Take clean energy as an example. To meet rising energy needs in ways that align with the Paris Agreement, annual public and private investment in clean energy in emerging and developing markets in Asia will need to nearly triple to as much as US$1.7 trillion by 2035.
Hong Kong is well-positioned to channel the required investment into countries that need it most, particularly through participation by its financial institutions in green financing transactions in the wider Asia-Pacific region. Hong Kong is a leading international bond market, and it has one of the world’s most active equity markets.
The Hong Kong Monetary Authority is making great strides in promoting the city as a green finance hub, too. It captured more than a third of Asia’s green and sustainable bond issuance in 2022, and about 200 environmental, social, and governance (ESG) funds are registered here.
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What is climate finance, and why is it crucial to the global energy transition?
What is climate finance, and why is it crucial to the global energy transition?
In the last few years alone, Hong Kong achieved the world’s largest retail green bond issuance, Asia’s largest ESG bond issuance and issued the world’s first tokenised government green bond. Total assets of the city’s asset and wealth management business stood at US$4 trillion at the end of 2022, and it ranks as the second-largest private equity centre in Asia with US$212 billion under management.
Hong Kong is also one of the world’s top innovation hubs, boasting a burgeoning start-up ecosystem and the research and development capabilities, technological infrastructure and capital markets to support it.
Home-grown innovations have the potential to solve environmental challenges facing emerging and developing economies across the region. One example is EcoCeres, a home-grown company that converts used cooking oil into low-carbon aviation fuel and is in the process of expanding into Malaysia.
EcoCeres’ plant in Zhangjiagang, Jiangsu province, turns waste oil into low-carbon fuel for aircraft and vehicles. Photo: Handout
The Asia-Pacific, meanwhile, is still home to many countries whose capital markets have yet to develop to the level needed to support them in the transition. Some countries in the region have yet to issue a green bond. The Asia-Pacific accounted for 50 per cent of total climate finance in 2022, but South Asia received just 4 per cent. China’s domestic climate finance mobilisation accounted for 51 per cent of the total.
There is both a substantial opportunity and a need for Hong Kong to become a go-to hub for private-sector firms and banks in the wider region that are looking to finance climate projects or enhance their capacity to offer tailored climate finance products to help their clients become more resilient. However, channelling capital to the countries that need it most requires a multipronged, multi-stakeholder response.
We need to enhance the capacity of financial institutions, regulators and stock exchanges, both in Hong Kong and the wider region, to enable climate finance and climate projects to thrive and set more robust global financial standards.
This can help in structuring, evaluating and monitoring climate finance instruments. This includes better defining uses of proceeds, aligning them with applicable UN Sustainable Development Goals and additional factors related to governance and impact measurement.
We also need to make it easier and more attractive for businesses and financial institutions in Hong Kong to invest in new climate opportunities in emerging and developing markets. One way to do this is by de-risking projects using blended finance, where small amounts of concessional donor funds are used to mitigate risks for investors and rebalance the risk-reward profiles of projects that can’t proceed on strictly commercial terms.
We also need to encourage the growth of newer financial instruments, including transition bonds, blue bonds, biodiversity finance and carbon markets.
Multilateral development banks can also support both the public and private sectors in creating enabling environments for such projects to thrive, thanks to having decades of experience navigating the political and economic terrains of these markets, de-risking projects through guarantees and mobilising equity and debt to finance them.
To mitigate the risks posed by climate change and respond to the increasing value placed on sustainable businesses by investors, consumers and governments alike, becoming more climate-oriented will be key for private-sector companies in the Asia-Pacific to meet rising expectations and stay competitive.
But this shift also offers the investment opportunity of a lifetime. With its deep pool of financial institutions and businesses looking for investment opportunities in emerging markets, Hong Kong is uniquely placed to capitalise on the wider region’s efforts to accelerate a resilient, inclusive transition. With sustainability moving up the agenda for all stakeholders, there has rarely been a better time to do so.
Riccardo Puliti is regional vice-president, Asia and the Pacific, at the International Finance Corporation
