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 performance.
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.