The United Nations’ Sustainable Development Goals are a set of 17
goals established to guide international cooperation to achieve
sustainable development, end poverty and tackle climate change by 2030.
Climate finance and green financial systems have an important role to
play in financing low carbon, climate resilient infrastructure. Even
more, financial markets are expected to support commercial innovations
to deliver on the SDGs.
Tracking green bond instruments
The green bond market has been growing rapidly, up about 90% year
on year (please see the diagram below). This development and investor
interest has created a demand for tools tracking green bonds instrument
Increasing investor, especially institutional, interest coupled
with knowledge gaps around types of green bonds and a lack of clear
risk and performance data about them created a need for benchmarking
indices that can represent a green bond market accurately and provide a
clear measure of asset class risk and return. In response, the S&P
Dow Jones Indices has developed indices that cover the entire green
bond spectrum. The S&P Green Bond Index includes bonds selected as
green by Thomson Reuters or Climate Bonds Initiative (CBI).
Green bonds rely on indices in other ways too. In particular,
international organisations start issuing bonds that are linked to the
equity-market performance of the sustainable companies.
This week the World Bank2
has issued bonds that, for the first time, directly link returns to the
performance of companies advancing global development priorities set
out in the UN Sustainable Development Goals (SDGs).
The equity-index linked bonds raised a total of EUR163 million from
institutional investors in France and Italy. The World Bank will use
the proceeds to support the financing of projects that advance its
goals of eliminating extreme poverty and boosting shared prosperity,
and that are aligned with the SDGs.
The return on investment in bonds is directly linked to the stock performance of companies included in the Solactive Sustainable Development Goals World Index.
Solactive is a new equity index which enables investors to gain
exposure to companies which have been identified as making a
significant contribution to the advancement of the SDGs.3
The index includes 50 companies that dedicate at least 20% of their
activities to sustainable products, or are recognized leaders in their
industries on socially and environmentally sustainable issues.
Hong Kong’s Mass Transit Railway Corporation Limited (MTR) is one
of the 50 companies on the list. MTR itself has been an issuer of green
bonds with its first green bond (USD 600m, 10-year tenor) issued in
2016. The bond financed an extensive list of the company’s sustainable
projects, including metro rail, energy efficient lighting, water and
waste management, and green station buildings.
World Bank’s example gives an opportunity of reflection for the
Hong Kong Government. Hong Kong Stock Exchange has its own Hang Seng
Corporate Sustainability Index that is comprised of Hong Kong-listed
companies that perform well with respect to corporate sustainability.
Similarly to S&P 500 Green Bond Index, the Hang Seng Corporate
Sustainability Index has underperformed the Composite Index in 2016 but
is delivering higher returns in 2017.
The Hong Kong Government could follow the example of World Bank and
issue Hong Kong government green bonds that would be linked to
particular environmental projects in the territory. Given that major
institutional investors – Blackrock, State Street Global Advisors,
Allianz Global Investors – are setting up green bond funds with more
capital available than the supply of the bonds that fit their mandates,
the Hong Kong government could issue green bonds with the return that
could be linked to Hang Seng Corporate Sustainability Index.
This could deliver a relatively cheap capital earmarked for the
development of environmental projects and achieving the SDGs without a
need to tap into public resources. Indeed, in its 2017 budget
announcement, Hong Kong Government made a commitment in stepping up its
efforts to promote competitive capital market and encourage the sector
to explore opportunities brought by green finance.
In addition, this scheme would also bring attention to the firms
that are constituents of Hang Seng Corporate Sustainability Index. As
the index would gain a prominent role, more investors would start
tracking it and more firms would find it prestigious to be part of and
improve their environmental performance. Moreover, Hong Kong Government
green bonds might facilitate green bond issuance by private firms in
Hong Kong, something that few corporations, with notable exceptions of
MTR and Link Reit, have done so far.
At the Group of Twenty (G20) Summit held in Hangzhou last year, the
G20 recognised that green finance is critical to addressing climate
change and fostering sustainable development. The summit advocated the
implementation of the voluntary options, including the provision of
clear strategic policy signals and frameworks, to promote green
financial business. Hong Kong possesses the right conditions for
developing green finance and exploiting Hang Seng Corporate
Sustainability Index could be one avenue to start.