HKIMR Offers Suggestions to Develop Hong Kong Green Bond Market

To encourage more active participation in the market, efforts can be made to implement tax incentives and subsidies to address the high costs of certification.

Hong Kong’s green bond market could be further developed by raising public awareness, reducing verification and certification costs, and adopting homogenous standards, says a new report.

The report was published on Tuesday (24 November) by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the research arm of the Hong Kong Academy of Finance (AoF), in collaboration with Ernst & Young.

Based on a survey of 28 issuers and 20 investors, the report says the green bond market saw a record-breaking year in 2019 in terms of issuance amount, reaching USD 261 billion globally by year-end.

In Hong Kong, cumulative green bonds issuance reached USD 26 billion by the end of 2019, with mainland entities accounting for more than 70 percent of the total market.

The survey respondents cited the large number of international investors, availability of supporting policies, solid presence of socially responsible issuers, and transparent ESG information disclosure as the leading advantages of the Hong Kong market.

According to the report, green bond issuers generally enjoy a lower cost of borrowing, which becomes more tangible if they are verified or certified, and can ultimately lead to higher equity prices and enhanced reputation.

Green bond investors, meanwhile, may be benefitting from better risk-return tradeoffs, as well as better resilience in market downturns, than investors in conventional bonds. This was demonstrated during the Covid-19 pandemic, which saw some green bond indices exhibit better relative returns.

Still, challenges remain. The report offers suggestions for enhancing the green infrastructure in Hong Kong, encouraging greater participation by market participants, and ultimately accelerating the development of Hong Kong as a leading green bond hub.

Strategies to improve the green infrastructure include improving transparency of ESG information disclosure, supporting responsible investment and government issuance, encouraging convergence towards international green bond practices, facilitating cross-border green bond issuance, constructing green bond indices, and promoting green exchanges.

To encourage more active participation in the market, efforts can be made to raise awareness of the benefits of green bonds, while also implementing effective tax incentives (e.g. exemptions on interest income), and subsidies to address the high financial and time costs associated with certification.

“When a green bond is verified or certified, its yield at the issuance date is about 50 basis points lower than its matching conventional bond,” the report says. ” The process of verification and certification not only makes a green bond credible, but also helps investors with green mandates to justify their investment.”

The report also highlights a need for a unified taxonomy or standard across jurisdictions. While this is not yet available, significant efforts have been made by international organisations and financial institutions to harmonise these definitions.

The full report is available here.


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