Where the money goes?

Green Finance Advisor of Friends of the Earth (HK)

As green bonds have become a popular source of financing with rising demand from fixed income investors, we can see burgeoning issuance of the securities. Over the month, Industrial Commercial Bank of China just announced to issue the first ever green bond dedicated to the development of the Greater Bay Area, with a total amount equivalent to over USD 3 billion. The proceeds will be used to finance assets specifically related to low-carbon and low emission transportation as well as renewable energy in the Greater Bay Area. As the green bond market evolves, we can observe some interesting patterns in how the capital is deployed.

Since the first green bond made its debut in Hong Kong in 2015, a total of USD 11 billion of green bonds has been raised for various usages. To be classified as a green bond, a project has to fulfill certain criteria throughout the life cycle of the capital raised. And first and foremost, the use of proceeds should be closely related to environment and sustainable development. According to International Capital Market Association, the eligible categories of applications range from pollution control, sustainable management of natural resources, renewable energy, water and energy efficiency, clean and resilient transport, waste water management to green building. We can expect the more active our green bond market is, the more capital will flow into diverse environmentally friendly projects.

Interestingly, having said that, currently the Hong Kong’s green bond market is inclined to certain areas due to its market structure. Based on HKMA’s figures, low carbon building (37%), water (21%) and energy (14%) are the areas that most proceeds are allocated to. Unsurprisingly, tilting towards ‘building’ is due to the fact that many green bond issuers are primarily property developers, such as Hang Lung Properties and New World Development. Meanwhile, as a gateway Chinese issuers and international investors, Hong Kong’s green bond supply has also been underpinned by Chinese companies as the market is becoming more mature with the support from the authorities. As a result, several companies engaging in the energy, transport and water businesses have also left their footprints in the Hong Kong’s green bond market, and we expect the trend to continue onwards.

The recent issuance by ICBC sheds lights on the future development of the green bond market in Hong Kong. As an international financial center and the pivot of the Greater Bay Area, Hong Kong should continue to gain tractions from Chinese corporates. According to the People’s Bank of China (PBoC), we expect to see more active green finance activities in Hong Kong in order to achieve national environmental goals mentioned in the 13th Five-Year Plan, which is expected to require an annual investment of at least RMB 2 trillion, of which environmental protection and clean energy will be the key focuses. We look forward to seeing how these opportunities can provide impetus for the city’s sustainable development!

Source 1: “Green Bond Market Briefing” of Climate Bond Initiative, February 2019
https://gia.info.gov.hk/general/201902/25/P2019022500567_304636_1_1551093851497.pdf
Source 2: “The Green Bond Trend Global, Mainland China and Hong Kong” of HKEX, December 2018
https://www.hkex.com.hk/-/media/HKEX-Market/News/Research-Reports/HKEx-Research-Papers/2018/CCEO_GreenBonds_201812_e.pdf?la=en
Source 3: “Green Bond Market Briefing” of Climate Bond Initiative, February 2019
https://gia.info.gov.hk/general/201902/25/P2019022500567_304636_1_1551093851497.pdf
Source 4: “The Green Bond Trend Global, Mainland China and Hong Kong” of HKEX, December 2018
https://www.hkex.com.hk/-/media/HKEX-Market/News/Research-Reports/HKEx-Research-Papers/2018/CCEO_GreenBonds_201812_e.pdf?la=en

乾淨煤不乾淨 / Clean coal is not clean

香港地球之友綠色金融顧問  / Green Finance Advisor of Friends of the Earth (HK) 

雖然越來越多的銀行和金融機構正試圖削減與煤炭行業的關係,但業界正試圖為清潔煤炭技術進行綠色融資。潔淨煤技術是一系列旨在減少燃煤燃燒產生的碳排放和其他污染物的技術。然而,考慮到煤炭開採的處理,煤炭運輸的物流和燃煤發電的「清潔」過程,我們認為潔淨煤技術更像是一個神話而非解決方案。

首先,煤炭必須從地下開採。考慮到煤炭對環境的破壞,這很難成為一項綠色工作,更不用說將煤運到發電廠的問題了。目前主要問題是可用的大多數商業化清潔煤技術在減碳和其他污染物方面效率不高。事實證明,一些現有的潔淨煤項目排放污染物是增加而非減少。簡而言之,潔淨煤技術通常不被視為發電的可行綠色解決方案。使用綠色資本來為潔淨煤炭技術提供資金是不應被鼓勵的。

關於清潔煤的一些資訊 (來源: endcoal.org)(只有英文版)

While more banks and financial institutions are trying to cut their ties to the coal industry, the industry’s participants are trying to get green financing for clean coal technologies. Clean coal technologies are a collection of technologies targeting to cut down the carbon emissions and other pollutants generated in burning coal for power generation. However, considering the processing of coal mining, the logistics in transporting coal and the “cleaning” process in coal-fired power generation, we see clean coal technology is more like a myth than a solution.

First of all, coal has to be mined out of the ground. This can hardly be a green exercise considering the damage to the environment, not to mention the issues in transporting coal to power plants. The major problem indeed is that most of the commercialized clean-coal technologies available at present are not efficient in reducing carbon and other pollutants. Some existing clean coal projects are in fact proved to be emitting more but not less pollutants. In a nutshell, clean coal technologies are generally not perceived as a viable green solution for power generation. Using green capital to finance clean coal technologies is not encouraged.

Some facts about clean coal from endcoal.org

氣候變化與陸地……綠色農業需要綠色金融的支持 / Climate Change and Land .. Greener Farming Calls for Greener Finance

Alexandra Tracy, 香港地球之友綠色金融顧問 / Green Finance Advisor of Friends of the Earth (HK)

政府間氣候變化專門委員會(IPCC)本月發布的「氣候變化與陸地特別報告」把焦點放在我們如何使用(往往是濫用)自然資源上。

根據IPCC的數據,全球農業、森林砍伐和土地轉換產生的氣候變化影響佔溫室氣體總排放量近25%。大陸板塊為天然碳匯,但開伐森林、農業和可觀察到的天氣因素意味著它們的二氧化碳吸收能力可能會大幅降低。

正當我們需要保護地球上自然環境的同時,不斷增長的全球人口急需更多的土地賴以生存。大多數政府於二十一世紀面臨的最大挑戰之一,是要同時在政策上平衡兼顧供養人民需求以及應對氣候變化的迫切性。

事實上,有些行動能有效地幫助解決以上急切的需求。減少森林砍伐以及重建退化的生態系統可能是最重要的行動,尤其亞馬遜目前的情況已令人沮喪。幾乎同樣緊迫的是,必須在整個食物供應鏈中減少浪費,原來由農場到超級市場有超過四分之一的食物被浪費了,食物生產過程實在有需要變得更具可持續性。

世界資源研究所最近發表一份名為「創建可持續糧食未來」的報告,指出技術創新所提供的機會和農業實踐變革,足以在2050年前養活近100億人口,同時又能達到氣候減碳目標。而這將涉及提高農業生產力、管理需求和減少浪費(不單是放棄肉類),以及減少生產鏈中產生的溫室氣體排放。與此同時,保護自然生態系統和人工造林將非常重要。

金融在綠色農業中能發揮甚麼作用?

綠色金融世界的最新發展為綠色及可持續性貸款,貸款甚至其產生的利息回報,成就借貸雙方層面攜手實現可持續性表現目標。綠色債券則有所不同,籌集到的資金可用於一般企業用途,而不僅僅是特定的綠色項目,但借款人必須每年量化並報告其環境或可持續性收益。

農業生產商與商品交易商是加入綠色貸款結構的先導者之一。Danone、Louis Dreyfus和歐洲的Gunvor集團等國際企業,及後來才加入的一些亞洲主要企業,都希望通過綠色貸款,盡力達到以更可持續的方式進行生產並帶來更便宜的資本成本。

2017年,新加坡控股公司豐益國際與荷蘭銀行ING達成了1.5億美元的綠色貸款共識,是棕櫚油行業中的第一宗此類交易。一家重要的區域性商品交易商Olam International立即跟隨,,很快便進行了亞洲首宗可持續發展表現掛鉤貸款,15家銀行共同向該公司提供資金。

而最近,於今年7月,中國最大的食品貿易公司中糧集團簽署21億美元貸款,成為中國第一宗以及全球商品交易商中最大的一宗可持續貸款。利率將與包括供應鏈透明度在內的指標掛鉤,以確保貸款不會涉及森林砍伐。

談到這宗貸款對公司業務的影響,中糧集團國際首席財務官吴竞認為,「未來農產品的交易需求只能透過可持續性採購才得以實現」。綠色金融對於可持續發展的明確表現,將有助改變農業部門,並確保綠色金融能在我們的長遠未來中發揮作用。

“Climate Change and Land”, published by the Intergovernmental Panel on Climate Change (IPCC) this month, puts the focus clearly on how we use – and often misuse – natural resources.

The climate change impact of agriculture, deforestation and land conversion around the world accounts for nearly 25 percent of total greenhouse gas emissions, according to the IPCC.  Land masses are natural carbon sinks, but deforestation, agriculture and observable weather factors mean that their carbon dioxide absorption capacity may be significantly reduced.

While the world needs to maintain its natural environment, the growing global population needs ever more land to feed itself.  Managing the policy trade offs between feeding the people, on the one hand, and addressing the urgency of climate change, on the other, is becoming one of the greatest challenges for governments in the twenty first century.

But there are actions that could help to meet that imperative.  Reducing deforestation, together with action to regenerate degraded ecosystems, is perhaps the most important – the current situation in the Amazon is a cause for dismay.  Almost as pressing, however, is the need to reduce food waste along the entire supply chain, from the farm gate to the supermarket: over a quarter of food produced is not consumed.  And the production of food itself needs to become more sustainable.

A recent report from the World Resources Institute, “Creating a Sustainable Food Future”, highlights opportunities for technological innovation and changes in farming practice that could feed nearly 10 billion people by the year 2050 – while also meeting climate goals.  This would involve raising agricultural productivity, managing demand and reducing waste (not just giving up meat) and reducing greenhouse gas emissions generated in the production chain.  At the same time, natural ecosystems protection and reforestation will be essential.

What role can finance play in greening agriculture ?

The new stars of the green finance world are green and sustainability loans, which link the interest rate payable to meeting sustainability performance targets.  Unlike green bonds, the money raised can be used for general corporate purposes, not just specific green projects, but the borrower must quantify and report its environmental or sustainability benefits each year.

Agricultural producers and commodity traders have been some of the first movers in signing up to green loan structures.  Global players such as Danone, Louis Dreyfus and Gunvor Group in Europe have latterly been joined by major players in Asia, looking to leverage their efforts to produce more sustainably into a cheaper cost of capital.

In 2017, Wilmar International in Singapore agreed a US$150 million green loan with Dutch bank ING, which was the first deal of its kind in the palm oil industry.  Olam International, a substantial regional commodities trader, soon followed with Asia’s first sustainability linked club loan (in which fifteen banks jointly extended funds to the company).

Most recently, in July this year, Cofco International, the trading division of China’s biggest food company, has agreed a US$2.1 billion facility, which is the first sustainability loan in China and the largest to a commodity trader.  Interest rates will be linked to targets which include transparency in the supply chain to ensure that it is not contributing to deforestation.

Speaking about impact of the loan on the company’s business, Jing Wu, chief financial officer at Cofco International, argued that “future demand of agri commodities can only be met by sustainable sourcing”.  Green finance, coupled with clear performance on sustainability, will help to transform the agricultural sector and ensure it plays its part in our long term future.

為甚麼自然資源成本那麼重要? / Why does Natural Capital Cost matter?

Michele Leung, 香港地球之友綠色金融顧問 / Green Finance Advisor of Friends of the Earth (HK)

自然資源為地球上有限的實物和生物資源,包括水、土地、空氣及棲息地,而自然資源成本一詞則用於描述企業所能依賴的環境資源的未定價或非市場價值。通過進行環境輸入量的經濟評估,自然資源估值能有效補充ESG分析報告內容。

2013年,聯合國曾斥資開展一項具有標誌性意義的研究,名為「自然資源的危機:100個商業外部成本」的分析,並作為推動「生態系統及生物多樣性經濟學」的廣泛措施之一。 分析估計世界初級產業的土地使用、水用量、溫室氣體排放、空氣污染、土地和水污染、以及廢物的處理成本高達近7.3萬億美元。

2019年5月,生物多樣性和生態系統服務政府間科學 ― 政策平台(IPBES)發表了一份新報告,報告中發布的一些普遍統計數據和事實描述了令人擔憂的趨勢:

  • 75%:人類活動迄今為止「嚴重改變」了陸地環境的比率(海洋環境佔66%)
  • 47%:全球生態系統的規模和狀態指標比估計的自然標準減少了的比率(當中不少指標以每十年至少4%的幅度下降)

「2020年愛知目標」是各國政府於2010年簽訂的一系列全球生物多樣性承諾,旨在減慢生物多樣性的流失速度及為可持續發展經濟提供基礎,但是IPBES報告已經暗示這些目標將不會達到。以上事實表明,大自然的貢獻對我們和下一代至關重要,社會應更廣泛及深入地了解生物多樣性的減少所引起的風險。

惟有透過企業以至金融投資者的共同努力,大自然才可以被保護、回復生氣及可持續地發展。方法之一,就是將自然資源成本納入估值。一間公司採用的資源貨幣量化和其創造的環境外部成本,能促使環境風險整合到估值和定價機制中。此舉令環境外部成本成為進行公司財務分析時的考慮因素之一,並因此而有效地評估財務和信用風險的潛在影響,最後便能整合至投資層面。企業可利用自然資源估值,更了解公司因環境和社會影響將面臨的風險,而金融機構也會對特定環境風險投資進行壓力測試,並根據這些風險調整資產配置策略。

Natural capital is defined as the limited stocks of physical and biological resources found on earth including water, land, air and habitats while the term natural capital cost is used to describe the unpriced or non-market value of the environmental resources that businesses depend on. Natural capital valuation would supplement the ESG analysis with economic valuation of environmental inputs.

In 2013, a landmark study commissioned by UN, Natural Capital at Risk: The Top 100 Externalities of Business[1] analysis was launched and also as part of a wider initiative on The Economics of Ecosystems and Biodiversity. The estimated cost of land use, water consumption, GHG emissions, air pollution, land and water pollution and waste for the world’s primary sectors amounts to almost US$7.3 trillion.

In May 2019, the Intergovernmental Panel on Biodiversity and Ecosystem Services (IPBES) issued a new report[2], some of the general statistics and facts published in the report describe alarming trends:

  • 75%: terrestrial environment “severely altered” to date by human actions (marine environments 66%)
  • 47%: reduction in global indicators of ecosystem extent and condition against their estimated natural baselines, with many continuing to decline by at least 4% per decade

The 2020 Aichi Targets – a set of global biodiversity commitments agreed by governments in 2010 – were designed to slow the rate of loss of biodiversity and provide foundations for a more sustainable economy, yet IPBES report implied these targets will be missed. All these pointed that natural’s contribution is very vital to us and our future generations. The implications of risk arising from biodiversity loss should be more widely and deeply understood.

The nature can be conserved, restored and used sustainably through collaborative efforts from business to financial investors. One approach would be to start integrating natural capital cost into valuation. The monetary quantification of resources used by a company and environmental externalities created enables the system integration of environmental risks into valuation and pricing mechanisms. It allows for consideration of environmental externalities in financial analysis of companies, and the potential impact on financials and credit risk, which would then be aggregated at portfolio level. Companies can use natural capital valuation to better understand the risks they face as a result of environmental and social impact costs, while financial institutions would also stress test its portfolio for specific environmental risks and adjust its asset allocation strategy according to environmental risk.

[1] https://www.trucost.com/publication/natural-capital-risk-top-100-externalities-business/
[2] Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services