Mainland China turns Hong Kong insurers green - with desire

Channels: Asia Pacific, SAA/ALM, Sustainability

Companies: BNP Paribas, Insurance Authority, Hong Kong Green Finance Association, Hong Kong Federation of Insurers, Zurich Insurance Hong Kong

People: Christopher Hui Ching-yu, Eric Hui, Ma Ho-fai, Chaoni Huang, Paul Chan Mo-po, Hu Xiao

As the world's second-largest economy pledges to become net-zero by 2060, the Hong Kong Insurance Authority's annual conference heard $1trn of green investing opportunities lie just across the border. David Walker reports

Hong Kong's insurance industry has promised to play its part in building green finance in the jurisdiction, despite some hurdles, as rival centres fight to be crowned Asia's 'green finance hub'.

One thing all jurisdictions wanting that honour share, and that drives sustainable investing, is the threat from climate change, Ma Ho-fai, non-executive director on the Insurance Authority (IA), says.

Its unmistakeable impact "gathers momentum for green and sustainable finance" in Asia and elsewhere "and insurers should have a significant role to play in addressing climate change, because [they] have expertise and data to provide innovative solutions of managing and mitigating climate-related risks," he says.

"They are sizeable institutional investors for impact investment, too, as well as being corporate citizens."

A dash for cash

But making Hong Kong a hub for green finance transactions is not just about 'averting the worst' of global warming, speakers told the IA's annual conference in December.

Chaoni Huang, vice president and secretary general of the Hong Kong Green Finance Association called financing a lower-carbon future "$1trn worth of opportunity".

She said, in aiding Beijing get to net zero, as pledged, even 10 years 'late' by 2060, immense volumes of R&D will need financing "and Hong Kong has a natural advantage to support China's ambitions, as well as Hong Kong's own [2050] net-zero climate ambition.

"We are only at the very beginning of the journey in terms of exploring opportunities," Huang, who is also head of sustainable capital markets, global markets APAC at BNP Paribas, says.

The hurdles

Speakers alongside Huang agree the hurdle in Hong Kong is rarely a lack of capital, but mobilising it "in supporting climate mitigation and adaptation for climate challenges".

Almost half the conference's online audience (49%) believed Hong Kong's government had the deciding hand to foster green finance there – double the share of attendees saying 'regulatory bodies'.

While Huang agrees government plays "a central role for producing the right policies and incentives", she adds the private sector's own role is "pivotal to mobilise capital for its own risk management and opportunities for growth. The finance sector needs to be part of the solution".

Christopher Hui Ching-Yu, secretary for financial services and the treasury in Hong Kong, said while the challenge of green finance used to be how best to foster supply of instruments, now it was how to satisfy those large investors' demand.

"If you talk to many asset holders now, it is more demand-driven. People come to us and say 'I want to invest 'green', what are the systems?' With this change, the role of [government] is ensuring we have the right things in place to satisfy demand," he added.

At the same time, he said, authorities needed to ensure all insurers would be able to follow TCFD disclosure precepts as will be mandatory from 2025, "so there has to be some capacity-building".

Green bond issuance

"Hong Kong's government is doing its part to satisfy appetite, having last month issued $3.75bn of USD-, euro and RMB-denominated green bonds," Paul Chan Mo-po, financial secretary for Hong Kong, says. "And we are now working to issue retail green bonds this financial year for the general public. Our green finance scheme is there...to encourage more issuers to take advantage of Hong Kong as a green finance centre."

"Having subsidies for private sector issuers is a way the government says 'we need the private sector to do this with us'," Hui Ching-yu explains.

That seems to be working. Authorities received 30 applications for issues, and what was once "corporates planning to build green buildings" has broadened to include sustainability-linked loans run by an ESG matrices – "something we want to encourage".

Fighting for the podium

Panellists agree no APAC jurisdiction can assume that a leadership in green finance is immutable.

To secure an advantage, Huang says Hong Kong needs to cement environmental, social and governance issues into its entities' risk matrices, product offerings and recruitment plans. "With a very vibrant finance market of banks and insurers with the capital, it is about connecting the dots [in Hong Kong]. An existing vibrant finance sector is important for the competitive advantage - but we need to add the ESG ingredient, too."

She adds: "Everyone is claiming to be a 'green finance hub' and 'ESG hub', on the Mainland, and outside Asia. It is increasingly competitive - and for the right reason. It is about the demand-driven dynamics we see in the market."

For Hui Ching-yu, the special administrative region's edge is in having insurers, banks and fintech all present - the latter presumably assisting the government consider issuing of 'tokenised green bonds'.

One speaker noted a need for asset allocation and risk management from mainland insurers, and regulations and enabling policies for this. "People in the past saw ESG and climate risk as something very distant, but with the recent events unfolding in Germany or China, people now see it as very imminent, and to manage it in a way that is economically viable."

He pointed to skills in Hong Kong "that are good at collecting and analysing data. We need to ensure the interests of global investors can take advantage of the opportunities".

Eric Hui, chairman of the Task Force on Green Insurance at the Hong Kong Federation of Insurers, called for "better collaboration on data and [for] good professionals to help us model. Insurers are sitting on a lot of capital, and need to know how to enjoy a better green investment return, and to get better transparency".

Alternative investments

Panelists also pointed to the emergence of insurance-linked securities issued in Hong Kong as a climate-related investment institutions could benefit from buying. China P&C Re issued Hong Kong's first ILS, worth $30m and linked to mainland typhoon risk, in October.

Hui Ching-yu said such products "are not linked to economic cycles, so there is diversification there that people looking for risk management and diversification are after".

China Re's chief financial officer in Hong Kong, Hu Xiao, said ILS issuance represented "a good example of making linkages with other financial services sectors", and underwriters such as his own could gain experience from speaking with foreign ILS investors and knowing "what kind of long-term products they can identify for us.

"In Hong Kong's risk-based capital regime maybe we will have some preferential policies in capital - and this will be a good promoter for the financial services sectors."

Green finance – today's solution for tomorrow's problem?

Eric Hui, chairman of the taskforce on green insurance at the Hong Kong Federation of Insurers and chief executive of Zurich Insurance Hong Kong, predicts Hong Kong could face a challenge to convince insurers that green finance is to solve a pressing issue.

"Many members are seeing green finance, and green insurance, as very far away, and they are expecting their government or regulator to lead the way. It is a challenge for us, how we change that mindset."

Christopher Hui Ching-yu names accessing data as another, common problem. "In study we did with asset owners and managers, we found many financial services companies are still looking for a lot of climate-related loss data."

Another practitioner added: "For indicators and benchmarks, a framework is important to help insurers identify what is actually 'green'."