HK’s new framework for green finance explained
Companies listed in Hong Kong must follow international standards when reporting environmental information, the city's securities regulator has ruled in its bid to promote green finance and deflect local asset managers tempted to just “greenwash”.
In its Strategic Framework for Green Finance released on Friday, the Securities and Futures Commission (SFC) said it aims to bring listed-company reporting standards in line with the recommendations of the Financial Stability Board, an international body established in 2009 to monitor and advise on the global financial system.
In the framework, the SFC pledged to work closely with the Hong Kong Exchange and Clearing (HKEX) to enhance the climate-related environmental disclosures made by companies.
"Amendments to the listing rules and other possible means to achieve this will be considered,” it added.
Hong Kong's new green finance framework comes at a time when China is seeking to be more active in promoting environmental, social and governance (ESG). In July, the Asset Management Association of China released a consultation paper outlining the kinds of assets that should underpin green investments and how fund managers pursuing such strategies should be supervised.
According to the “Guidelines for Establishing the Green Financial System” promulgated in 2016 by seven ministerial agencies, including the People’s Bank of China and the China Securities Regulatory Commission, environmental disclosures by mainland China-listed companies will be mandatory by 2020.
"It would be very odd for some Chinese companies listed in Hong Kong to be subject to [such standards] and other [Hong Kong-listed stocks] to not be. Inconsistency is the enemy of progress," said Ashley Alder, chief executive of the SFC, at the launch of the Hong Kong Green Finance Association (HKGFA), also on Friday.
It is hoped that the Hong Kong SFC’s new framework will foster a more scientific and standardised approach to environmental reporting and make disclosure more quantitative rather than qualitative.
Such an uplift in Hong Kong would help investors to assess companies in a more consistent and comparative manner, Huang Chaoni, director for green and sustainable solutions of corporate and investment banking at Asia Pacific Natixis, told AsianInvestor.
It would also help counter the perception that ESG or sustainability reporting is a tick-box exercise for many companies, which often fail to properly consider ESG in their core strategies and businesses, he said.
NEW PRODUCTS
In the framework, the SFC said it will facilitate the development of a wide range of green-related investments. This would include working with the HKEX on how best to develop and promote the listing and trading of green financial products such as bonds, indices and derivatives. Unlisted and over-the-counter products are also included.
As if to underline that, the Hong Kong chief executive Carrie Lam also said at the launch of the HKGFA on Friday that her government had a green bond sales programme in the works with a borrowing ceiling of HK$100 billion ($12.82 billion), "making it among the largest sovereign green bond issuance programmes in the world."
That's in the addition to the growing number of green bonds -- 15 in the first half of the year with a combined value of US$8 billion -- being issued by private entities and multilateral agencies in Hong Kong.
Green bonds are fixed-income instruments whose proceeds are earmarked for use on projects deemed to have positive environmental or climatic benefits.
However, Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA), said that the development of green investment products will very much depend on investor demand, rather than supply.
Green finance products are demand driven and in Hong Kong retail investor demand for them has so far been muted. There are some discussions in the institutional space but it is not overwhelming, she told AsianInvestor.
“It’s most important to go back to basics and make investors understand the propositions to invest in green finance … When there is investor demand, [the] products will be there,” she said.
"GREENWASH"
The SFC also highlighted the risk of the so-called “greenwashing”, meaning asset managers who market themselves as “green” or “sustainable” but do not fully integrate these factors into the investment processes.
The United Nations Principles for Responsible Investment has recently highlighted free-rider issues with some of its signatories and is taking a firmer stand with signatories who fail to demonstrate commitment.
HKIFA's Wong is more inclined to give asset managers the benefit of the doubt.
In some cases asset managers may not have greenwashed intentionally, she said, as there are no common ESG standards and without them asset managers may greenwash without realising it.
For instance, clean coals are considered green energy in some jurisdictions but not in others, Wong noted.
“Under what circumstances is it a case of breach [of ESG]? People may use different benchmarks and standards," she said.
As a result, she welcomed the SFC's plans to first survey asset managers and owners on their sustainable investment practices. "Starting off with [a] survey and understanding the current state of play, challenges, gaps before developing a framework is a pragmatic approach.”
No timeframe was given for the SFC study, which will cover the commitment, investment processes, post-investment ownership practices and reporting of ESG performance by both asset managers and owners.