Financing Green Infrastructure In The GBA: Key Takeaways

By Dharisha Mirando 16 August, 2018

CWR's Mirando on expert views from the HKUST event

The Greater Bay Area accounts for 12% of China's GDP but climate change could cost 10%-14% of GDP per year
Govt, business & financial sectors all need to catalyse green finance to slow climate change & protect assets
Ideas incl. a regional investment bank for the GBA & environ metrics for issuing loans, insurance & valuing co's

On the 13th of June 2018 HKUSTs business and environment schools hosted a “Financing Green Infrastructure in the Greater Bay Area” conference. Speakers from the academic, finance and corporate sectors participated as collaboration is vital to spur investments to prepare the Greater Bay Area (GBA) for future water and climate risks.

GBA strategy aims to transform the area into a globally competitive metropolis

The National strategy for the GBA was first introduced in March 2017 with the aim to transform the area into a globally competitive metropolis. The GBA already accounts for 5% of China’s entire population and 12% of national GDP, but the aim of the amalgamation of the region is to achieve significant economic growth through better integration and resource allocation.

Yet this is all at risk due to climate change. HKUST’s Dr Entela Benz’s chart highlights that climate change poses the biggest economic risk to the GBA, which she estimates could cost between 10%-14% of GDP per annum. In addition, Professor Alexis Lau referenced multiple studies that suggest the region faces the highest flood risks in the world.

The GBA already accounts for 5% of China’s entire population & 12% of national GDP…

 

…but climate change poses the biggest economic risk to the GBA, which could cost between 10%-14% of GDP per annum

Climate change poses GBA risk.png

How green finance can help

Green finance (GF) refers to investment activities that have an environmental focus; for example smart grids that protect against extreme weather, energy efficiency, water and waste management, and renewable energy. As it can be used to slow down the onset of climate change and protect assets against it, GF can play a key role in reducing future risks in the GBA.

The PBoC estimates that the total investment needed to clean up China’s environment and meet its peak carbon emissions targets by 2030 is RMB3tn (~USD450bn) annually. Additionally, the 13th Five Year Plan estimated water conservancy will cost RMB2.4trn (USD35 bn), 35% higher than the 12FYP. As 85-90% of this investment is expected to come from non-governmental sources, discussions at the event highlighted that this requires collaboration between government officials in the GBA’s 11 cities to catalyse the business sector and financial institutions into action. Below are some takeaways:

Government: China already presides over the largest green bond market in Asia but more is being done

  • Environment policies are shifting faster than anywhere else, from water capstaxation on resource use and pollution, and better enforcement.
  • Paradigm shift in accounting measures occurring to increase transparency – Robin How stressed that China was now seeking to enforce “environmental discipline over financial discipline”
  • A trading scheme exists for water rights, and now it is piloting carbon emissions trading schemes, which will be the world’s largest. Professor Jingyan Fu pointed out that the current uncertainty over pricing is making it difficult to attract more investment; however, as Prof Christine Loh opined, China is a policy driven country, and it would adjust and fine-tune its strategy as necessary to get the market going.
  • It was also suggested by Prof Alicia García Herrero that the GBA could develop a regional level investment bank similar to the EU’s European Investment Bank to align the strategies of the 11 cities and boost the supply of capital for climate finance in the region.

It was also suggested that the GBA could develop a regional level investment bank similar to the EU’s European Investment Bank

Green bond issuances globally

Business sector: The regulations and green accounting standards will change how businesses operate

  • Robin How commented that as China is seeking to enforce “environmental discipline over financial discipline”, the mandatory environmental disclosures by 2020 will force companies to maximise environmental performance if they want to maximise profit. This is a significant change.
  • Dr Calvin Lee Kwan shared Link REIT’s green bond issuance experience, highlighting how important it was that employees knew about GF and how it worked, which Benjamin Lamberg from Credit Agricole highlighted is necessary to galvanise a corporate culture around it.
  • Dr Kwan also mentioned that more investors want to know about the impacts of the funds, yet, this could be difficult and arduous as no standardise measurement and reporting method currently exists according to Dr Benz.
  • However, more European investors are interested in Asian green bond markets today than two years ago when Link REIT issued its first green bond.

Financial sector: Climate change and environmental data becoming vital for investment policies

  • Extreme weather patterns were increasing volatility and making it more difficult for insurers and reinsurers to manage their exposure to risk, according to James Maguire.
  • Thus, as Robin How pointed out, financial metrics alone will no longer be sufficient; environmental and climate change metrics will become as important when providing loans, insurance policies and valuing companies to fully understand the risks that lay ahead.
  • It is the financial sector’s responsibility to spur public participation and grow the GF market, with innovations in the instruments available, according to Professor Fu and Hannah Routh from Deloitte China.
  • In addition, they both felt Hong Kong, as the financial centre of the GBA, plays a central role in the region’s green-oriented financial system.
  • Benjamin Lamberg indicated that green bonds are expected to make up 10% of global markets in five years’ time, from its current level of just 1 to 2%. However, its success in the GBA hinges on scale, liquidity and innovation with the 11 cities collaborating to achieve this.

Further Reading

  • China’s Renewable Energy Quotas – China is releasing its first ever renewable energy quotas along with Renewable Energy Power Certificates to improve trading; see what these mean for provinces & renewable enterprises with China Water Risk’s Yuanchao Xu
  • Audit! Yangtze River Economic Belt – China’s first ever basin-wide environmental audit on the Yangtze River Economic Belt is an unprecedented step towards balancing economy & environment. China Water Risk’s Woody Chan shares the good and not so good findings
  • Sharing Rivers: The Lancang-Mekong Case – Using the emergency water release by China to help downstream countries in the Lancang-Mekong River Basin as an example, Tsinghua University’s Prof. Zhao Jianshi explores the benefits of cooperation & the importance of China
  • Upper Yangtze: Integrated Water Management & Climate Adaptation – Experts from China & Switzerland introduce their joint project to enhance water management & climate adaptation in the Jinsha River Basin. What lessons have been learned & what is next?
  • 3 Things You Need To Know About Hunan – Hunan connects provinces from the Yangtze’s upper to lower reaches – an important position. Check out 3 key things to know about Hunan as China develops the Yangtze River Economic Belt according to China Water Risk’s CT Low
  • 5 Trends For China Green Finance – CWR ‘s Xu sees positive outlooks from the 2018 Green Finance Conference: from disclosure to OBOR
  • Where Is The E In ESG Disclosure In China? – China is moving to mandatory environmental disclosure with a tentative 2020 deadline, but where are listco’s now? China Water Risk’s Dawn McGregor & SynTao’s Dr. Peiyuan Guo share 8 key takeaways from their newly released joint report, “CHINA PRIORITISES ENVIRONMENT: More Disclosure Needed To Match Rising Risks”
  • Connecting Finance & Water Risk – Natural Capital Coalition’s Mark Gough & Joseph Harris-Confino on their newly launched supplement for the finance sector – see how can this help bankers, investors and insurers alike amidst increasing ESG adoption
  • Key Takeaways From The 5th China SIF Conference – The 5th China Social Investment Forum Annual Conference was just held in Beijing. See Dr Guo Peiyuan of SynTao Green Finance, a co-host of the event, three key takeaways, including the first ESG Chinese equity index
  • How To Manage Water Risk In Your Growing Business – Water risk is financial risk. So how do investors and business overcome challenges and manage water risk? Trucost’s Byford Tsang and Rochelle March expand and also share the benefits
  • Environmental Risks: What, Where & When? – Hubert Thieriot explains his new venture, Environmental Risk Profiler, an online solution to identify, monitor and anticipate environmental risks – find out how it works
  • Top 10 CSR Trends For 2018 In China – 2018 is a landmark year for China on numerous fronts – what does this mean for CSR? SynTao highlights key trends to watch out for from their new report, including Xiong’An, the Greater Bay Area & mandatory disclosure
  • Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?

Dharisha Mirando
Author: Dharisha Mirando
Dharisha is responsible for CWR’s work related to enabling the financial industry to fully integrate water risk into the investment process thereby waterproofing portfolios. She hails from the finance industry and has joined CWR as she believes that despite being significant investment risks, climate and water factors are downplayed in the decision-making process. Not only are there various types of water risk (scarcity, pollution, floods, regulatory) resulting in multiple valuation methods, water is also a locational risk, which lends complexity to its valuation. Dharisha hopes to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks. This could also lead to innovative Green Finance instruments becoming more prevalent. Prior to joining CWR, Dharisha worked for a long-only public equities fund with a focus on sustainability. In addition to fundamental bottom-up analysis of companies, she led sustainability research and managed long term engagement strategies with a handful of firms. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio. Dharisha has a Bachelor’s degree in Economics and a Masters in Development Studies.
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