Sustainable investment continues to be the hot finance topic globally – and a link-up between Hong Kong and Guernsey is setting a precedent for meaningful partnerships around the world
Talking by video link to the UN General Assembly in New York on 22 September, Xi Jinping surprised the world by announcing that China will become carbon-neutral by 2060.
For a country that currently produces 28% of all the world’s carbon emissions, the scale of the challenge is breathtaking.
China’s intention to peak its emissions by 2030 was already well established, but to move from there to net zero will require an estimated $15trn of investment over the next three decades, according to one recent report by the Boston Consulting Group, Climate Plan for China.
That, in a nutshell, is why sustainable investment is the hottest finance topic in the world right now – and nowhere more so than in Asia.
According to Kate Hodson, Partner and Head of ESG funds at Ogier in Hong Kong, a key component of China’s strategy for combatting its environmental issues is the greening of its financial industry.
“The People’s Bank of China has previously stated that public finance can only account for 15% of the funding required to address China’s environmental problems and meet its climate goals,” she says.
“Therefore, private capital, whether it comes from onshore or international sources, is going to be critical to supporting the transition to a green economy in China.”
The reliance on private capital, Hodson adds, is a global phenomenon and underlines how important it is for sustainable finance to grow rapidly in order to meet that supply gap.
Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, says sustainable investment is currently topping the agenda thanks to a confluence of trends that have been building momentum for decades.
Two tangible targets that have focused the minds of governments around the world are the UN’s 17 Sustainable Development Goals for 2030 and the COP 21 Paris Agreement, ratified in 2016, which seeks to limit global temperature rises. Each country has its own individual commitment to emissions reduction.
The Covid-19 pandemic has proved a ‘Minsky moment’ for sustainability [when the Roadrunner cartoon character goes over the cliff and finds himself running in fresh air] – just as the global financial crisis did for financial stability, says Sloan. “It’s a physical risk issue,” he explains. “Covid-19 has made people ask: are our practices as a human race sustainable?”
The role that private investment needs to play in achieving sustainability, and in tackling climate change specifically, has been recognised for some time. It was first officially acknowledged at the Rio Earth Summit in 1992, when the UN’s Environment Programme Finance Initiative (UNEPFI) was founded.
Other milestones include the creation of the Global Reporting Initiative in 2002, the Principles for Responsible Investment launched in 2006, and the formation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015.
Guernsey has been a pace-setter. In 2018, it joined the UN’s Financial Centres for Sustainability (FC4S), and shortly afterwards created Guernsey Green Finance, with a brief to rapidly develop green and sustainable finance products and services.
The Guernsey Green Fund and TISE GREEN – a specialised section of The International Stock Exchange – are two tangible results of that initiative.
Green moves
In Asia, both Hong Kong and Singapore have been making moves to position themselves as Asia’s green financial centre, says Hodson.
In Hong Kong, a Sustainable Finance Cross-Agency Steering Group has been formed, pulling together government ministries and the main financial institutions. And both Hong Kong and Singapore have started a consultation process with regards to guiding the asset management industry on climate disclosures.
In October, Guernsey Finance linked up with the Hong Kong Green Finance Association (HKGFA) to host a webinar looking at the common global agenda of financing sustainability, and how the two jurisdictions could work together in this area.
At the event, Tracy Wong Harris, the Deputy Secretary General of the HKGFA, said China’s challenge to become carbon-neutral will require huge capital inflows, in addition to strong green finance policy and implementation.
“In Hong Kong, as one of the world’s financial hubs, we are in one of the best positions to channel green finance and to develop the right ESG products to allow international investors to access the China market,” she added.
“Here, like everywhere else in green and sustainable finance, the bond market is best developed so far.
“At the end of 2019, the total green bond issuance in Hong Kong was $26bn, and the Hong Kong government issued its first green bond last year at $1bn, which was four times over-subscribed.”
During the next five years, this will ramp up quickly, issuing a further $66bn of green bonds.
One of the priorities for all financial centres will be to translate the early successes in the green bond market into funds that can inject capital into the development of renewable energy and other sustainable initiatives. And funds will be the keystone to this market for Guernsey, says Sloan, who also chairs Guernsey Green Finance.
He points out that alongside the jurisdiction’s traditional strengths, its whitelisting status for anti-money laundering purposes is a major asset when it comes to ESG investing.
How would it work? Above a green fund, he says, you could create any number of private wealth structures to suit the needs of your client, which could, for example, be a wealthy Hong Kong family.
Nevertheless, it is early days for the development of sustainable funds. As Sloan acknowledges: “We are short of oven-ready projects to invest in genuine green and sustainable assets right now.”
For owners of private wealth, he says, there’s a strong impetus to invest sustainably, which has been strengthened by the pandemic.
At one end of the scale, Sloan says: “Once someone has made millions or tens of millions, they tend to come to the world with more of a philanthropic mindset.
“However, there’s also going to be a massive cross-generational transfer of wealth and the younger generation has a much more emotional mindset about investing for good.”
Kate Hodson says the significant factors driving investment include client demand, regulation and increased recognition that ESG factors can have an impact on risk and return.
“The driving force really depends on the type of investor,” she explains. “For example, within the family office space this is very much dependent on the mandate.
“If you are talking to a fund of funds, they are very likely to be asking about ESG as they ultimately face the same questions from their own investors.
“HNWIs have certainly been a huge driver of this demand globally, as well as locally in Asia, and the expectation is that millennials will increasingly look to invest in alignment with their values.”
Research by Standard Chartered Private Bank in 2019 found that ESG funds made up almost a fifth of Asian HNW portfolios. And the bank’s 2020 Sustainable Investing Review found that 90% of Asian HNW investors surveyed were interested in sustainable investments and plan to invest between 5% and 10% in this area.
Sustainable investment does nevertheless face challenges. At one level, there is greenwashing – the potential efforts by investment vehicles to appear greener than they are. At another level, there is the issue of how much trust investors can put in the data that is visible.
“The availability of ESG data, the reliability of that data, as well as some gaps in the transparency of benchmarks and indexes, has made it harder to measure and effect ESG investments,” says Hodson.
The big issue though – on which the future of the planet hangs, no less – is whether sustainable finance will develop fast enough to bring forward the massive investment needed to fund the transition to a carbon-neutral world.
And that’s a goal in which financial centres, whether in the Channel Islands or Asia, will have a key part to play.
• This article was first published in the Asia Edition of Businesslife in December 2020.