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Open green digi-bonds to retail: a proposal for H.K.

Green bond issuers and investors face problems. Here’s how to make fintech part of the solution.



Green bonds provide capital market participants with tools to finance environmentally friendly projects, and to discipline companies that pollute. No solution to our planet’s environmental crisis will be complete without financial action. Green bonds are problematic, however, as a recent study backed by the Hong Kong Monetary Authority notes.

HKMA and the Hong Kong government see a chance to make the city an important player in the emerging green-bond field. However, although HKMA is looking at addressing market shortcomings, it is not looking at fintech’s role. It is not even asking questions about how digital technology can help green the capital markets.

DigFin would like to add fintech to this discussion and broaden it to all of Hong Kong’s financial regulators.

One of the longstanding complaints about digital technologies, especially blockchain, is that it is a tool looking for a problem. Well, here we have clear problems. What tools might help?

Growing market

According to the report (here), in 2019 Hong Kong-arranged and -issued green bonds raised $10 billion that fund projects with positive environmental effects, with a total outstanding market of $26 billion. Worldwide, by December 2019, total green-bond issuance outstanding exceeded $700 billion.

Green bonds typically must define their use of proceeds, how they select projects to finance, and how they manage those proceeds; all of these must be reported to investors periodically.

Hong Kong has supported its growing role by setting “climate bond standards” and making itself an attractive issuing venue for mainland Chinese companies raising debt in foreign currency. The report also notes that green bonds help boost a company’s stock price – an important advantage given Hong Kong’s globally leading role as an IPO center.

Green bonds come with disadvantages, however.

Problems for investors and issuers

For issuers, although green bonds might lower their cost of capital, certifying their bonds as “green” incurs administrative and reporting costs. Secondly, issuers bear a reputational risk if their green bond’s credentials are challenged – that is, if they are accused of “greenwashing”. They could even face investor demands for penalties if their environmental claims aren’t met.

For investors, green bonds remain a small, illiquid market. The lack of standards makes it difficult to assess what is green and what is fake. There is little means of legal enforcement of green claims.

But the biggest problem for investors is information disclosure.

71%: Investors who “always” read ESG disclosures

The HKMA-backed survey, carried out by the research arm of the Hong Kong Academy of Finance, asked investors in Hong Kong if they pay attention to ESG information disclosure of their green bonds, and 71 percent said “always” and 14 percent said “often”.

Disclosure is therefore critical to investors.

But only 14 percent report they are “satisfied” with the quality of that disclosure.

14%: Investors “satisfied” with ESG disclosure

The lack of global standards and low investment returns are other problems for investors, along with the lack of public awareness of green bonds.

For issuers, the biggest problem is verification and certification procedures, along with lack of public awareness.

Fintech’s role

Both issuers and investors say they want more external reviews of these green bonds. They’d like to see Hong Kong’s standards converge with international norms and they want better quality around ESG information disclosure. Investors also want better returns.

Fintech can play a supporting role, especially when it comes to external verification of ESG credentials, and ESG information disclosure.

Our “Green DigFin” series will continue to highlight fintechs that are bringing tools to this arena. Satellite imaging, the Internet of Things, big-data analytics, and blockchain networks for provenance can all help fight greenwashing and tie specific assets to companies.

The higher the confidence in a green bond, the lower the risk to issuers and investors, and therefore the lower yield that companies must pay to raise debt (because their bonds will command higher prices, and yields are the inverse of a bond’s price).

The software that powers regtech firms offering reporting solutions should hold true to green bonds as well. Vendors providing reporting tools to issuers and investors can either develop their own ESG components or work with fintechs to do so.

Regulators keen to promote green bonds should extend their promotion of standards around categorizing ESG (environment, social, and governance factors) to such regtech products.

HKMA in 2020 made clear its support for regtech and “suptech” to make compliance and reporting efficient, and to make it easier for it to supervise and enforce its rules. Extending this drive to ESG-related issues will help.

Digital green assets: open to retail

Finally, DigFin would like to see the Securities and Futures Commission and Hong Kong Exchanges get involved by promoting more in digital assets. The SFC last year licensed one technology company, BC Technology, as a digital exchange. This opens the door to tokenized green bonds.

Tokenized green bonds come with challenges around liquidity, market familiarity, and institutional demand. But over time, blockchain-based finance can be transacted at far lower costs. Moreover, blockchain networks can be used to identify, value, and categorize assets throughout their life cycle.

These benefits directly address the biggest problems in green bonds, around certification and disclosure – in other words, trust that a green bond really is green and not false advertizing. Given the fact that green bond markets are still small and illiquid, it would also seem that the downside of a tokenization effort (that it’s small and illiquid) is not severe. If you’re building almost from scratch, why not build for the 21st century?

To fully realize these gains, however, the SFC should reconsider its approach to retail investors in digital assets. Today, the SFC requires any regulated digital asset (that is, any such asset that is a security) be limited to professional investors only: institutions and rich people.

Retail investors are shut out of the Hong Kong regulated market and can only trade cryptocurrencies or other non-securities on unregulated markets.

Allowing retail investors to access green digital assets would have two benefits. First, it would broaden investor awareness of green bonds. Second it would introduce an important source of liquidity to this small market.

The SFC has genuine concerns about protecting retail investors. The crypto space is highly speculative and volatile, with more than its share of scammers.

Green digital bonds present an opportunity to carve out a safe space for retail investors, under which the SFC could place limits on activities such as leverage.

One of the benefits of digital assets is they are easy to fractionalize. Selling securities as “green” is a great way to attract retail investors. Making access available in small allotments at an efficient cost level would generate a new demand segment for these securities.

It would also create a product that Hong Kong’s young virtual banks could use to grow their own brokering and wealth-management businesses. Similarly, it would offer smaller businesses the ability to raise “green” capital in a way they cannot do with traditional capital markets. Green digi-bonds can help grow Hong Kong’s entire industry for digital finance.

As issuers, venues, and regulators grow more comfortable with retail activity in this niche, the SFC could consider opening more of the digital-asset space to retail.

Hong Kong is looking for ways to define itself in an era when mainland China has developed a much bigger capital market. Singapore, Malaysia and other markets are already moving towards digital green bonds. But Hong Kong remains a financial locus thanks to its equity and risk-taking culture. Marrying fintech to green bonds is one way for Hong Kong to assert leadership.

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