Can green finance be a game changer? CSj takes a look at the growing green finance sector in Mainland China and Hong Kong.
As global temperatures and sea levels are rising, so is the pressure on world leaders to actually do something about it. A United Nations (UN) report says the world is already 1 degree Celsius (1.8° F) hotter today than it was in the pre-industrial era, and temperatures will continue to rise if the world continues to release heat-trapping carbon as today. If we do not act now, experts warn, we could push the climate beyond a tipping point.
As is so often the case, a successful solution to this problem will depend on access to finance. In 2015, the G20 member countries reaffirmed through the Paris Agreement (the 21st Conference of the Parties Agreement under the UN Framework Convention on Climate Change), that an annual amount of US$6.9 trillion between 2016 and 2030 will be needed for investment in green, low-carbon and climate-resilient infrastructures globally. But governments alone can hardly hope to raise such sums.
As an answer to the call, green finance has gained importance in recent years as an important part of meeting global commitments to build a green and sustainable world economy. In short, green finance aims to increase financial flows from the public, private and not-for-profit sectors – via banking, microcredit, insurance and investments – to sustainable development priorities.
Although interest and activity in green finance has grown rapidly in recent years, there’s still a lack of consistency in market terms, standards and evaluation mechanisms. In fact, there is still some doubt about what it really means to be ‘green’ or ‘sustainable’. Rebecca Self, Chief Financial Officer for Sustainable Finance at HSBC Holdings, says that the lack of a common standard for non-financial reporting is an issue that urgently has to be dealt with, but this should not stand in the way of green commitments.
‘Traditional accounting standards and traditional industry definitions just don’t work. There’s a lot of confusion because there are no global standardisations – this is too new,’ she says. ‘Still, lack of standardisation shouldn’t stand in the way of innovation. What’s most important is to get started, to move in the right direction and to make commitments. That’s why you have to be transparent about what you are including, and sometimes even more importantly what you’re not including.’
As an acknowledgement of the scale of the challenge of making the transition to a low-carbon future, HSBC has announced its commitment to provide US$100 billion in sustainable financing and investment by 2025. Among the green financing projects the bank has so far been involved in is the support of Indonesia’s first sovereign green sukuk (an Islamic financial certificate), green automotive loans in the United Arab Emirates and lower-carbon funds through HSBC Global Asset Management. To date, the London-based bank has provided some US$25 billion in sustainable financing over the past two years, supporting projects such as renewable energy and energy efficiency in 35 countries and territories.
In Hong Kong, HSBC recently launched a new Sustainable Financing Programme for its commercial banking clients. Under this scheme, companies can apply for loan rebates on investments that aim to reduce carbon emissions.
‘What we are doing in green finance is really exciting. It’s a way to make money, but it’s also ethical, green and has social dimensions’, Self says, clearly passionate about the cause.
HSBC’s progress towards the US$100 billion target will be disclosed in its environmental, social and governance (ESG) report this year. HSBC has also adopted the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which was set up by the G20’s Financial Stability Board in 2015 to develop a voluntary framework for companies to disclose the financial impact of climate-related risks and opportunities.
‘We are big supporters of TCFD. I think it’s a really good set of standards. They take into account that all businesses differ and have different types of exposures and differences in how they can fight climate change,’ she says.
She adds that she’s looking forward to launch by the European Union (EU) of a unified classification system of what can be considered an environmentally sustainable economic activity. The taxonomy would make it possible to determine which investments – such as loans, stocks or bonds – are environmentally sustainable, making it easier for market participants to finance these activities and limiting the risk of greenwashing, according to the European Commission website.
An even greater problem than the lack of a common standard for non-financial reporting, Self says, is a lack of reliable data. Not all companies publish data on carbon dioxide emissions, for example. And if you look at methane, nitrous oxide, or water/air pollution impacts, even less is disclosed. If data is published, numbers are often estimates based on arbitrary calculations.
The China factor
Self also highlights the need for global collaboration and strikes a positive tone when it comes to the collaboration with Mainland China. A new platform for green finance, officially named UK-China Climate and Environmental Information Disclosure Pilot, has proven surprisingly successful. In this way, Mainland China has taken a public leadership position with green finance.
‘China is emerging as a leader in green finance and is collaborating effectively with other countries,’ Self says.
Long associated with coal power plants and air pollution, Mainland China might well turn out to be a leader in green financing globally – at least, that’s the view of experts working in Mainland China’s green finance field. The world’s most populous country has emerged as a global powerhouse in green bonds issuance, growing from almost zero in 2015 to having the second-highest issuance by country in 2018. Green bonds are bonds where proceeds are earmarked for green projects, typically backed by the issuer’s balance sheet.
Mainland China issued US$30.9 billion in green bonds in 2018, according to figures from the Climate Bonds Initiative (CBI), a global non-profit organisation that tracks and certifies global climate bonds issuance. That’s just close behind top-ranked US at US$34.1 billion. That progress has led to Sean Kidney, CEO and Co-founder of CBI, to characterise the development of Mainland China’s green finance field as ‘exciting, incredibly exciting’.
‘We’ve been involved with regulators of the [Chinese green bond] market for five years now. It’s basically a market that has been created from nothing. The market has grown quickly and it will grow again,’ the UK-based Kidney says.
Since its founding in 2009, Kidney’s CBI has now become the de facto non- governmental organisation for tracking global green bond issuance and it also has its own certification programme called the Climate Bond Standard. It has worked closely with Mainland China’s regulators, namely the National Development and Reform Commission (NDRC) and the People’s Bank of China (PBOC), in developing Mainland China’s green bond market.
The explosive growth in that market comes as the country transitions from speed of growth to quality growth. In the Communist Party of China annual Central Economic Work Conference, held in December 2018, where the country’s top leaders typically chart the course of the economy for the next year, ‘acceleration of green development’ featured high on the agenda.
‘On the whole, China is unlikely to return to the past of “growth at all cost” — it’s moving to a growth model that is more sustainable,’ says Raymond Zhang, Managing Director of SynTao Green Finance, one of Mainland China’s leading green finance consultancies. ‘It’s also something that the people of China want,’ the Beijing-based Zhang points out.
Syntao Green Finance is China’s first Climate Bonds Standard approved verifier and a signatory to the UN Principles of Responsible Investment, a UN body that drives responsible investing. It also hosts the yearly Mainland China Investment Social Forum, which just had its sixth year last December. Attendees included officials from Mainland China’s top government agencies and international bodies such as HSBC and United Nations Environment Programme Finance Initiative.
Development of Mainland China’s green bond market is an important part of the country’s push towards green finance. That market accounted for close to 90% of Mainland China’s green finance sector in 2017, according to the PBOC’s 2017 Green Finance Report. The market has come in for criticism, however, directed at what is seen as looser standards on what constitutes a green bond, as compared to international standards.
The PBOC and NDRC guidelines on green bonds – the PBOC oversees financial bonds and the NDRC oversees enterprise bonds, or bonds issued by state-owned enterprises – include tolerance for ‘grey’ sectors such as coal. The NDRC also allows for 50% of the proceeds from bonds to pay off previous loans or working capital, compared to international standards where at least 95% of proceeds need to go towards green projects, according to CBI’s definition.
Zhang points out that Mainland China’s priorities are different from those of the West. ‘This is related to how China and how the West sees the environment. For the West, the concern is more about climate change, whereas China views it more in terms of emissions and pollution control,’ Zhang says.
Kidney, whose organisation has worked closely with the PBOC to develop Mainland China’s green bond market, agrees and thinks changes might come to align Mainland China’s and international standards. ‘We track every single green bond issuance worldwide. The regulatory environment in China is the toughest in the world by a long way when it comes to green bonds; the demands on issuers are very high,’ Kidney says. ‘It’s not because of an attempt to hide anything, it’s due to a different regulatory framework and we believe that it’s going to be changed this year,’ Kidney says, referring to the expectation that Mainland China regulators will exclude coal from its green bonds definition.
The implications for governance
Aside from the obvious benefits of a move towards more sustainable business, there are also potential governance benefits from further development of the green finance sector, in particular the imposition of tougher transparency standards.
‘Going green promotes transparency. Under the NDRC regulations, you need to tell people where the money is going and you have to be specific about linking the funding to, for example, a railway line or a water utility plan. This is an advance on the lack of disclosure that we had in the past,’ Kidney says.
This raised disclosure level, perhaps not surprisingly, is popular with investors and may be one of the factors driving the positive correlation between ESG scores and market performance. Zhang’s Syntao Green Finance, along with Caixin Data, came up with a sustainability index of Mainland listed companies called the SGCX ESG 50, which includes the top 50 listed Mainland China companies based on their ESG scores. The SGCX ESG 50 index performed better by 16.6% over the last three years compared to the CSI 300 Index, which tracks the top 300 listed companies in the A-shares market, according to Syntao Green Finance.
The Mainland China market is not known, however, for high levels of transparency and Mainland China’s green finance sector is still dominated by commercial banks. ‘If you look at mature markets overseas, yes, Chinese companies are still lacking. But the pace of development of Chinese companies adopting ESG practices is very fast,’ he says. Kidney is even more upbeat. He is hoping that Mainland China will take on the mantle of co-leading the global green development with the EU, while the US is ‘off for lunch for a while’ under Trump.
‘China has a history of doing things quickly. Now, there might be complaints about riding over the rights of farmers and things like that, but when you are a faced with a major crisis that is potentially the extinction of the human race due to climate change, you want people who can do things quickly and think ahead. But it can’t do it by itself, the challenge we have now as a planet is how to have a working relationship with Mainland China as an equal and the large blocks such as the EU,’ Kidney says.
Regional differences and the lack of common ESG standards aside, all interviewees for this article agree on one issue – green developments offer massive business opportunities.
Karine Hirn, a Partner at asset manager East Capital in Hong Kong, says that China’s war on environmental damage is a structural transformation trend that means openings for investors and businesses, both local and international. China’s cleantech market is the largest in the world and grows on average by 20% per year, she says.
The firm, which she co-founded in Sweden in 1997, focuses on emerging and frontier markets. It launched the East Capital China Environmental Fund in 2016, which has a climate finance label from the Luxembourg labelling agency Luxflag. The fund (which is not for sale in Hong Kong) has identified around 350 publicly listed companies in the Mainland and Hong Kong markets in sectors such as cleantech, waste management, renewable energy and clean transportation.
‘If you look globally at all listed companies in the environmental sector, a third of them in terms of market cap are actually in China. But many are unaware of this fact because these companies are often listed on the A-shares markets, which are just opening up to foreign capital and are mostly working in China only,’ she says.
With some 20 years experience of cleantech investments and 10 years experience of investments in China, the team behind the fund has witnessed how pollution has come to the forefront of social and political concerns in China. Hirn points out that people in China feel the urgency of change in their everyday life.
‘People in China have another approach to sustainability and green investments because they pay the price of pollution already today, and they can envision the impact now of what remains for others a very long-term trend related to climate change,’ Hirn says. ‘The challenge however is that Chinese retail investors are quite short term, while the equity market is still lacking strong and large institutional investors.’
Another challenge, she says, is the risk – especially in a sector where growth potential is very high and taxonomy and standards are not yet completely set – of a flurry of companies and financial service providers making themselves look sustainable, as this window-dressing will deter clients.
‘There are many definitions and practices in the world of sustainable investing which make it sound more complicated than it actually needs to be. Investors should remain alert and just do their own due diligence before investing,’ she says.
In a move to strengthen environmental responsibility and disclosure, the China Securities Regulatory Commission, in collaboration with China’s Ministry of Environmental Protection, has enacted a plan by which all listed companies will have to issue specific environmental reporting by 2020. The agency has also pledged to actively support green bonds, encourage environmentally friendly companies to use the capital market and look for new ways to finance environmental protection, according to a Reuters report.
Another challenge, Karine Hirn suggests, is the perception that sustainable investments are not as profitable as other investments and something for ‘tree-huggers’. This is just wrong, she says. ‘In the long run it is obvious that companies that do a proper assessment of their own ESG risks and opportunities will do better than the ones which do not. I call it the “Darwinism of capitalism” – survival of the fittest.’
Johan Nylander and Poo Yee Kai
For more on the development of Hong Kong’s green finance sector, see the interview with Julia Leung, Deputy Chief Executive Officer and Executive Director, Intermediaries, Securities and Futures Commission, published in this month’s In Focus article.