Bruno, distinguished guests, ladies and gentlemen,
- Good morning. It gives me great pleasure to be here today. The two themes of today’s conference - sustainability and the Greater Bay Area – are indeed two of the HKMA’s top priorities when it comes to developing Hong Kong as an international financial centre. I am therefore very pleased to share with you both the opportunities and challenges they bring for our financial services industry.
The Importance of Green Finance
- Let me start with the importance of green finance. In the past decades, the impacts of climate change have become increasingly visible. Frequent extreme weather events such as heatwaves, super typhoons and tornadoes have inflicted extensive casualties and physical damages and caused problems with food security and water resources. According to a recent study1, continued temperature increases under a roughly “business as usual," or high-emissions, scenario would result in a 7.2% cut to GDP per capita worldwide by 2100. In contrast, if countries were to cut greenhouse gas emissions in line with the Paris climate agreement, such effects could be brought down to closer to a 1.1% loss in GDP per capita. The effects vary significantly by country.
- Clearly, Asia is not immune. 50% of Asia’s urban population lives in low-lying coastal areas and flood plains; Asia has more than 90% of the global population exposed to tropical cyclones. The average damages from natural disasters in Asia-Pacific reached an estimated US$76 billion a year in the past decade, more than twice the cost in the decade before that.2
- These major risks have compelled countries to act, and the global community has put policies in place to implement the Paris Agreement. In fact, there is a huge demand for investments in green and climate-resilient infrastructure. The UN Environment Programme estimated that to transit to low-carbon and climate-resilient economies that support the goals of the Paris Agreement, it requires an additional investment of at least US$60 trillion from now until 2050. The private sector can benefit from the investment they put into backing this transition. It is estimated that addressing the Sustainable Development Goals could unlock US$12 trillion in business savings and revenue annually and create 380 million more jobs by 2030. Therefore, the momentum of green finance is gaining and will grow faster in the coming years. Green finance is not just a “nice-to-have”, but a “must have”, and a necessary direction.
- The green bond market is one of the fastest growing segments in green finance and Asia’s share is also catching up quickly. Asia has become a major contributor to the global green bond market, with share in the global issuance value increasing from 5% in 2013 to 28% in 2018. This is compounded by the exponential growth in the global green bond market, with US$118 billion issuance in the first half of 2019, a 48% increase from the previous year. China is now the world’s second largest green bond market, representing 18% of total issuance value in 2018.
- Hong Kong’s green bond market is also growing strong and fast. Last year alone, US$11 billion green bonds were arranged and issued in Hong Kong, up from US$3 billion the year before. There is a diverse issuer base that includes multilateral development banks such as the Asian Development Bank and the European Investment Bank, as well as the private sectors from the Mainland, Hong Kong and abroad.
Greening the financial system
- Globally, there is an emerging consensus for central banks to take a more active stance in addressing climate-related risks and “greening” the financial system. For example, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) has assembled a group of over 40 central banks and supervisors, covering half of global GDP and two-thirds of the global systemically important banks and insurers, to exchange experiences, share best practice, and contribute to the development of environment and climate risk management in the financial sector on a voluntary basis. The HKMA is a member of this network.
- Hong Kong has already taken concrete steps to nurture the growth of green finance. For example:
- The Securities and Futures Commission (SFC) announced its Strategic Framework for Green Finance in September last year, launched a survey on integrating ESG factors in asset management in March, and published guidance on enhanced disclosures for green or ESG funds earlier in April. The Hong Kong Stock Exchange also launched a consultation in May on enhancing ESG reporting and disclosure.
- The private sector is also responding. The Hong Kong Quality Assurance Agency (HKQAA) recently launched the Green Finance Certification Scheme for Green Funds, to encourage more investors from the fund market to support green projects by enhancing transparency of the green investment process. Not to mention HKIFA’s recent Green / Sustainable Finance Roadmap, which aims to foster the long-term development of green and sustainable finance among the asset management industry in Hong Kong.
- HKMA, as a bank regulator, one of the largest asset owners globally, and key promoter of market development, is committed to the green and sustainable development. We have already been taking concrete actions to drive awareness and development of the market. In May 2019, we announced three sets of measures on Green and Sustainable Banking, responsible investment and capacity building.
- In particular, as a peer asset manager and investor, HKMA is leading by example to incorporate ESG principles into the investment processes of the Exchange Fund. The guiding principle is that we will give priority to Green and ESG investments, if the long term return is comparable with other investments on a risk-adjusted basis. Why are we doing this? Apart from being just a good cause, responsible investment makes investment sense. ESG risk has become too significant to be ignored in the investment decision making process. Assets or companies with high ESG risk will see diminishing value over time and might risk becoming “stranded assets”. ESG factors also help unveil long-term value in new opportunities, e.g. renewables. By integrating ESG factors into investment, the Exchange Fund aims to get better risk-adjusted return in the long run, which is consistent with our investment objectives.
- Let me elaborate with a few examples:
- For Exchange Fund investments, HKMA is already engaged in green bond and other green investments including renewable energy and green buildings.
- We have included ESG factors in the selection, appointment and monitoring of our external managers. We want our external managers to take ESG matters seriously and we expect them to help us discharge ownership responsibilities in investee companies by active ownership, through voting and engagement activities. For example, we require external managers of our Hong Kong equities and China active equities portfolios to comply with the SFC’s Principles of Responsible Ownership on a “comply-or-explain” basis.
- Other ESG implementation measures include incorporation of ESG factors in the credit risk analysis of our bond portfolio and examination of ESG policies and practices of our general partners as part of our due diligence of private market investments, amongst others.
- We are also keen to collaborate with like-minded investors to promote ESG standards in the investment process. For instance, we are a supporter of the Task Force on Climate-related Financial Disclosures (TCFD), a member of Focusing Capital on the Long Term (FCLTGlobal), and recently became a signatory of the United Nations-supported Principles for Responsible Investment (UNPRI). By becoming a UNPRI signatory, we hope to encourage asset owners to sign up to this global network, making green and sustainable investment a core aspect of their investment.
Opportunities for HK
- By now, we can clearly see the importance of green finance and the actions being taken around the world, and in Hong Kong, by various stakeholders. So what are the opportunities in this, and what role can Hong Kong play?
- Mainland China has a large appetite for green financing and is already one of the world’s largest green bond issuers. Hong Kong, being a gateway to the Mainland, can play an important role in matching the Mainland’s demand with increasing international supply of green capital. In particular, as the designated green finance centre in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), there are great opportunities and potential for Hong Kong going forward.
- But how? Green financial flow between Mainland China and the rest of the world has so far been insignificant, generally held back by issues regarding infrastructure, market practice, legal and regulatory regimes, etc. Leveraging on our strength in bond market- being the third largest bond market3 by issuance in Asia ex-Japan, Hong Kong could play a role in facilitating this flow. This can happen in many ways, say, by being a premier offshore centre for Mainland enterprises to raise funds for green projects, a platform for international investment in the Mainland green bond market, such as via Bond Connect, or by providing a trusted source of green investment information through combining on-the-ground knowledge of the local market and internationally-recognised green assessment approach.
Greater Bay Area Development
- So we have talked about the importance of the GBA in developing green finance. Then what about the overall game plan? How should financial institutions position themselves to capture opportunities arising from the GBA development?
- First, let me give you a brief overview of what the GBA entails. The GBA is a metropolitan cluster comprising the two Special Administrative Regions Hong Kong and Macau and nine cities in the Mainland. With a population of some 70 million and GDP of US$1.6 trillion, the GBA is larger than some G20 countries, such as Australia and Indonesia, in terms of economic output. Apart from its sheer size, the city cluster is the most economically vibrant and outward looking region in China; it has a budding innovative technology sector and a world-class financial centre, with different cities perfectly complementing each other. All these translate into an enormous potential to become the growth engine in China, if not the world.
- The GBA Development is a vision, extending to 2035 in the long term. The Outline Development Plan published in February this year sets out the guiding directions and objectives to realise this vision. And I would like to draw your attention to one of the key objectives, which is to promote the efficient flow of factors of production, such as people, goods, and capital. This is a unique challenge facing the GBA because it comprises three tariff zones and three legal jurisdictions. To achieve efficient flows of these factors requires policy breakthroughs with an innovative and open mind from all governments, regulators and stakeholders involved.
- With the financial services sector being an important element of the GBA development, the HKMA has been studying ways to take forward new initiatives with our Mainland counterparts. In the first stage, our top priority is to address the financial services needs of residents who commute, work or reside in the GBA. And there has been encouraging progress –
- Mobile payment has been a tremendous success in the Mainland, but it is also a pain point to many Hong Kong residents without a Mainland e-wallet. We have therefore discussed with the Mainland authorities to provide the necessary policy headroom for cross-boundary payment services. Since last year, several Hong Kong e-wallet operators have launched such services, and their coverage in the Mainland has been expanding gradually.
- Similarly, opening a bank account in the Mainland can get quite clumsy. To help Hong Kong residents do so without crossing the border, we have discussed with the Mainland authorities to allow pilot schemes for remote account opening services. With positive responses at the initial stage, we hope to expand the pilot scheme to cover more banks in the future.
- Some may see these as small wins; but improving individuals’ access to basic financial services goes a long way in promoting flows of people and capital. As the next step, we will explore with our Mainland counterparts ways to satisfy the need for cross-border wealth management. As the most economically advanced region, the GBA accumulates wealth at an unprecedented pace, generating a huge demand for global asset allocation. The Outline Development Plan has set out objectives that could facilitate cross-boundary wealth management, such as expanding the scale and scope of the cross-boundary use of RMB and enhancing mutual financial markets access. We will continue to work with the Mainland authorities on ways to achieve this.
- Apart from individuals, we also attach great importance to serving corporations in the region. Throughout the years, Hong Kong has always been the platform of choice for Mainland corporations when it comes to international fundraising, owing to the depth of our capital markets and our strong professional services sector. To better facilitate GBA enterprises to access international capital and expand overseas, we are exploring measures with the Mainland authorities to improve cross-border capital mobility and deployment.
- Before I hand the stage over to other speakers and panellists for more in-depth discussions, allow me to quickly summarise a few key takeaways –
- Climate risk might be overlooked in the past, but its impact is increasingly visible now. Governments, regulators and industry participants around the world must act timely. Hong Kong has great potential to develop into a green finance centre in the region.
- The GBA will be a driving force for economic growth in the region. Hong Kong stands to benefit from further financial integration and pilot liberalisation measures to promote more efficient flows of people, goods and capital in the region.
- Both developments will inevitably bring some disruption to the current market landscape. I would therefore urge our industry players to consider the unique prospects offered by these developments when mapping out their long-term strategic direction. Thank you.
1 Source: National Bureau of Economic Research
2 Source: Asian Development Bank
3 after Mainland China and Korea.