ISE02/17-18

• In recent years, green finance has emerged and gained importance amid the global commitments to build a green and sustainable world economy. According to a dedicated study group established by the Group of Twenty ("G20"), the Green Finance Study Group ("GFSG"), "green finance can be understood as financing of investments that provide environmental benefits in the broader context of environmentally sustainable development". Apart from bringing environmental benefits, green finance also helps promote technological innovation and facilitate growth of green industries, while creating potential business opportunities for the financial sector.
• It is estimated that US$6.9 trillion (HK$54 trillion) of annual investment in green, low-carbon and climate-resilient infrastructures would be needed globally during the period from 2016 to 2030.^{1Legend symbol denoting See OECD (2017).} The enormous amount of funding implies the need to mobilize the private capital, which points to the business potential of the market of green finance. In her 2017 Policy Address delivered on 11 October 2017, the Chief Executive indicated that the Government would take the lead in arranging the issuance of a green bond in the 2018-2019 financial year, and promote the establishment of green bond certification schemes that meet international standards by local entities.
• This issue of Essentials highlights the global development of the green finance market, with special reference to the work of GFSG and the experience of the United Kingdom ("UK") (a global centre for green finance). It is followed by a discussion of the opportunities that Hong Kong might benefit when developing green finance.

Global development of green finance market

• Pollution, natural resource depletion and effects from climate change have posed challenges to many places around the world, and climate change has long been on the top international agenda. At the United Nations Framework Convention on Climate Change Submit back in 2009, member countries agreed for the first time to limit the maximum global average temperature increase to no more than two degrees Celsius.^{2Legend symbol denoting See United Nations Framework Convention on Climate Change (2009).} In 2015, G20 member countries further reaffirmed, through the Paris Agreement, the goal of controlling global temperature increase and agreed to implement their national climate plans and progressively strengthen their efforts over time.^{3Legend symbol denoting The United States has officially notified the United Nations of its intention to withdraw from the Paris Agreement on 4 August 2017.} To achieve the above goals, it is estimated that between 2016 and 2030, an annual amount of US$6.9 trillion (HK$54 trillion) would be needed globally for investment in green infrastructures globally.^{4Legend symbol denoting See OECD (2017).}

G20's Green Finance Study Group

• Reflecting the global efforts to make the financial sector contribute more to the transition to a green economy, green finance was for the first time included on the agenda of G20 Summit held in Hangzhou in September 2016. On the proposal of China, G20 has set up GFSG which aims to "identify institutional and market barriers to green finance, and based on country experiences, develop options on how to enhance the ability of the financial system to mobilize private capital for green investment". GFSG was co-chaired by the People's Bank of China and the Bank of England.^{5Legend symbol denoting GFSG was co-chaired by the People's Bank of China and the Bank of England in 2016 under China's Presidency, which continued into 2017 under the Germany's Presidency.}
• GFSG has conducted studies on a number of areas in the context of green finance. It released a synthesis report in 2016 which identifies the following trend of green financing:^{6Legend symbol denoting See G20 Green Finance Study Group (2016) and UNEP (2016).}
  
  

  (a)	financing of most green investment through banks. Banks play an important role in mobilizing capital through the provision of various services, such as extending green credit to key commercial sectors (e.g. clean energy), offering green savings products to retail clients, and underwriting of green debts;
  (b)	increasing popularity of green bond issuance as a financing option for environmental projects. Over the last decade, the global green bond issuance increased from US$800 million (HK$6.2 billion) in 2007 to US$80 billion (HK$622 billion) in 2016. The surge should reflect the attractiveness of green bond as a long-term financing option with longer maturities than bank loans, as well as the growing popularity of green bond products with international investors; and
  (c)	growing recognition of environmental factors by investors as a source of long-term value creation. A growing number of institutional investors are making efforts to develop long-term responsible investment strategies, featuring the inclusion of material environmental factors into their investment decision making process and/or allocation of assets to green investments.

• However, GFSG has also identified various challenges facing the development of green finance. These include: (a) maturity mismatch in green lending;^{7Legend symbol denoting Maturity mismatch is the result of inadequate supply of long-term funding to meet the funding demand for long-term projects. According to G20 Green Finance Study Group (2016), some banks lack the ability or interest in extending long-term loans, due partly to the relatively short maturity on the liability side of their balance sheets. On the other hand, many green projects are long-term in nature.} (b) absence of clear guidelines and standards on what qualify as green bonds, creating concerns over "green washing"^{8Legend symbol denoting According to European Commission (2017), "green washing" refers to a company or organization spending more time and money claiming to be "green" through advertising and marketing than actually implementing business practices that minimize environmental impact.} when issuing green bonds; (c) nascent development of market infrastructures with limited provision of green bond ratings and benchmarks which can potentially help reduce the funding costs; and (d) scanty product innovation with limited range of green investment products in the market.
• Based on the identified challenges, GFSG has come up with a number of broad options to accelerate the mobilization of green finance. These include (a) providing strategic policy signals and frameworks to help reduce perceived policy uncertainties for green investment; (b) promoting voluntary principles for green finance which take advantage of market-led opportunities that allow the advancement of green finance without the potential cost and delays associated with some regulations; and (c) promoting international collaboration to facilitate cross-border investment in green bonds.
• While it takes time to implement the policy options proposed by GFSG, G20 member countries have made notable progress in promoting green finance during 2016 according to the latest GFSG report released in July 2017. For example, France has issued its landmark sovereign green bond with a long duration of 22 years to support the development of the green bond market, while South Korea is developing green bond guidelines. The Mainland has also designated five pilot areas^{9Legend symbol denoting The five green finance pilot zones are Guangdong, Guizhou, Jiangxi and Zhejiang provinces, as well as the Xinjiang Uygur autonomous region.} to boost green finance by giving incentives to financial institutions to issue green credit products. Likewise in Singapore, the country has introduced a green bond grant scheme to encourage the issuance of green bonds.

Development of green finance in the United Kingdom

• When it comes to the issuance of bonds for sustainable projects, the global financial centre, London, is renowned for its green bond market with the first green bond listed on the London Stock Exchange back in 2009. In fact, the London Stock Exchange has been active in promoting green finance. Specifically, it launched in 2015 a range of dedicated green bond segments for investors. Issuers seeking to list bonds on the green bond segments are required to provide the London Stock Exchange with an external review document prepared by an independent third party verifying the "green" nature of the bonds.^{10Legend symbol denoting The external review could take the form of consultant's review, second opinion, verification, third-party certification, or green bond rating.} As at April 2017, there were 42 green bonds listed on the London Stock Exchange in seven different currencies.^{11Legend symbol denoting See London Stock Exchange (2017).} Besides, the London Stock Exchange also supports the voluntary green bond principles developed by the International Capital Market Association by acting as an observer.
• In addition, the UK has recently introduced various initiatives to boost the development of green finance. These initiatives include: (a) launching the "Green Finance Initiative" through the City of London to promote the UK as a global centre for green finance; (b) setting up the Green Finance Taskforce, with members from senior leaders of the financial sector to accelerate investment in the transition to a low carbon economy, thereby creating high-value jobs and opportunities for UK businesses; (c) working with the British Standards Institution, a recognized UK National Standards Body, to develop a set of green standards which provide clarity to financial institutions over the credentials of green financial products; and (d) planning to work with mortgage lenders to support the development of green mortgage products associated with, for example, more energy efficient properties.^{12Legend symbol denoting See City of London (2016b) and GOV.UK (2017).}

Development of green finance in Hong Kong

• In Hong Kong, two corporations - Link Real Estate Investment Trust and the Mass Transit Railway Corporation Limited - already issued their first green bond in 2016. The Airport Authority has recently indicated that it would issue green bonds as part of the funding plan for the three-runway system. Nevertheless, Hong Kong seems to be lagging behind the global development as evidenced by a lack of a targeted strategy to develop its green finance. In his 2016-2017 Budget Speech, the Financial Secretary stated that the Government would "strengthen the efforts to publicise our competitive capital market and highlight our edge in developing green financial products". Yet, the promotion of green finance in Hong Kong has been criticized by the Financial Services Development Council ("FSDC") as being piecemeal, uncoordinated and largely driven by market opportunities as opposed to direct policy or regulatory direction.^{13Legend symbol denoting See Financial Services Development Council (2016).}
• Most recently, the Chief Executive announced in her Policy Address that the Government would take the lead in arranging the issuance of a green bond. Hong Kong is considered to be able to leverage on its strengths in the financial services sector to grow the green finance market. FSDC has previously made recommendations on how Hong Kong could seize the opportunities to develop green finance. The opportunities and recommendations put forward by FSDC cover the following:^{14Legend symbol denoting See Financial Services Development Council (2016), Reuters (2016), and China Daily Asia (2016).}
  
  

  (a)	positioning Hong Kong as a hub for raising green capital. Amid the tremendous funding needs for green infrastructural development on the Mainland15Legend symbol denoting Faced with extensive environmental pollution challenges, the Mainland authorities have in recent years made committed efforts to improve the environment by developing green infrastructures and introducing standards and regulation. It is estimated that during the National 13th Five-Year Plan period (2016-2020), an annual investment of at least RMB 2 trillion (HK$2.33 trillion) would be needed to finance the green industries. Public sources are expected to account for no more than 15% of the funding required, and the ensuing funding gap hints at business opportunities for Hong Kong. and the opportunities arising from the Belt and Road Initiative, Hong Kong should make use of its superb financial infrastructure to strengthen its project financing services (especially green bond issuance) and serve as a platform for raising equity capital for green enterprises;
  (b)	broadening the offer of green financial products. Increasing green awareness has boosted the demand for and popularity of green investment by institutional and retail investors, pointing to business opportunities for Hong Kong to introduce more green financial products which help facilitate further growth of the investment management industry. The increasing use of insurance to transfer environmental or related project risk should bode well for the green insurance sector as well; and
  (c)	developing green guidelines or standards to enhance market credibility and transparency. There are suggestions that Hong Kong should put in place a supportive environment by developing guidelines or standards on green financial products to address the concern of "green washing". This will help strengthen investors' confidence in the use of proceeds, facilitate the green asset management services, and attract more green product issuers and investors to Hong Kong. As indicated in the latest Policy Address, the Government would initiate to promote the establishment of green bond certification schemes that meet international standards.16Legend symbol denoting According to the Government, the Hong Kong Quality Assurance Agency is working on a green finance certification scheme. A Technical Committee has been formed to deliberate technical details of the scheme. See Gov.HK (2017).

Concluding remarks

• Global commitments to combat climate change and other environmental problems hint at a number of green projects in the pipeline, which will require funding on a massive scale. However, public finance will only provide a small fraction of the financing needs. To mobilize more private capital, developing green finance has been emerging. In recent years, various economies have made efforts to accelerate green investment by, for example, issuing long-term green bonds and developing standards or guidelines to strengthen transparency. At present, Hong Kong does not have a targeted strategy on the development of green finance. However, it is believed that with its strength in the financial services sector, Hong Kong has the potential to grow the green finance market by offering a broader range of green investment products and acting as a hub for raising green capital to meet the needs of both green enterprises and investors.

Prepared by Tiffany NG
Research Office
Information Services Division
Legislative Council Secretariat
27 November 2017