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
Source 2: “The Green Bond Trend Global, Mainland China and Hong Kong” of HKEX, December 2018
Source 3: “Green Bond Market Briefing” of Climate Bond Initiative, February 2019
Source 4: “The Green Bond Trend Global, Mainland China and Hong Kong” of HKEX, December 2018