Green Bond Market Briefing Hong Kong May 2020 Green Bond-HK issuers: Cumulative issuance USD7.1bn: FY 2019 USD2.6bn, down 5% on FY 2018 Green bonds arranged and issued in HK: USD26bn overall; USD10bn in 2019* Low-Carbon Buildings remain dominant theme, new government green issuance and support measures The Hong Kong green bond market in 2019 was characterised by the Government’s continued support, notably the inaugural government Climate Bonds’ approach to determining a green bond, coupled with measures from the city’s financial regulators. bond’s country Total issuance by Hong Kong-domiciled entities was down slightly Climate Bonds uses the country of risk to determine how to to USD2.6bn (HKD20bn)1, a decrease of 5% or USD140m on assign a country to each bond. 2018, offset by increasing diversification of issuer types and project categories funded by green bonds. For unsecured bonds, the country of risk is determined by the domicile of the issuer. If it is a fully owned subsidiary, this Issuance from real estate developers remained one of the key drivers becomes the domicile of the parent or group. for the domestic green bond market. Newcomer Hysan MTN Limited tapped the market with four green bonds (USD197m) in 2019. A growing For secured bonds, the country where the assets used as number of real estate developers opted for green loans to finance collateral are located is considered. However, a parent guarantee projects in 2019, including The Wharf Holdings, Hang Lung Properties or other recourse to a parent company in another domicile and Capital Court Limited (a subsidiary of Lai Sun Development).2 would influence the determination. 2019 marked by most diversity and first We do not take currency denomination, listing venue or similar government green bond factors into account to determine the country. Six Hong Kong issuers came to market in 2019. Only the Hong Kong Special Administrative Region (HKSAR) Government and Link REIT Increasing diversity of issuer types in Hong Kong issued benchmark-sized deals in 2019, with a USD460m green loan to Capital Court Limited coming close. Despite being the smallest 3 Financial corporate Non-financial corporate issuer by volume (USD197m), market debutant Hysan was the most prolific with four deals from January to May. Government-backed entity Sovereign Loan In terms of issuer types, the mix changed significantly in 2019. Hysan 2 was the only Non-Financial Corporate of the year - the other three green deals from Non-Financial Corporates are classified as loans. The drop in issuance from this issuer type was compensated by Hong Kong’s first government deal as well as the first deal from a Financial Corporate 1 since 2016 (the same issuer, Link REIT). 2019 was also the first year with no issuance from Government-Backed Entities. Overall, there were four different issuer types, making 2019 the year with most diversity so far. Amount issued (USDbn) Amount issued 0 Low-Carbon Buildings reach record-high of 61% 2016 2017 2018 2019 While the mix of proceed allocations was quite varied in 2019 with Nearly two-thirds allocated to Low-Carbon Buildings eight categories financed, the share of Buildings grew to almost two- thirds (61%), the highest yet. Allocations to Buildings now represents Industry 6% Unallocated A&R 2% just under half (48%) of the total cumulative amount issued. Land Use 6% Energy 5% All nine deals from 2019 were intended to finance Buildings to some degree, and four only funded this category. The three largest allocations by volume came from the Buildings category, Link REIT Waste (HKD4bn/USD510m), Capital Court Limited (HKD3.6bn/USD460m) 8% and The Wharf Holdings (HKD2bn/USD255m), respectively. The next Water largest category was Waste (8%), followed by Industry, Transport, 6% Water, Land Use all at 6% and Energy at 5%. This range was driven by Transport HKSAR’s Government’s deal, whose Green Bond Framework listed all 6% categories except ICT as eligible. Waste additionally benefitted from Buildings allocations from Hysan’s four bonds, which also financed Buildings, 61% Adaptation and Energy Efficiency across sectors. * Note: HKMA figures capture green bonds only, for which a majority of bond arranging activities take place in Hong Kong. See p. 3. Hong Kong green bond market briefing Climate Bonds Initiative 1 Hong Kong External reviews are common GBA green bonds grew 54% in 2019 A significant share (85%) of 2019 green issuance volume, and 100% of 2019 green bond issuance volume in Hong Kong benefits from at 6 least one type of external review. 67% carries a second party opinion Guangdong (SPO). Vigeo Eiris was the top external reviewer in 2019 benefiting Hong Kong from the USD1bn inaugural green bond from HKSAR Government. 4 This is followed by Sustainalytics with 28% market share, composed Macau of two deals from two Hong Kong property companies – Hysan and Link REIT. 18% of the 2019 issuance carries assurance from Hong 2 Kong Quality Assurance Agency (HKQAA). The remaining 15% that do not have any form of external reviews are green loans. Amount issued (USDbn) Amount issued 0 85% of issuance has at least one type of external review 2016 2017 2018 2019 81% of HK green bonds carry post-issuance N.A. disclosure 15% Post-issuance reporting allows investors to track the allocation SPO of green bond proceeds during the life of the assets or projects Vigeo Eiris financed. It provides transparency and enhances the credibility of Assurance 39% green bonds, contributing to market integrity. The Climate Bonds HKQAA Standard requires compulsory reporting on proceeds allocation at 18% least annually for Certified Climate Bonds; the Green Bond Principles (GBP) and other local guidelines also encourage issuers to report to investors on the indications given at issuance regarding the use of SPO green bond proceeds and, ideally, also project or portfolio impact. Sustainalytics 28% In 2019, Climate Bonds conducted a survey of 48 of the largest Europe-based fixed income asset managers, with total assets under management (AUM) of EUR13.7tn. The survey found that green Denomination in local currency on the rise credentials and transparency are highly valued by investors. The majority of respondents stated that poor post-issuance reporting While in 2018 USD-denominated deals dominated (66%), 2019 saw would (55%) or could (30%) lead to bond sale, while only 15% HKD-denomination rising strongly with eight deals from five issuers stated they would hold the bond regardless. accounting for 61% of the volume. The remaining deal was the HKSAR Government green bond, denominated in USD. Given that most guidelines encourage annual reporting, we allowed time for a year to lapse with a grace period for reporting to be 2019 was the first year in which the majority of volume was made public. Climate Bonds analysed green bonds issued up to 31 denominated in local currency, and the first year since 2016 with December 2018 and excluded bonds that had matured before the denomination in only two currencies (USD and CNY in 2016). cut-off date. Of the USD4.5bn worth of green bonds from 12 issuers HKEX remains the most popular listing venue since 2016, 81% (or USD3.6bn) carries disclosure on the proceeds allocation at post issuance stage. The absence of public disclosure is Hong Kong Stock Exchange (HKEX) remained the largest venue for common among privately placed deals. China’s offshore green bond listing. In addition to Hong Kong’s local issuance, such as the USD1bn government green bond, there are Best practice example USD7.3bn worth of green bonds from ten mainland China domiciled issuers listed on HKEX. Examples include Jiangxi Provincial Water, Government-Backed Entity: MTR Wuhan Metro, ICBC Financial Leasing, and the GBA-themed deals MTR publishes an annual standalone Green Finance Report, from Agricultural Development Bank of China (ADBC) and Zhuhai which details the company’s green finance portfolio and Da Hen Qin Investment. the project portfolio funded, alongside an assurance report Greater Bay Area green bonds on the rise confirming its compliance with the GBP. As per the 2018 Green Bond Report, the green finance portfolio In addition to the Hong Kong green deals, there were USD2.9bn of MTR consisted of nine green bonds and one green loan. MTR worth of green bonds from Guangdong-based issuers in 2019. The gives a breakdown of how the green finance proceeds were USD963m green bond placed by Bank of China through its Macau allocated to different projects. A description of each green Branch marked inaugural issuance in Macau SAR.3 Total volume of project is also included in the report. green bonds from Greater Bay Area (GBA)-domiciled issuers reached USD6.4bn in 2019, a 54% increase year on year. In terms of the environmental benefits, MTR provides the GHG emissions avoided in tonnes CO2e for low carbon transportation In addition to Zhuhai Da Heng Qin Investment as a local issuer who projects and energy conservation (estimates) in kWh (MWh) brought a GBA-themed green bond financing green buildings in the for energy efficiency projects. The methodology for estimating region, the Industrial and Commercial Bank of China and ADBC have environmental benefits of railway lines is given in the appendix also issued GBA-themed green bonds with proceeds dedicated to of the report. green development in the area. Hong Kong green bond market briefing Climate Bonds Initiative 2 Hong Kong Distinction between Climate Bonds’ and HKMA’s approach to measuring market size To reflect the size of Hong Kong as an international financial centre for green bond issuance, the Hong Kong Monetary Authority (HKMA) adopts a different methodology to Climate Bonds (as described on p.1) in measuring the green bond market size.