Hong Kong is transitioning into a green financial center at a crucial time when leading Asian economies have pledged to achieve carbon neutrality between 2050 and 2060. The most dominant economy is China, committing to reach carbon neutrality by 2060; while Japan, South Korea, and Hong Kong have pledged to achieve net-zero emission by 2050. Various central banks have also stepped forward with their sustainability policies.
Asset owners are increasingly driving the sustainability revolution. Yet, a successful transformation requires the ability to integrate science, data, technology, and sustainable values into investments across various asset classes. Climate risks must be assessed and integrated too. This cannot be achieved without improving transparency and disclosure, divesting from brown investments, and migrating capital from brown to green investments.
Early green investors in Asia, such as Annie Chen, Principal and Chair of RS Group in Hong Kong, began thinking about how to invest for good 20 years ago. Chen considers “investing and philanthropy as different ways of deploying capital.” Her portfolio approach aligns assets specifically to achieve sustainability goals. This includes creating a divestment strategy in 2013 to remove fossil fuels, unsustainable utilities, and harmful exploration and production activities, and redeploy capital into renewable energy and other impactful projects.
Where many asset owners question the return of green investments, RS Group shared that its climate-related investments in both public and private markets had generated a competitive if not superior return compared to the mainstream benchmarks over the years. (The overall return of the RS Group’s total portfolio has been around mid-single-digit due to its philosophy of investing sustainably across the spectrum of capital to support its activities including significant cash holding for its philanthropic initiatives.) Chen’s success in green and sustainable finance is not only encouraging but also paves the way for other Asian asset owners to follow.
As more asset owners refocus “purpose and impact” alongside “return”, some major global hedge funds have also committed to sustainability, bringing a shot in the arm to green finance. Yet, a key factor lies in the attitude and capability of asset managers. Managers are used to focusing solely on achieving high returns for clients when it is possible to also consider other factors at the same time. A genuine shift to sustainability requires building the capacity to understand what sustainability means.
“Even though there isn’t a “green” standard in the market now, there should be something that helps to expose greenwashing,” demands Elsa Pau, Founder and CEO of WealthAsia Group. This motivation propelled her to create BlueOnion, a digital platform curated for asset owners and institutional investors, providing data access to the constituents that make up their investments. The platform also helps investors and managers identify stronger investment funds. Pau noted that when reviewing major selloffs during COVID-19, greenwashed mutual funds were more likely to close off.
The science is clear that a rise beyond 1.5 to 2°C in global temperature will lead to more severe weather events. However, as Pau pointed out, up to 50% of the 70,000 funds that BlueOnion monitored still contributed to increasing the global temperature towards the 3°C scenario despite having an alignment temperature score. “We wanted to give more transparency to help asset managers,” said Pau.
Pratima Divgi, Director of CDP Hong Kong, Southeast Asia, Australia, and New Zealand, urges financial institutions to investigate the portfolio-level risks and emissions that their investments and financial decisions generate. This will enable integration of climate-related assessments that can have financial impacts, negative or positive, on investment portfolios.
With CDP driving the disclosure movement, the number of companies reporting on its platform in the Asia Pacific region increased by 20% despite the pandemic. Divgi predicts that disclosure on climate-related financial risks and opportunities will become the norm among companies in the region.
Investors should also realize that what is perceived as mid to long-term impact of climate change has an immediate impact on their investments. This is simply because climate risk is not yet priced in simply due to the lack of information on climate-related risk. Once this new additional information flows to the market, we will see immediate price adjustments not just in the property market but across value chains. Climate risk is universal but at the same time local as well as industry specific. Entela Benz, Adjunct Associate Professor in Finance at HKUST and Co-founder of Intensel Ltd, a ClimaTech company, believes that understanding the impact of climate change can be a more tangible approach.
Benz’s innovative work at Intensel bridges the gap between sustainability and finance, generating extensive models and datasets for companies to evaluate climate risks and run short and long-term forecasts to make better investment and financial decisions.
Introducing this technology to the private sector can speed up the transition. But this calls for engagement at a governmental level. The public sector must bring these solutions with proper infrastructure, tools, and support to drive momentum.
Looking ahead, Bénédicte Nolens, Head of BIS Innovation Hub, Hong Kong Centre, is spearheading innovative projects to incorporate finance, climate change and technology. As banks begin to recognize the opportunities in green finance, offerings such as green loans and green deposits can catalyze more capital for positive causes on a broader scale. Nolens is exploring new technology solutions such as blockchain to deliver green bonds to retail investors in small denominations, equipping investors with full disclosure and tracking transparency.
Nolens also stressed that environmental risk analysis (ERA) of banking portfolios is still evolving. Banks will need to explore increased use of data and technology to systematically identify and measure environmental risks. For example, high carbon assets may become stranded and suffer from credit or investment write-downs. Negative biodiversity impact and water and soil pollution risks are also rising in risk focus. Exposures can be in the corporation to which loans are extended or in which investment is made or in affiliates or in the supply chain.
The “brown to green transition” is a massive challenge for all economies, including Asia. Achieving carbon neutrality in 30 to 40 years depends on regular and close engagement between the public and private sectors. This includes those in finance where cross-disciplinary learning will benefit the transition. The economic vibrancy of financial centers depends on catalyzers who spur innovation. Hong Kong is fortunate to be populated by many changemakers.Click here to review the webinar.