Financing Green Infrastructure In The GBA: Key Takeaways
By Dharisha Mirando 16 August, 2018
CWR's Mirando on expert views from the HKUST event
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
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 caps, taxation 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
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.
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