Green Bonds And The Global Gateway In Asia
At the Fixed Income Leaders Summit happening on 28th – 29th May 2019 at the Harbour Grand, Hong Kong, a panel of experts moderated by Brett Elvish, Director, Financial Viewpoint will be debating the wisdom of launching green bonds as a separate fund, as opposed to integrating them into your mainstream investment portfolio. Weighing up the pros and cons of sustainable investment opportunities will be Anthony Cheung, MD, Global Head of ESG & Sustainable Investing, Hamon Investment Group, Jay Lee, Partner, Simmons & Simmons, and Ricco Zhang, Director, APAC, International Capital Market Association (ICMA).
What Are Green Bonds?
Investopedia defines a bond as "a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate."
Green bonds are bonds which are specifically intended to support climate-related issues, environmental projects, the preservation of natural resources, or the provision of vital infrastructure. They are designed to encourage sustainability. Often referred to as climate bonds, green bonds are typically asset-linked and backed by the issuer's balance sheet.
Amongst other things, green bonds have financed projects promoting energy efficiency, pollution prevention, clean transportation, sustainable agriculture and fishery, the protection of aquatic and terrestrial ecosystems, sustainable water management, and the development of environmentally-friendly ("green") technologies.
While many mainstream bond funds invest a portion of their capital in such projects, green bond funds are specifically invested in environmental initiatives. To qualify as green, bonds are often verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include actual benefits to the environment.
Are Green Bonds A Good Investment?
For investors, green bonds are an attractive prospect, as they come with financial incentives such as tax exemption or tax credits, and the personal and public image benefits of associating the investor with socially responsible and eco-friendly projects. Conscientious fund managers will typically provide regular reports detailing the projects which have been funded by the bonds - allowing socially conscious investors to track how their money is being spent.
For bond issuers, the green bond's association with environmental responsibility is an attractor for younger investors - a demographic that fund managers may have difficulty connecting with through investment in other types of taxable bond. A base of younger investors also pays dividends in the longer term, as issuers can expect financial input from them over a period of time greater than might be possible with an older generation.
Are Green Bonds A Sustainable Option?
Green bonds offer investors the option to diversify their portfolios based on criteria of social responsibility and environmental consciousness, as well as income. While a substantial number of individual bonds and ETFs exist, most of the investment to date has been driven by governmental and large institutional initiatives.
The World Bank issued its first green bonds in 2008, and in the years to 2019 has issued debt instruments to the value of over $3.5 billion related to climate change, alone. Between 2008-2018, the World Bank's green bond issuance program exceeded $10 billion, with offerings of over 130 bonds in 18 different currencies.
As recently as 2012, the global market in green bonds amounted to only $2.6 billion. A surge in 2016 was largely due to Chinese borrowers, who accounted for $32.9 billion of the total - or over a third of all issuances. The ratings agency Moody's reports that green bond issuance soared to a record high in 2017, accounting for $161 billion worth of investment worldwide. That figure is set to exceed $200 billion in 2019.
Since the cash flows from green bonds issued by governments or large institutions generally come from projects having government sponsorship and protection, it's reasonable to expect that green bonds can deliver longer-term returns. But in the short term, performance may be somewhat lower than government debt, due to the lower liquidity of green bonds. Liquidity should become less of a problem as more green bonds are issued - and as the market expands, offerings should become more diverse.
How Clear Is The Picture On Green Investment?
With the increasing trend in sustainable investment, green bonds are arguably the next best investment asset class.
Questions still remain as to the true motivation of bond issuers (Are they only looking for a tax exemption? Where exactly is the channeling of funds happening?) - and even as to whether green investing is actually a legitimate sector. At present, the specifics of what constitutes a “green” investment are open to interpretation, though the definition is tightening as the market expands, and more bonds are being issued.
Many investors are nonetheless hesitant, given the lack of any clear benchmark standards in this space. The lack of liquidity and research in green bonds also makes it difficult for investors to make educated investment decisions, or to gain positive returns from green bonds.
Can Hong Kong Become The World's Bridge To Mainland China’s Green Bond Market?
Despite these misgivings, commitment to the green investment ecosystem remains strong in Asia.
During a media briefing in June 2018, Hong Kong Monetary Authority executives and banking officials revealed plans for a green bond program and other initiatives expected to encourage more issuances in Hong Kong by mainland China and overseas companies -and to raise the city’s profile, globally.
Hong Kong is Asia’s fourth largest bond issuance center after Japan, mainland China and South Korea, and Helen Wong Pik-kuen, chief executive for Greater China at HSBC, said at the briefing that: “The Hong Kong government’s planned HK$100 billion (US$12.74 billion) green bond program, which will be the world’s largest sovereign green bond issuance program, will play an important role in establishing Hong Kong as an international green finance hub.”
Vincent Lee, executive director (external) at the HKMA, added that: “The government’s green bond program will be a long-term project. It will issue different batches of green bonds when the right projects arise. This will attract mainland and international green issuers to Hong Kong. Investors who like to invest in these green bond products will also come to Hong Kong,” .
A report published in February 2019 confirmed that US$11 billion in green debt was issued in Hong Kong last year, of which US$2.3 billion was raised by local issuers. In that same month, Beijing announced an initiative which as from March will align China’s bond issuance standards with international norms.
In the opinion of Sean Kidney, chief executive of the London-based non-government organization Climate Bonds Initiative, investors should “Expect a change in the green bond catalog that is used to govern China’s domestic issuance some time next month … [it will help] remove the barrier to international capital flow to the Chinese market." Mainland China was the world’s second largest green bond issuer last year, with deals just over US$30 billion, according to Climate Bonds Initiative.
Overseas investors can also look forward to “The greening of the Bond Connect scheme" - a reference to the mutual market access scheme launched last July which allows investors from the mainland and overseas to trade in each other’s respective bond markets, through Hong Kong.
One possible hiccup lies in the fact that Chinese regulators allow domestic green bonds to fund cleaner coal consumption projects - a concession not permitted under international standards. Chinese and European standard setters have however been in discussions on ways to harmonize their different standards.
Yet the argument that Hong Kong is positioned to serve as a global gateway for green investment in Asia is a potent one. The Hong Kong government has launched a subsidy program for first-time corporate issuers from China and over 60 nations covered by Beijing’s cross-regional development plan, called Belt and Road Initiative. It would cut their issuance expenses by half, and boost Hong Kong’s role as a regional bond issuance center.