Already a hotbed for sustainable finance, Asia is poised to become even more so as China makes green finance a national priority for 2021 and the next five years.
In a speech titled “Make Full Use of China’s Monetary Policy Space and Promote Green Finance” at the recent Roundtable of China Development Forum, Yi Gang — governor of the People’s Bank of China — said China’s goal to reach carbon emission peak by 2030 and achieve carbon neutrality by 2060 (also known as the “30/60 goal”) sets a high bar for the government as well as China’s private sector.
“Hundreds of trillions of RMB is needed to achieve the 30/60 goal. Public finance, however, could cover only a tiny fraction. It is therefore imperative to put in place sound public policy incentives to encourage market forces to fill in the gap,” Yi said.
In line with its 30/60 goal, China is encouraging “massive green investment” and the development of a wide range of green finance products such as green bonds.
Interest in green bonds — debt instruments that enable capital-raising and investment for new and existing projects with environmental benefits, including climate change mitigation — has been increasing around the world.
The global green bond market issued a record US$269.5 billion in 2020, an increase from US$266.5 billion in 2019, according to Climate Bonds Initiative, a U.K.-based nonprofit organization working on mobilizing the US$100 trillion bond market for climate change solutions. More than US$1 trillion cumulatively in green bonds have been issued to date. But the green bond market is still a small percentage of global bond issuance — about 3.5%, according to research by the Bank for International Settlements (BIS).
A survey of 425 investors in 27 countries found that global investors planned to double their sustainable assets under management by 2025, with allocations to the sustainable fixed income asset class set to increase, according to BlackRock’s 2020 Global Sustainable Investing Survey.
However, poor quality or availability of environmental, social and governance (ESG) data and analytics are the biggest barrier to wider implementation of impact or sustainable investing, the report highlights. According to the Green Bond Principles, issuers of green bonds have to be clear about four core components: use of proceeds, process for evaluating and selecting projects, management of proceeds and timely reporting to investors.
Experts say there is a lack of consistency in the definitions of what is green and sustainable as well as transparency in the monitoring and reporting of outcomes.
“There’s a lot of complication, in terms of just tracking things, to make sure that a green bond actually does create the impact that it says it’s going to create,” Robert Greenfield told Forkast.News in an interview. Greenfield is chief executive officer at Emerging Impact, a technical consultant for NGOs and government agencies leveraging blockchain technologies for humanitarian purposes. The first step, Greenfield says, is to ensure that the financing going towards a sustainable project be tracked in terms of the environmental impact it creates and that the impact can be tokenized.
Blockchain can power green finance
“How blockchain can help is really that traceability element that’s kind of missing,” Greenfield said. “Tokenization is an excellent way to do that because it’s part of that traceability solution where one token can only be created if, one, the project existed, and two, it satisfied certain requirements.” Internet of Things (IoT) devices and Artificial Intelligence could also be used on-location to collect real-time data to improve the traceability and investor reporting.
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Blockchain technology and digital securities are a game changer for all private market issuances because they automate manual processes, allowing the securities to be distributed in smaller units and to be traded freely on an exchange, Oi Yee Choo, chief commercial officer at iSTOX, a Singapore-based digital securities exchange, told Forkast.News in an email.
“Even in markets where the demand for green bonds is high because investors are motivated by ESG considerations, tokenization helps investors diversify their portfolio across different bonds because of smaller subscription sizes,” Choo said. “In markets where demand for green bonds still has room for growth, tokenization has the potential to play a bigger role because it expands the pool of capital available to green bond issuances by bringing to the table smaller investors, whether institutional or individual.”
“Through blockchain technology and smart contracts, digitization can also significantly reduce upfront issuance and ongoing administrative costs, which have limited access to traditional bond markets to larger issuers,” she added.
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The cost savings can be significant. According to a report by the HSBC Centre of Sustainable Finance and the Sustainable Digital Finance Alliance, the estimated cost of issuing a green bond under a standard process was US$6.4 million compared to just US$692,000 for a full blockchain automated issuance.
“The technology allows you to manage stakeholders better, review in real time the returns, allocate portions of revenues, have better transparency on the management of proceeds, and also think about innovative ways to manage the impact of the bond,” said Vanessa Grellet, president of the Blockchain Social impact coalition (BSIC) and executive director at blockchain software company ConsenSys, in an interview with Forkast.News.
The transparency, Grellet said, will build trust, adoption and lead to more investments in climate-related investments. “The information on the blockchain is immutable so it cannot be manipulated, and that’s where you create more trust for the public investor. But you would need to have access to the blockchain in a way that’s digestible to investors.”
See related article: Blockchain is now on the front line against climate change
Green finance gaining momentum
With the United Nations’ sustainable development goals initiatives targeted to be achieved by 2030 and the 2021 U.N. Climate Change Conference scheduled to be held in November this year, green finance and fintech are gaining attention from governments and the private sector.
“We’re in a position now where, for example, if I total up all the balance sheets that want climate disclosure across pension funds, sovereign wealth funds, asset managers, banks, it’s now US$170 trillion that’s demanding this climate disclosure,” said Mark Carney, the former Bank of England governor who is now U.N. special envoy on climate action and finance, during the Singapore FinTech Festival last December.
While Europe and the U.S. currently dominate in terms of green bonds issuance, Asia is well positioned to make up a lot of ground that might have been lost, said Emerging Impact’s Greenfield.
“Primarily because if you look at the blockchain space and FinTech in general, Asia is far past Europe and the United States, particularly as it relates to tokenization,” Greenfield said. “Singapore, I think is a perfect example of that, where they have trialed many different things at an institutional level that still have not yet been trialed in the U.S.”
Asia’s green finance hubs
Asia contributes about a quarter of global green bond issuances annually, and a slew of green finance initiatives have been announced in the region in recent months.
Singapore, Southeast Asia’s largest green finance market that also accounts for close to 50% of cumulative ASEAN green bond and loan issuances, announced last month that it would issue US$14 billion (S$19 billion) of green bonds on public sector infrastructure projects. As part of its Green Finance Action Plan, the government is taking the lead to deepen market liquidity for green bonds, attract green issuers, capital and investors, and catalyze the flow of capital towards sustainable development in Singapore and beyond.
“As Asia continues to urbanize, its demand for affordable and sustainable energy will only grow,” said Ravi Menon, managing director of the Monetary Authority of Singapore at the Singapore-China (Chongqing) Financial Summit last November. Countries in the region are also collaborating on initiatives to support green financing. For example, Chinese and Singapore banks have jointly issued over US$2 billion in green bonds and loans in Singapore to finance Belt and Road projects.
According to a recent report by the International Capital Markets Association, Hong Kong has become the largest center for arranging Asian international bond issuance, capturing 34%, or US$196 billion of the Asian international bonds market in 2020, followed by the U.S. at 18%, the U.K. at 17% and Singapore at 5%. US$26 billion of green bonds had been arranged and issued in Hong Kong, with a significant number of them by mainland and overseas entities by the end of 2019.
Hong Kong recently announced a plan to issue US$22.6 billion (HK$175.5 billion) more in green bonds within the next five years. This follows the government’s US$2.5 billion green bonds offering in January.
“We believe Hong Kong, which adopts international standards in green bond issuance, is the ideal platform to raise green capital from international investors to support this transition and are looking at ways to facilitate this, in particular within the Greater Bay Area,” said Howard Lee, deputy chief executive of the Hong Kong Monetary Authority, in a recent speech.
The Hong Kong government intends to pilot the issuance of green bonds that involve more types of currencies, project types and issuance channels, as well as issue retail green bonds for the general public.
The feasibility of tokenized green bonds in small denominations for retail investors is a project that the Bank for International Settlements Innovation Hub in Hong Kong is exploring. The project will also integrate tracking and disclosure of green outputs for investors, so as to demonstrate how the technology can be used to reduce green washing and enhance transparency.
iSTOX’s Choo says the project has strong potential to further expand access to green bonds and to channel capital to impactful ESG projects.
Investors in the future
Will retail investors buy in? It may depend on the marketing.
“Particularly with the millennial generation and also Gen Z after them, they’re going to be a lot more environmentally conscious and they’re going to want to work at and invest in things and efforts that are equitable across the board, not just in terms of the environment,” said Greenfield, of Emerging Impact. “Retail demand will definitely be based on regulatory requirements and marketing on behalf of firms that have the scale to reach as many retail investors as they can.”
Greenfield sees a new impact asset market emerging and that it will be interesting to see, with the impending changes in climate, how retail investors respond to these opportunities.
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But it is still early. “People are coming to the realization that it’s not just about trading bitcoin, it’s about using blockchain as a financial infrastructure to make it easier, cost effective, involve more participants, more transparent, and also allow you to track more things — outcomes and impact — more efficiently,” Grellet says.
But she notes that it will take time for people to adopt new technologies. “You’ll see a very different situation in two or three years.”
“The experience of Covid has shown us that we can do things differently — that we can work differently, that we can think about the issues that we have differently and that we can think about our carbon footprint differently,” said Grellet. “This changed mindset would allow us to innovate in the financial instruments space and notably green bonds.”
She added: “I anticipate that in the future, the level of green bonds and the alignment of large countries on sustainability will be very positive.”