Under what conditions can the green bond market support a transition to a green economy — evidence from Hong Kong

This report draws insights from the ‘Rearchitecting the Global Financial System’ roundtable at the Japan FinTech Festival 2024, exploring the global financial system’s modernization and technological needs. The discussion generated actionable insights for the industry, addressing four central themes:

Concerns about climate change and environmental degradation have intensified, impacting both emerging and industrialized nations' future growth (World Bank, 2021). This is largely due to the rapid economic growth and increased industrial production in recent decades (World Bank, 1992). The IPCC (2018) warned that global warming caused by human activities is likely to exceed 1.5°C above pre-industrial levels between 2030 and 2052. The Swiss Re Institute (2021) predicted that a 2°C rise by 2050 could reduce global GDP by up to 11% and by 15% in Asia.

In response, the United Nations Framework Convention on Climate Change was adopted in 1992 to stabilize greenhouse gas emissions (United Nations, 1992). Governments have since promoted green growth and a green economy. The Paris Agreement of 2015 saw 196 parties commit to keeping global temperature increases below 2°C compared to pre-industrial levels. Additionally, 'climate action' was listed as one of the United Nations Sustainable Development Goals (SDGs) in 2015. COP26 in 2021 emphasized the importance of considering climate change in financial decisions.

Achieving green economy transition and climate goals requires substantial investments in green infrastructure. The OECD (2015) highlighted the importance of investing in green infrastructures and technologies to meet the 2°C climate goal and achieve carbon neutrality. The International Energy Agency (2014) noted that an additional investment of $44 trillion in the decarbonized energy system could generate $71 trillion in net savings. However, financing these green infrastructures poses a significant challenge. PwC (2015) estimated that the low-carbon transition investment needed is $700 billion per year in the EU and China alone.

Traditional financing methods may be insufficient for funding green projects. Yoshino et al. (2019) identified a mismatch between the short-term nature of bank loans and the long-term requirements of green projects. Establishing a green financial system is crucial to bridge this gap. Green finance, initiated by the United Nations Environment Programme Finance Initiative in 1992, includes various instruments like green bonds, green funds, and climate risk insurance. Green bonds, which fund specific environmental projects, constitute nearly 40% of all sustainable debt issuance (BNEF, 2022; Edie, 2022).

This study explores how green bond development can support Hong Kong's green economy transition, examining the current state, policies, and barriers to scaling participation in the green bond market. Utilizing secondary data from sources like Bloomberg NEF, Climate Bonds Initiative, and Hong Kong Exchanges and Clearing Limited, the research provides a comprehensive analysis of Hong Kong's green bond market.

The research structure includes a literature review on green economy transition, the concept of green bonds, and an analytical framework. The methodology is outlined in chapter three, followed by a case study of Hong Kong's green bond market in chapter four. The final chapter offers insights and further research questions.

The study confirms that factors like financial market characteristics, climate action plans, regulatory frameworks, and incentives are crucial for developing the green bond market. Capacity building of stakeholders, strengthening green project pipelines, and incentives for investors are also necessary. Although limited research supports these pathways in Hong Kong, they are essential for future analysis.

Hong Kong's green bond market development provides insights that can be applied to other regions. While Hong Kong has the potential to lead the Asian green bond market, challenges remain, including the need for global and regional standardization. Standardized criteria and international cooperation are essential to expand green bond issuance and lower transaction costs.

Governments can boost investor capital and the green bond market through supportive policies, tax incentives, and developing a carbon trading system. Implementing a carbon price and facilitating carbon trading can drive green investment and support the low-carbon transition. Overcoming obstacles like verification and transaction inefficiencies is crucial for the carbon trading market's development. This research aims to enhance understanding and support the green bond market's growth globally.