During the 2020 Policy Address in November 2020, the Chief Executive delivered these magic words: “I now announce that the HKSAR will strive to achieve carbon neutrality before 2050.”
As a long-time advocate for sustainability and sustainable finance, they remain magic words and represent a very important (albeit overdue, if truth be told) policy commitment, the potential impact of which cannot be overstated.
Hong Kong’s net zero carbon commitment must be viewed in a much broader context that includes President Xi’s 2060 commitment, similar commitments made by other regional and international leaders and now President Biden signing the US back in the Paris Agreement. These are all major events that individually would provide a powerful signal to the market. It is remarkable therefore (especially for those of us who have been tub-thumping for a long time) to think that all these events occurred in the space of few months or so.
We have entered a new phase in the transformation of the global financial system, and it is all about acceleration.
While public/private collaboration is essential to this process, in a financial centre economy such as Hong Kong it is the private sector that will have to adapt the most to ensure Hong Kong delivers on our net zero carbon commitment. This means businesses across every sector will have to make fundamental changes on multiple levels. Saying we are going to be net zero is the easy part, actually achieving and maintaining net zero (not to leave out the integrity of these efforts) is going to be very challenging until there is a system in place, including financial infrastructure, to support it. For most, some degree of reduction will be possible but there is currently limited (if any) practical access to green finance and quality carbon offsets, two essential components of any net zero strategy.
As lawyers and believers in action over words, it is the language following Mrs Lam’s 2050 commitment that fascinates us the most, namely: “To this end, the Government will update the “Hong Kong’s Climate Action Plan” in the middle of next year to set out more proactive strategies and measures to reduce carbon emissions.” This statement was essentially repeated by the Financial Secretary in last week’s 2021-22 Budget.
Hongkongers know that our Chief Executive and Financial Secretary are our chief policy makers and policy custodians. We therefore interpret each of their promises to define specific and proactive strategies and measures, within a specified timeline, to give effect to the net zero carbon policy commitment as confirmation of the Hong Kong government’s determination in delivering on this policy. Strategies and measures can mean many things, so what should we expect? Well, we are quite certain that Hong Kong will have to regulate to accelerate our transformation. It will take too long for the market to put a system in place and build capacity to implement the net zero commitment and corporate strategies. And to layer on some additional context, we understand that Mainland China will soon introduce climate regulations to expand on existing circular economy regulations and this will likely provide clues about the direction Hong Kong’s legislature and regulators intend to go. In the longer term, it is possible that Hong Kong will enact climate laws too.
Sooner or later, our entire financial system and every business connected to Hong Kong is going to be impacted to the ultimate benefit of all of us. Here are some of the things we think Hong Kong businesses can anticipate from the upcoming government strategies and measures:
- Measures to effectively price or charge for environmental externalities. Carbon pricing is going to be key to the transformation of the financial system and a fundamental component of most corporate net zero strategies.
- Measures to put a system in place, including key financial infrastructure, to enable businesses to execute their net zero strategies, such as carbon trading. We believe Hong Kong will (and should) position itself as an international centre for carbon trading in support of the China national ETS and development of the voluntary offset market and may possibly also impose a carbon tax.
- Enhanced and expanded mandatory disclosure requirements for strategic / financially material climate-related data following recommendations from the TCFD. With more data, expect more sustainability-related indices and ratings.
- Adoption of international taxonomies consistent with the China/EU harmonisation efforts.
- Measures to accelerate a pipeline of qualifying sustainable investments.
- Measures to enable banks in Hong Kong to lend on more favourable terms to sustainable projects through sustainable and sustainability-linked debt.
- Measures to expand access to financing for qualifying green and sustainable projects. Sustainable financing should be further expanded by facilitating more asset classes (we need more than green bonds) and more retail investment opportunities.
- More ambitious standards and targets for specific sectors (such as green building standards) to accelerate the transformation.
- Incentives to encourage certain qualifying funds.
If the Hong Kong government chooses to be ambitious to accelerate change, and we hope they do, we should expect regulations to form part of the strategy. We will update you as we learn more. Until then, it is time to fasten our seatbelts and start preparing for what’s to come.
Please contact us at hello@bmcquhae.com if you have any questions or concerns or would enjoy the benefit of our insights into what is happening and how to prepare.
