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Capital markets can help us reach our climate change goals

A screen displays share prices in the Central district outside the Hong Kong Exchanges, China September 14, 2020. REUTERS/Tyrone Siu - RC28YI9K1B2M

Capital markets can influence companies in their transition towards sustainability. Image: REUTERS/Tyrone Siu

Laura M. Cha
Member, Executive Council, Office of the Executive Council of Hong Kong SAR
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Financial and Monetary Systems

This article is part of: The Davos Agenda
  • Regulators can support the shift towards a more sustainable future by making ESG risk management and reporting a core regulatory requirement.
  • Proactive and transparent ESG reporting and data help companies to raise capital.
  • Exchanges can help facilitate change by innovating and creating new sustainable finance investment products and indices.

Chinese President Xi Jinping’s commitment to speed up emissions cuts in one of the world’s top-polluting nations and reach carbon neutrality by 2060 took the world by surprise. Hong Kong, the financial gateway to mainland China, followed by setting a goal to become carbon neutral by 2050.

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Elsewhere in the region, Japan and South Korea also committed to become carbon neutral societies by 2050. Meanwhile, US President-elect Joe Biden has promised to sign the US back into the Paris Agreement, resuming America’s engagement in global coordination on climate change.

This leadership from some of the world’s largest economies is a crucial step in the right direction. It comes as COVID-19 and its economic impact have taught us the value of integrating sustainability into long-term business and economic strategies. The need for change has been clearly demonstrated. Now the highest levels of leadership are stepping forward to lead the way.

Meanwhile, investors have shown they are ready and willing to finance companies who want to build a better future. With capital markets facilitating the world’s sustainability journey, we now have all the pieces that we need to build a more sustainable future.

Capital markets can drive change

To date, the global sustainable finance market has attracted about $30 trillion in investments but only 0.8% of that is in Asia, according to the Global Sustainable Investment Alliance. This means that the region has significant opportunities and growth potential in green finance.

However, much of Asia lags behind international best practices in how corporations manage and report their environmental, social and governance (ESG) risks and impacts, as well as the level of investor education and availability of sustainable finance investment products.

As critical infrastructure, connectors, and platforms that transcend borders, capital markets have a responsibility to help influence companies and economies in their transition towards more sustainable practices, and ensure that investors are prepared to finance that change.

Setting a regulatory framework

First of all, capital market regulators can support the shift towards a more sustainable future by making ESG risk management and reporting a core regulatory requirement. While regulation may not be an effective way to inspire or lead the most ambitious companies, it does help create a basic level of competency within a market.

In order to further encourage and support the more than 2,500 listed companies on our markets, Hong Kong Exchanges and Clearing (HKEX), as a market regulator, has introduced listing rules that require issuers to publish ESG reports. This is a first, but important, step. Companies that want to have a significant social and environmental impact need to go beyond listing requirements and aim for international best practices.

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Making ESG reporting and data accessible

Global market operators are increasingly embracing the opportunity, and responsibility, to educate on ESG risk management and reporting. They are in a unique position to guide investors by explaining ESG metrics, and encourage issuers to make their ESG reports and performance data available and accessible for progress tracking.

There are growing resources that support companies that want to improve their ESG reporting and achieve their sustainability goals. For example, the World Economic Forum last year introduced a set of metrics and disclosures that can be used to standardize ESG disclosures.

Proactive and transparent ESG reporting and data help companies to raise capital to finance the transition to a low-carbon economy and more sustainable business model. As such, exchanges should work closely with international bodies to promote a system of international reporting and performance standards that closely link sustainable finance with responsible business practices, in order to generate credible ESG data and avoid greenwashing.

Growing the sustainable product ecosystem

Exchanges can help facilitate change by innovating and creating new sustainable finance investment products and indices. While China is leading the way with the world’s second largest green bond issuance, there is still room for the region to develop and broaden the range of sustainable investment products in Asia.

For example, according to Morningstar, assets in passive sustainable funds domiciled outside of Europe and the US represent only 4.2% of global assets as of June 2020. Many Asian markets still lack diverse sustainable investment product offerings, and market operators can do much more to encourage greater innovation in this area.

Passive sustainable funds by market.
Image: Morningstar

In 2020 HKEX launched STAGE, a sustainable finance platform that connects issuers, investors and other stakeholders, as a way to grow the underserved sustainable finance market in Asia by increasing sustainable investment data awareness, accessibility, and transparency.

STAGE highlights how the proceeds of sustainable investment products are utilised by showcasing their environmental or social impact. Those that commit to going the extra mile in this regard may find that they earn higher ratings from analysts, attract new investors, and gain recognition within their communities. This is how capital markets can work for the benefit of all.

Ready for a Great Reset

Renewed global ambition to tackle climate change is a positive sign for a great reset in 2021. Capital markets can play a vital role in this, providing an efficient and regulated trading platform for sustainable finance products and supporting companies on their sustainability journey. Together, as investors, issuers and market operators, we can take action that will help us realize our sustainability goals and address the most pressing challenge of our generation.

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Forum InstitutionalClimate ActionEconomic GrowthFinancial and Monetary Systems
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