” she says.
In 1988, Tennant started the Merlin (now Jupiter) International Green Investment Trust, the world’s first specialist green investment trust with £28 million (about HK$400 million at the time) in assets under management. Since then, the Jupiter funds has grown substantially and now holds about £650 million in assets under management.
Tennant says the purpose of green finance is to make a world where business benefitted everyone and operated within the planet’s ecological boundaries. “This is still pretty much the vision of green investment,” she says.
Today’s green finance focus, she adds, should be impact investment and project financing to support the Paris climate agreement signed within the United Nations Framework Convention on Climate Change. “Like most strategies [green finance] is not a silver bullet, more a useful lens through which to manage investment portfolios.”