Social Innovation

    HKMA should adopt EU finance standards to avoid 'greenwashing'

    09/02/2019 - 10:00

    This article appeared originally in the China Daily on 2 September, 2019.
    Authors: Stephen Wong, Deputy Executive Director and Head of Public Policy Institute at Our Hong Kong Foundation, Johnson Kong and Gloria Luo, Assistant Researchers at Our Hong Kong Foundation

    ESG green finance


    While green finance has been developing rapidly in recent years, there is still no standard definition of “green”. Hence, investors are naturally worried about the risk of “greenwashing”. If an issuer uses “green” as the pretext and invests the raised capital in daily operating expenditure that has nothing to do with the environment, or just invests in a project that has limited environmental benefit, this will make a very limited contribution to the climate crisis that the world is facing today.

    In June, the EU Technical Expert Group published the Technical Report on EU Taxonomy (EU Taxonomy Report), which precisely defines what a green economic activity is.

    As one of the world’s largest asset owners, the Hong Kong Monetary Authority has in recent years been actively greening the foreign exchange funds. Hence they should, at this moment in particular, learn from the EU how to prevent the foreign exchange fund from becoming a victim of “greenwashing”.

    As the pioneer of global climate actions, the EU is setting its eye on the goal of zero carbon emissions in 2050. With this policy goal in mind, the EU is establishing a set of standard categories to support investors in distinguishing and screening assets, projects and companies that purport to contribute to alleviating climate change. The EU also provides guidelines for corporations in developing green business to meet the demand for an annual climate investment between 175 billion euros ($193.2 billion) and 290 billion euros.

    The EU Taxonomy Report provides technical indicators for 67 sustainable economic activities spanning eight industries, including agriculture, electricity, transport and construction. They can be divided into three types: low carbon activities that meet the policy goal of zero emission; activities that contribute to low-carbon business changes – transit activities that have yet to achieve the zero-emission target; and activities that promote the two categories of activities above.

    Apart from meeting the specific technical targets, these economic activities also need to comply with two major principles — no major negative impact on other environmental targets, and the compliance with minimum social protection — or the eight core pacts stipulated by the International Labour Organization.

    The EU Taxonomy Report pioneered by the EU technical experts is a bridge between the low-carbon transfer policy goals and the implementation of green investment. The report sets out to enable investors, enterprises, policymakers and regulatory institutions to use the same set of green standards and climate objectives to evaluate, vet and regulate economic activities.

    Right now, in the realm of bonds, there are certain commonly used standards. However, they are mainly used in nontechnical areas. It is only climate bonds that require compliance with eight categories of environmental regulations for “climate bonds accreditation qualifications”, by virtue of the “climate bonds categorization proposal”. In comparison, the EU categorization proposals are more demanding in terms of environmental vetting.

    The EU categorization standards are expected to take effect by the first half of 2020, but the details of implementation have yet to be confirmed. There is a view in the market that the EU may not insist on implementing the new standards. However, as asset owners, the member state governments and sovereign funds will take the lead in incorporating the new standards into their investment decision-making by requiring the investment managers and their investment companies to put these categories into use. As a result, the EU categorization standards will progressively become the market standards for green investment and the related public policies.

    ESG green finance


    Earlier on, the HKMA announced a number of measures to support the development of green finance. These include expanding the portfolio of green bonds in the foreign exchange fund, requiring externally hired investment managers to take part in investment in ESG-themed publicly raised equity, and to take into consideration the properties’ environmental accreditations when investing in property portfolios.

    Of course, we are happy to see the outcomes, yet the HKMA must not lose sight of the external parties’ concern over greenwashing. For instance, are the relevant measures just to address “greenwashing”? How should foreign exchange funds avoid mistakenly investing in “greenwashing” items or products?

    The release of the EU Taxonomy Report has provided a reference for the HKMA. When some market participants looked forward to the EU standards becoming a universally used market standard, the HKMA should grasp the earliest opportunity to explore the possibility of applying the related technical objectives to the foreign exchange fund. More specifically, the HKMA should, in the process of expanding the green bond portfolio and carrying out ESG public equity and investment in green property, appropriately employ the relevant technological indexes to select suitable green investment projects. The HKMA should also release such information to the public to showcase the results of green investment.

    The HKMA’s new chief executive, Eddie Yue Wai-man, has said: “I hope that more asset managers will join hands with us to contribute to green finance on a global scale. We will continue to work with the government and industry to support the development of green finance in Hong Kong.” I certainly look forward to this new chief executive leading the HKMA to bring green finance to the next level.