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Hong Kong’s ESG-focused grant scheme falls short

AdobeStock_green_finance_575x375_17March2021
By Pan Yue
11 May 2021

The Hong Kong Monetary Authority’s newly unveiled Green and Sustainable Finance Grant Scheme is big on ambition but falls short on some areas that are growing in importance.

The Hong Kong central bank has taken a fresh step towards making the city a regional hub for green finance. Its recently launched Green and Sustainable Finance Grant Scheme came into effect on Monday, offering subsidies for bond issuers and loan borrowers to cover the costs of issuance and external reviews.

The grant scheme, which will last for three years, is a renewal and expansion of Hong Kong’s previous Green Bond Grant Scheme and Pilot Bond Grant Scheme, both of which were launched in 2018 and expire this year.

Hong Kong’s new scheme is certainly bigger, better and vastly improved on a number of factors.

For example, loans and bonds are both included this time, while the old programmes only targeted bonds’ external review costs. The HKMA has lowered the requirements for a bond’s size to HK$200m-equivalent ($25.75m) from HK$500m-equivalent, taken into consideration the bond issuance cost and external review costs, and boosted the total subsidies amount.

The changes show the Hong Kong government’s determination to develop the city as Asia’s green finance hub. The move is only natural. After all, the global green bond market has risen from pretty much non-existent a decade ago to be worth $270bn by the end of 2020.

But the HKMA needs to go further. For starters, the language used in its documents only explicitly mentions green and sustainable bonds and loans, but makes no mention of social bonds and loans. This at a time when social bond issuance globally has jumped due to the Covid-19 pandemic.

For instance, global sustainable bond issuance hit a new quarterly record of $231bn in the 2021 first quarter, according to research by Moody’s, released this week. That included $99bn of green bonds, $90bn of social bonds (also a record quarter) and $42bn of sustainability bonds.

In the loan market specifically, Europe’s Loan Market Association (LMA), its Asia Pacific counterpart the APLMA, and the US Loan Syndications and Trading Association jointly published social loan principles last month. They offer guidelines on the use of proceeds, the process for project evaluation and selection, the management of proceeds and reporting.

It is obvious that the social part of ESG linked financing is increasingly capturing the market’s attention.

In Asia, the market is nascent, which means government support could go a long way to speeding up the asset class’s development. Subsidies could increase companies and banks’ willingness to test out the new product, providing early stage support for the market’s long-term growth. GlobalCapital Asia understands that the HKMA’s grant does include social bonds and loans — even if they haven’t explicitly been mentioned — but there is lack of clarity around who can benefit from the scheme.

Secondly, the HKMA has failed to include costs for raising green and sustainable loans, like underwriting fees, to its scheme.

The scheme has made improvements to cover loans’ external review, but the fees involved with actually raising a loan still need to be incurred by the borrowers. This is unlike the bond market, where the HKMA subsidies cover the costs for arrangers, legal advisors, auditors and accountants, and rating agencies.

Hong Kong is also taking a slightly different approach to its key Asia rival Singapore in tackling costs involved with raising green or sustainable loans or bonds.

The Hong Kong government will grant the full cost of the external review expenses on such deals, capped at HK$800,000 per bond or loan, which includes consultation for developing a framework, certification, post issuance reviews and reporting.

However, that still lags Singapore. Singapore’s green and sustainability-linked loan grant scheme has two tracks: one for external review and one for framework setup. The subsidies for external view are capped at S$100,000. There are also separate subsidies for framework that cover 90% of the cost capped at S$180,000 for small and medium enterprises and individuals, and 60% of the cost capped at S$120,000 for other companies.

Hong Kong can also learn from its western peers that have approach the ESG market by offering banks some support. Many bankers in Asia believe that part of the reason that the European green finance market has flourished is because banks can enjoy some capital relief by providing this type of financing. It’s something Hong Kong can look to replicate.

Of course, the city’s green and sustainable finance grant scheme will go a long way to pushing this market further. But there is still plenty more work to be done.

By Pan Yue
11 May 2021