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How can Hong Kong Leverage the Recent Sustainable Finance Drive and Turn Momentum into Action?

2018-06-15

Earlier this year the Hong Kong Government announced the world’s largest sovereign green bond at HK$100 billion, as well as a support scheme for other green bond issuance. Seven corporate green bonds have been issued to date, and the World Bank has issued its first Hong Kong Dollar green bond, demonstrating that there is a growing green investor base in Hong Kong.

The success of these green bonds and a rising generation of engaged investors and stakeholders have given Hong Kong’s sustainable finance community a moment of opportunity. How can private investors and the finance industry make the best of this opportunity?

In our first SFi Salon – a curated discussion between industry players and thought leaders – we will be looking at this sustainable finance momentum and try to get a sense of the challenges and opportunities faced by private investors who seek out sustainable investments. Here are the guests:

Mario Knoepfel, Specialist, Sustainable and Impact Investing, Asia-Pacific, UBS Wealth Management.

Durrie Hassan, Executive Director of Visible Mission Ventures and represents the new generation of private investors seeking to make an impact.

Leonie Kelly, Project Director for Sustainable Finance initiative (SFi). How have the green bond developments impacted Hong Kong’s local sustainable investing environment?

Mario: What the green bonds have done is raise awareness with investors. They read about it in the newspaper, and that addresses one of the key components that need to change, which is the awareness.

Leonie: Hong Kong’s green bond issuance is a positive signal to regional and international financial markets. There are more opportunities to explore around building a more sustainable Hong Kong, such as investment in certified green buildings, or more sustainable transportation and waste treatment facilities. Transparent guidelines and support in green due diligence and review will become necessary as the market (and the bonds) mature in Hong Kong. One sign of the market’s maturation will be a broader range of sustainable finance products, beyond green bonds, to include products such as ESG indices, impact funds, sustainability and social bonds. How would you describe the offering of sustainable finance products in Hong Kong at the moment?

Durrie: In my experience private banks are rapidly increasing the number of products they are offering, but there’s still a gap if you’re based in Hong Kong or Singapore versus the US or Europe. It can still be a bit of a challenge if you ask an investment advisor from a family office about impact investing. These investments can have a long time horizon, they require patient capital, and there may be a bit of disconnect between that and how your investment advisor is compensated based on the investments they sell.

Mario: The key question for product providers is, do we push or pull? What comes first, the demand or the offerings? Maybe we need to develop solutions that are attractive, then go out and build the markets and awareness for them, and use sustainable investing as a way to engage with investors.

Leonie: Wealth managers are gradually being pushed to adapt their offering as the population of millennials and their share of global income continues to grow. This generation also shows a willingness to tackle unsustainable growth, with sustainable, private capital solutions. The city has major potential to become Asia’s largest market for sustainable investing. What are some unique characteristics of Hong Kong’s sustainable finance investor community?

Mario: Many private investors here are entrepreneurs themselves, and that affects how they look at sustainability. The key ESG values are what management discuss all the time, it’s how they operate, how they weigh their risks. So if you speak that language to these investors they understand, because they run their own businesses. You have to approach it from a values perspective, not only about exclusion, saying we don’t invest in fossil fuel, tobacco, whatever. Companies that operate sustainably have lower risks and are likely to perform better, and this is something that entrepreneurs and the younger generation in particular, understand.

Also many high net worth individuals in Hong Kong have their investments and their philanthropy, and these are separate. Charitable contributions are often aligned with what they care about, but investments are not aligned the same way. Why not?

Durrie: A lot of wealth owners are used to separating their philanthropy and business, but my generation are a bit more open to the idea of sustainable or responsible investing in addition to philanthropy. But investors are still looking for guidance. The idea of generating a return from money that is meant to do good is difficult to convey to the older generation of the family. You can tell your grandparents that impact investing is a good thing, but their mindset may be hard to change. What are some of the misconceptions or challenges that sustainable finance faces in Hong Kong?

Mario: There is a misconception that sustainable means compromised returns but that is not the case. Investors who are new to this topic are driven by return and yield expectations.

Durrie: The returns vary greatly, depending on what you’re doing. For development bonds, public securities and PE funds who are in the emerging markets, you can expect market rate returns. But if you do direct investments in social enterprises like I do, you have to expect concessionary rates of return, and for those returns to take a longer time. I consider this my risk capital in terms of portfolio strategy.

Leonie: Our latest research tells us skepticism of financial returns from sustainable finance products is one of the biggest obstacles to growth. But we need to move beyond the trade-off debate, and instead show how investors can select strategies aligned with their values and risk-return appetite. We need to provide education on the financial materiality of environmental and social issues across the spectrum of capital. The sustainable finance spectrum maps out a range of risk-return strategies that investors can adopt, with traditional investments on the left of the continuum and traditional philanthropy on the right – pending investors’ desired risk, return and impact profile. As the market matures, products across the return and impact spectrum will need to become available, offering investors a range of choices.

Durrie: Once advisors get the idea that people are interested in impact investing, and before there’s enough education on green washing and real qualifications, the first challenge will be products out there that take advantage of wealth owners and their enthusiasm to make more sustainable investments. This is especially true for the investors that may be coming more from the philanthropy sector, as well as the younger generation that may not have decades of investment experience. How do you see the Hong Kong market developing over the next year or so?

Mario: I think the offerings and advisory from banks will develop dynamically. The solutions on offer will accelerate. Secondly, we’ve now seen the Green Bond issued in Hong Kong, and this pipeline will build up, and there will be more action on this front.

Durrie: SFi coming into being is one of the most important things that will happen for the Hong Kong sustainable investment sector in the near term. There’s a lot of talk about approaches, metrics and all that, but in the next year I think SFi will help identify the core beliefs and methods of impact investing. It will be a resource for investors and I look forward to the collaboration between family offices that it will foster.

Leonie: Hong Kong, home to one of the most mature capital markets in Asia, as well as a concentration of sophisticated financial expertise and deep experience with infrastructure financing specifically, is a logical choice to be a leader in this evolving area. Sustainable finance will be a key driver of future competitiveness in financial markets, and in order to compete on that stage Hong Kong investors, banks and the government need to come together and turn momentum into action. We have a great opportunity to create change, to become a sustainable finance hub to the world, so let’s get to work!

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