2018: The Year That Sustainable Finance Took Root in Hong Kong

2019-01-28

Hong Kong’s sustainable finance industry finally took root last year, with key developments from investors, banks and the government marking the start of an evolution for our global financial centre.

Sustainable finance (SF) has had a slow start in Hong Kong, but 2018 brought many significant changes and developments that show that the local finance industry is moving in the right direction. It was a year of new organisations, increased interest and concrete actions that create a framework for the coming years of development.

One in four US dollars were invested sustainably in 2018 in the United States. The global sustainable investment pool has reached US$ 22.9 trillion, but Hong Kong, even as an international finance hub, only accounts for about 0.06%, or US$ 13.5 billion, of the total. The good news is that the Hong Kong SF market has made progress in crucial areas which signal that there is more growth to come.

Until now, frustrated SF investors could rightly say that the banks and the government were not providing the tools and rules needed to build a thriving SF market. Last year that complaint lost some of its currency as many of the crucial building blocks of an SF industry were put in place.

For example, an increasing number of banks began to develop in-house ESG capabilities, including research, to service growing demand from private investors. This creates

hope that research will eventually translate into financial products for private investors and in time the broader retail market.

Key Developments

The Hong Kong government threw its weight behind SF development in 2018 and took the key steps needed to create a strong local market. It committed to a green bond issuance programme and established the HK Green Bond Grant Scheme to subsidise the costs of obtaining certification under the HK Green Finance

Certification Scheme. The Securities & Futures Commission (SFC) Strategic Framework for Green Finance helped raise the credibility of the city’s green finance product offerings. The Financial Services Development Council (FSDC) released an ESG Strategy for Hong Kong with six key recommendations. The Hong Kong Monetary Authority (HKMA) held its first conferences on green and social bonds in collaboration with the International Capital Market Association and the People’s Bank of China.

Hong Kong Exchanges and Clearing Limited (HKeX) issued new corporate governance code and related Listing Rules with changes to the requirements for independent non-executive directors. It also updated ESG Reporting Guidance to account for international climate-related disclosure recommendations, and it became a partner of the United Nations Sustainable Stock Exchanges Initiative (SSE).

The past year also brought the launch of Hong Kong Green Finance Association (HKGFA), which aims to gather industry experts and provide policy suggestions to the HKSAR Government and other regulators in developing green finance in the city.

The Investors

All of these developments resulted in a more nuanced but very noticeable rise in public interest. In the past we often saw the same people at every ESG event, but in 2018 we began to see new faces. This indicates that a broader group of investors and financial practitioners are willing to commit time towards ESG education and networking. SFi has welcomed new private investors to our community and unsolicited requests to participate are on the rise. There has also been an increase in job opportunities related to green finance and people seeking work in SF. This is important, as attracting new talent and re-skilling financial analysts will help transition Hong Kong into an SF hub.

We need to generate more locally relevant SF content and educational material in order to leverage this heightened interest and turn it into investment action. SFi research, since supported by reports from Schroders, UBS, and Standard Chartered, found that a lack of understanding of sustainable investing principles prevented Hong Kong investors from investing sustainably. But there are many reasons to be optimistic, as UBS found that 85% of Hong Kong investors are interested and that women and millennial investors stand out as strong supporters. The task for 2019 is to convert this interest into action.

Hong Kong can be proud of the progress it made in 2018 towards positioning itself as a global SF centre. These developments showed that there is appetite from all the key market stakeholders, giving us optimism as work on even greater gains traction in 2019.

2018 GLOBAL TRENDS IN SF Hong Kong’s SF development is closely intertwined with international developments. Some overseas developments will take time to be adopted in Hong Kong, others have an immediate impact on our local market. Here are the global SF market developments of the past year that we think local SF investors need to be aware of.

The “S” Factor In 2018 there was an increased focus on the social dimensions of ESG with a spotlight on human rights and labour standards. At the COP24 UN Climate Conference in Poland, the Just Transition Silesia Declaration was signed by more than 50 countries. Considering the social aspects of the transition towards a low-carbon economy is crucial for gaining social approval for the changes taking place.

New investor guidance also called for a just transition to be integrated into the procurement of investment services across all asset classes. The Liechtenstein Initiative (LI) for a Financial Sector Commission on Modern Slavery and Human Trafficking was launched to examine how the financial sector can help end slavery and human trafficking.

A bid to rule out impact-washing Concerns over ‘impact-washing’ (mislabelling without meaningful fidelity to impact) remains a deterrent to sustainable and impact investing. In 2018 we saw new guidelines developed which will add a layer of transparency for investors, with The International Finance Cooperation (IFC) issuing new operating principles for impact management. The Impact Management Project (IMP) was also launched, bringing together leading standard-setting organisations to develop shared principles, standards and benchmarks. GIIN also led an effort to create a shared identity for impact investors.

Steps towards standardisation The International Network of Financial Centres for Sustainability (FC4S), of which Hong Kong is a member, set out 10 principles for the development of SF definitions. The European Commission action plan for financing sustainable growth was another step in the right direction. In China, the Asset Management Association and the China Securities Regulatory Commission issued voluntary guidelines for green investment, the first of its kind for the Chinese asset management industry. The International Standards Organisation is committed to develop the world’s first internationally endorsed green bond standard by 2020.

Climate change remains the most important specific ESG issue considered by asset managers, with assets more than doubling from 2016 to 2018 as reported by US SIF. The UN’s 2018 global warming report showed that even a 1.5°C increase will have catastrophic effects for the globe and that we could experience such effects as early as 2040. Talks at COP24 brought agreement on the rules of the Paris Agreement, which will cover how countries cut carbon, provide finance to poorer nations and ensure everyone stays on track to meet climate targets. Generation Thunberg

A 15-year-old Swedish girl named Greta Thunberg went on school strike to demand that the Swedish government respond to climate change, highlighting the vulnerability of the next generation. Australian students also went on strike in November. Other movements such as Zero Hour put young voices at the center of the climate change debate.

As we begin a new year we ask, what key trends will shape SF in Hong Kong in 2019? Share your thoughts with SFi and we’ll publish the best ideas in the coming months.