Yesterday at Sibos, Laura M. Cha, Chairman of Hong Kong Exchanges and Clearing (HKEX) sat down with Anna Coren of CNN to discuss Asia’s role in sustainability. Particularly because the COP26 summit is now just a matter of weeks away, sustainability and the ESG agenda have been deliberated extensively at this year’s Sibos. Indeed, as we covered yesterday, the CEO of Société Générale, Frédéric Oudéa, identified ESG as one of his three biggest trends in global banking. What role does Cha believe her exchange can play in promoting sustainability and green finance in Asia – the continent that produces the largest amount of greenhouse gas?
Asia is undoubtedly lagging behind the US and Europe when it comes to progressing towards net-zero targets. In many ways this is unsurprising; Asia is predominantly made up of emerging markets which are not yet sufficiently developed to consider green energy sources. The brute force of coal and oil is often needed to build economies; countries are (understandably) interested first in raising living standards before contemplating the environmental consequences. Partly because of this, less than 1% of the global sustainable finance market – an industry which Coren claimed is now worth $13 trillion – is invested in Asia. Interestingly, however, Cha also suggested that Western economies are also partly to blame: with supply chains shifting to the East, are Western countries simply offloading their emissions to countries in Asia? As Cha outlined:
“To start off, Asia is the continent that has the [biggest] population in the world. And also we have economies in different stages of their development; with developed economies like Japan, like Australia, etc., and then of course we have developing countries – that consist most of Asia. And it is not surprising that with the [biggest] population, and with varying degrees of development, it has become the world’s largest emitter.
“Now of course, if we think about it from another angle, globalisation has brought supply chains to Asia. In the sense that we are the manufacturing hub for many of those centres that were originally in the West. So, you know, in a way, the emitting industries have shifted to some degree to Asia. So there are a lot of contributing factors, but that’s a reality we have to live with.
“And I think I like the term “common goal but differentiated responsibilities”: in the sense that we are in it together, we have to do things together, but different economies might have a slightly different timeframe.”
This is an important point. Hong Kong has joined many European countries in setting a target to reach net-zero emissions by 2050; Japan and South Korea share the same goal. China follows slightly behind at 2060. One of President Biden’s first acts was to rejoin the Paris Climate Accords; he also recently announced an aim to reduce greenhouse gas pollution by 50-52% by 2030. But not all countries are at the same stage of development, and so it is important for the authorities – and financial markets – to show some flexibility. It would be counterproductive to stunt growth in these economies in a well-intentioned but misguided attempt to enforce climate goals on such countries too quickly.
Of course, there are practical things the financial markets can do to help developing economies – and indeed all economies – move further down the path to net-zero. Cha believes that capital markets, which are increasingly embracing products like green bonds, have a role to play in financing the physical infrastructure that will be needed to create a greener future:
“We need finances, we need money to restructure: whether it is the restructuring, or reconstruction, after natural disasters or building new, alternative energy [sources]. Wind farms, solar panels; all these need funding […] And so that’s where the financial markets come in, and that’s where the exchanges can play a role.”
And what is the role of exchanges like HKEX? Cha believes there are three major roles that exchanges should play: as a regulator, as a market operator, and as an example for others to follow:
“I think HKEX has a very unique role because we have three different aspects of our role.
“The first is as a regulator. We can and we have mandated our listed companies to up their disclosure requirements [since] 2013 when we produced guidelines [that] listed companies should follow. Then from 2017 to 2019, we made it mandatory disclosure. Now, granted, a lot of the smaller companies are still grappling with what that means, and what they can do, but the awareness has been raised – there’s no question about it. And so, you know, every listed company has to disclose in their annual report what they have done in that space. [We have] a system of “comply or explain:” you explain what are your goals and what you intend to do, if you haven’t done so. So I think that is a major step.
“And then as a market operator, we provide the ecosystem. We try to encourage the listing of great products and so become an ecosystem where there will be more awareness and more professionals in the field. That’s also answering to investors’ demand. There are now many portfolio managers that would want to allocate a certain portion of their assets under management to green products. So that’s another area.
“And finally, we are a corporate; we are a listed company. We have to lead by example. We set the standard of what we can do. And then of course we also, through our foundation and our philanthropy, HKEX contributes to the community [and] helps the community to try and achieve these aims.”
Another role for exchanges that Cha talked about was the need to develop harmonised standards with which a company’s record on sustainability can be accurately judged. It would be fair to say that Asia continues to lag behind on, in Coren’s words, “international best practice in how companies manage and report their ESG risks and impacts.” Because investor demand for green products is so strong, Cha argued that we need proper standards to ensure their money is financing the projects they want them to. This would also have the consequence of guaranteeing that capital from the green markets was genuinely being used to finance the green infrastructure we need:
“[For one exchange to improve ESG reporting standards] by itself might not be that easy. I think the important thing is really to try to harmonise or standardise the taxonomy – the standards – because disclosure is one thing, but people disclose different things based on different standards. So I think now, pretty strong voices are saying that we need to look at the taxonomy and standards much more seriously.”
Hong Kong has a unique role to play in the global markets. It is a place that connects East and West, a role that will perhaps become even more important as geographical tensions are heightened. It is, of course, a major market in the East Asian region and is intimately linked with China, a country that – given its size and the volume of its carbon emissions – is a particularly important player in this global issue. HKEX is working closely with other exchanges on the Chinese mainland, such as the Shanghai Mercantile Exchange, and is a shareholder of the Guangzhou Futures Exchange – helping to drive them in the direction of green finance.
More widely, the capital provided by Hong Kong’s markets will be crucial in financing China’s – and the wider region’s – path to a net-zero future. It will be to Hong Kong that businesses and entrepreneurs across Asia look to find the capital needed to build the green infrastructure and the transformative products of the future. As economies across the continent continue to develop, and become more economically sophisticated, it will be cash originating in Hong Kong that will wean them off coal and onto green energy.
Laura M. Cha and her colleagues at HKEX certainly have a major role to play in Asia’s bid to improve its sustainability credentials.
Author: Harry Clynch
If you are interested in hearing more from HKEX, its CEO Nicolas Aguzin will be speaking at Hong Kong Fintech Week, being held this year between November 1st-5th.