How Exchanges Can Drive Sustainable Finance

By: Glenda So, Co-Head of Markets, HKEX Oct 2022

How Exchanges Can Drive Sustainable Finance

Though we may live in an increasingly polarised world, there is broad consensus among individuals and investors about the key role that sustainable finance can play in addressing global challenges and advancing the ESG agenda.

Global institutions and governments are taking the lead, with a swath of new commitments made at COP 26; and regional initiatives such as the European Green Deal and national-level plans such as China’s aim to achieve carbon neutrality by 2060.

Sustainable investing is on the rise

For investors, sustainable investing means investing in companies performing well with a commitment to environmental, social and governance (ESG) measures, such as greenhouse gas emissions, labour rights and board diversity.

Here in Hong Kong, investors are mobilising.

In a 2021 survey of 3,770 Hong Kong investors1, 55% said they planned to invest in sustainable products and strategies, and 75% of that group expect to allocate between 10% to 40% of their total investments to ESG products in 2022.

Greenwashing is a major concern

But though interest is rising, greenwashing is a major concern for investors.

An Investor and Financial Education survey2 of 1,004 investors in Hong Kong cited greenwashing as being one of their top concerns, and reams of research speak to this being a global problem too, with close to half of respondents across the world in a survey by American Century Investments citing greenwashing as a top concern.

Greenwashing happens when an organisation inaccurately portrays its products, activities or policies as producing positive outcomes measured against ESG indicators.

The risks of greenwashing include investing in assets that are not aligned with ESG principles and missing out on the opportunity to capitalise on the growth of the green economy.

As such, investors want to be convinced that the companies and strategies they invest in are living up to their claims on being environmentally responsible.

How can investors’ concerns about greenwashing be addressed?

Firstly, robust standards for corporate disclosure are essential.

Effective and robust corporate disclosure helps stakeholders precisely measure risks that a company may have around emissions, social impact and corporate governance.

Secondly, by providing investors with reliable, trusted platforms offering data about sustainable finance products that boost transparency, build confidence and facilitate capital flows.

Exchanges have a key role to play

That’s where exchanges have a key role to play.

Capital markets’ regulators can address concerns about greenwashing and support the shift towards a more sustainable future by making corporate ESG risk management and disclosure a core regulatory requirement.

At HKEX, we see ourselves as a change agent in global markets driving ESG awareness, enhanced regulations and high standards of responsible corporate governance by advocating and introducing strong ESG disclosures.

We first introduced ESG disclosure requirements in 2013, and since then, we have continued to enhance our ESG framework in line with international developments. Starting from 2016, all listed issuers are required to publish ESG reports on an annual basis.

Our rules emphasise the board’s leadership role in overseeing ESG matters. Through our regulatory efforts, we hope to facilitate the development of a corporate culture in which ESG practices and reporting are fully integrated into daily business operations, leading to greater transparency, more resilient risk management processes and sustainable value creation.

Apart from climate change and environmental issues, ESG also covers “social” issues that impact the company. This includes areas such as employment, labour practices, as well as supply chain management. We have introduced new KPIs in 2020, urging issuers to consider the environmental and social risks along the supply chain.

Further, we have made significant efforts to educate issuers and market participants about the importance of transparency and disclosure; and encourage issuers to make their ESG reports and performance data available and accessible for progress tracking.

As operators, exchanges can also play a key role in connecting issuers, investors and other stakeholders through platforms that provide information, access and transparency on a wide range of sustainable, green, and social investment products, such as green bonds.

In 2020 HKEX launched STAGE, a sustainable finance platform to grow the underserved sustainable finance market in Asia.

STAGE serves as Asia’s first multi-asset sustainable investment product platform, acting as a central hub for data and information on sustainable and green financial products.

Covering bonds, equities and exchange traded products, STAGE offers a consolidated view of ESG ratings from different providers, enabling investors to compare companies across sectors and sources when making their investment decisions.

We have also built a Hong Kong Board Diversity Repository to improve access to information on and transparency around board diversity, enabling investors and other stakeholders to stay informed of businesses’ policy and approach to good governance and board diversity.

So as investors look to leaders to serve as trusted role models, define acceptable standards of corporate governance and connect capital with ESG opportunities, we are intent on providing the leadership required.

We firmly believe in the potential for sustainable finance to address the most pressing challenges that the world faces and we are passionate about serving as a change agent in this field – setting the rules that provide the transparency investors want to see, building the channels to direct capital to the green projects that need it, supporting our communities and setting the example for others to follow. So please join us in creating a future in which we can all thrive.