At Hong Kong Green Finance Association’s (HKGFA) seventh annual forum held in October, the city’s financial secretary, Paul Chan Mo-po, ambitiously said that Hong Kong could be “Asia’s leading transition finance hub”. In his opening speech, he cited a robust regulatory framework, well-developed financial infrastructure and market, and compliance expertise, as the Special Administrative Region’s (SAR) main advantages.
“What we need now is to raise the awareness of the necessity of transition finance, and the potential it offers,” Chan said.
Transition finance refers to investments dedicated to decarbonising high-emitting economic activities to support environmental protection. Such financing facilities are usually targeted at what is called “hard-to-abate” sectors, which are energy intensive, high emitting, and costly to change, for example, steel, cement, aviation and shipping.
The global transition finance gap stands at around $4 trillion a year. As pointed out by Fidelity, transition finance has great uncertainties, both regarding technologies and a reputational risk of holding “dirty” assets, from an investor’s perspective. Discussions in this space include how regulators, financial institutions and issuers can come together to provide greater certainty for investors.
FinanceAsia spoke with Chaoni Huang, executive vice president at HKGFA, who is also managing director, head of sustainable capital markets, global markets, Asia Pacific (Apac), at BNP Paribas.
In this interview, Huang (pictured) explained challenges and opportunities around transition finance development in Hong Kong and across Asia, as well as other key sustainable finance trends.
Founded in 2018, HKGFA aims to mobilise public and private sector resources and talent in the SAR to promote green finance-related policies, business and product innovations.
Standardised, localised
While a standardised transition taxonomy is key for investors to measure the credibility of projects they invest in, at the same time, Huang said that a local approach to these references is also needed.
For example, the World Bank Just Transition Taxonomy identifies 57 eligible economic activities to support transition in the coal industry. The activities include commonly understood ones, such as wind power electricity generation and coal power plant demolition, as well as less direct and more complex activities, including empowering vulnerable groups in coal regions and designing public-private partnerships for transition investments.
The taxonomy, published in June 2024, provides clarity and consistency when it comes to deciding whether an investment counts as a transition project, specifically in the coal industry.
In China’s Huzhou city of Zhejiang province, the local government issued a transition taxonomy looking at sectors including textile; pulp and paper; chemical; and metal, detailing technologies and routes to achieve certain sustainability pledges.
While there are local nuances, Huang believes a nationwide standardised taxonomy across all markets issued by authorities, such as the People’s Bank of China (PBOC), would help investors the most. However, taxonomies and guidelines will vary, especially when considering countries’ different energy mixes, regulations and investment journeys.
“The transition landscape in China and Southeast Asia (SEA) would be different. Taxonomies help to a very good degree, but investors still need to do their own homework when it comes to supporting a specific market,” she noted.
Transition bonds
Transition bonds have accounted for only around 2% of global bond issuances year-to-date, according to BNP Paribas figures.
Looking ahead at the transition bond market, which is still nascent, Huang anticipates more hard-to-abate industrial issuers to join, however, many issuers and investors are waiting for a more authoritative definition of transition finance.
The Apac region has mainly seen transition bond issuances from the public sector or financial institutions – Japan issued a first tranche of its ¥1.6 trillion ($11 billion) climate transition bond in February; and the Bank of China’s Luxembourg branch tapped European investors in October 2023 with a transition bond targeting China’s steel sector.
“Financial institutions will remain active in this space, while we expect more issuances from hard-to-abate sectors such as petrochemicals and aluminium that haven’t been too active in the past, to engage with fixed income investors,” she said.
“We have spent the past two to three years building the market awareness. There would be a lot of room for transition bonds and loans to grow over the next five to ten years.”
Green market
Companies looking at green financing solutions, especially with cross-border exposures, have to examine factors including: the demand for greener end-products; stricter regulations in certain markets such as Europe; increased costs; and adapting to new technology.
Statistics as of September suggested that Apac accounted for 28% of the global supply of sustainability-labelled bonds, following Europe, which represents almost half. South Korea and China dominated supplies in Asia, making up 60% of Apac sustainable bond issuances in the first half. SEA and India are growing, said Huang.
China remains the leader in terms of onshore market, recording onshore sustainability-labelled bonds issuance at Rmb2.2 trillion ($306 billion) and green loans at Rmb34.8 trillion during the first half of 2024.
Huang underlined that when the US enters a rate cut cycle – the latest move on November 7 by the US Fed brought the benchmark overnight interest rate to 4.5%-4.75% range – a gradually closing gap between US and China rates should be on issuers’ radars.
“Chinese issuers still have much cheaper funding onshore. But it’s also important to start thinking about diversification strategies. Treasurers need to keep in mind the investor pool they want to tap into,” she said.
Speaking on behalf of the BNP Paribas team, Huang told FA that banks are increasingly taking on an advisory role when working with corporate clients, helping navigate an increasingly complicated sustainability landscape. In addition to product structuring, banks are helping with companies’ overall operational strategies, green technology application, and framework compliance.
An imminent concern for corporates is the adoption of the International Sustainability Standards Board (ISSB) disclosure guidelines, which requires a standardised disclosure of sustainability-related information for investors’ decision-making.
“It’s no longer straightforward financing,” she said.
