Green finance: Hong Kong agency to offer net-zero certification for firms under pressure to disclose carbon footprint and climate ambitions

green or sustainable bonds, climate change

The Hong Kong Quality Assurance Agency (HKQAA), a food-to-sustainable finance products certification provider, will launch a net-zero certification programme by March for financial and listed firms facing rising pressure to disclose their carbon footprint and climate ambitions.

The self-financed, non-profit government body is the city’s biggest provider of assurance services for green and sustainable bonds and loans, and has issued more than 200 certificates for deals worth US$35 billion since 2018.

“We believe carbon reduction will transition in the next few years from a voluntary corporate initiative into something of a basic requirement in many industries,” Chan Pui-cheong, HKQAA’s deputy CEO, said in an interview on the sidelines of a sustainable finance symposium it hosted on Friday. “We want to provide companies, investors and other stakeholders with some tools to showcase their progress and achievements.”

Two types of certifications will be offered, which either validate an entity’s achievement of net-zero emissions, or their commitment and progress towards such goals.

Net zero is achieved by making investments to reduce one’s carbon emissions and offsetting any residual amount by buying credits to fund other parties’ carbon reduction projects. Carbon neutrality, while similar, can be achieved solely through offsets without reducing one’s own carbon footprint.

As a financial gateway between China and the rest of the world, Hong Kong, which aims to be carbon-neutral by 2050, has played host to many green and sustainable financing and investment instruments by the local and mainland Chinese governments and firms.

Since 2018, HKQAA has provided pre-issuance assurance services for 65 green or sustainable bonds and 32 green or sustainable loans. In addition, about 20 post-issuance certificates have been provided for such bonds, compared to none in 2018.

“Green” refers to projects with environmental benefits, while “sustainable” additionally covers projects or issuers’ social impact and governance standards. The pre-issuance certification verifies issuers’ adherence to international and national standards and principles on green and sustainable finance.

For example, only certain projects are eligible for green bonds issuances, and issuers must report on the use of proceeds annually, according to International Capital Market Association guidelines. Issuers of sustainability-linked bonds must set performance targets that are ambitious, comparable, verifiable and consistent with its overall sustainability strategy and go beyond a “business as usual” trajectory.

Post-issuance assurance provides updates on issuers’ progress towards their targets. Chan said he expected more demand for post-issuance certification going forward, as more asset managers globally will be required to trace, disclose and update the greenhouse gases footprint of their investees and funds.

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, published in July a consultation paper on guidelines for banks to identify, measure, monitor, report and mitigate the climate-related risks of their asset and loan portfolios and operations.

For example, climate change can reduce collateral values, weaken borrowers’ repayment ability and disrupt business operations. The HKMA expects banks to make their first climate risks disclosures in line with guidelines of the Task Force on Climate-related Financial Disclosures (TCFD), which was established by Basel-based Financial Stability Board, no later than mid-2023. These disclosures will be mandatory in 2025.

Listed firms have been required by bourse operator Hong Kong Exchanges and Clearing since July last year to incorporate certain key elements of the TCFD disclosure recommendations.

Up to a tenth of the about 2,000 Hong Kong licensed asset management firms will be required to disclose the greenhouse gas emissions data of their investment portfolios and investees from November next year, the Securities and Futures Commission announced in August. It will apply to those with at least HK$8 billion (US$1.03 billion) in clients’ assets in Hong Kong.

Besides the net-zero certification, HKQAA will early next year offer two free online tools for companies to self-assess and disclose their climate risks preparedness and alignment to TCFD reporting guidelines. They will receive simple maturity scores after answering a questionnaire.

“Our current approach is a mild, voluntary self-assessment based method … still, it will appeal to large companies, because most of them would want to prepare ahead for the eventuality of mandatory emission caps,” said Ho Chi-shing, the HKQAA’s chairman.

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