15 ASIAN LEGAL BUSINESS – MARCH 2024 WWW.LEGALBUSINESSONLINE.COM SUSTAINABLE FINANCE international green and sustainable bond issuances in 2022, says Norton Rose Fulbright counsel Alvin Wong. “A strong regulatory and supervisory framework, coupled with Hong Kong’s active participation in the development of regional and international green and sustainability initiatives, has cemented Hong Kong’s position as the leading sustainable financial hub in Asia,” he adds. GREEN TRENDS This government-friendly environment is leading to increased sustainabilityfocused financing in the market, says Angie Chan, also a banking and finance partner with Mayer Brown. “Sustainable finance market is becoming more prevalent in the Hong Kong market. We have seen more borrowers borrowing green finance (such as amending existing documentation to introduce green finance elements). On the other hand, there is also increased scrutiny by lenders on the quality of sustainable finance products,” says Chan. There is also a proliferation of ESG loans across bank lending and private credit, says Wong. “Most bank lending nowadays are structured as ESG loans. Banks would (more likely than not) offer to refinance any maturing loan that was not an ESG loan as an ESG loan. We have also begun to see private credit funds structuring their private credit lending as ESG loans to meet their investors’ ESG requirements.” There as also been a change in the choice of key performance indicators (KPIs) in the sustainable loan market. While traditionally, environment was the most selected KPI ahead of S and G, “we have seen an uptick in the selection of social and governance KPIs in the Asia Pacific sustainable loan market,” explains Wong. For example, the Hong Kong Mortgage Corporation launched the largest social bond issuance in Asia in September 2023, the proceeds of which will be used for financing or refinancing a scheme to alleviate the cash flow pressure of small and medium enterprises in Hong Kong during the pandemic, Chan of Mayer Brown points out. Blue bonds are another new category of sustainability-linked financial products that are gaining popularity. “Another notable issuance was by Fujian Zhanglong Group, which successfully issued US$500 million blue bonds in Hong Kong in November 2023. This is the first offshore blue bond and the largest offshore USD bond issued by a local non-financial state-owned enterprise in Mainland China in 2023,” Chan explains. The sustainable market, despite all its success, is yet to make strong inroads in the small and medium size enterprises (SMEs) market which constitute 989.5 percent of the companies registered in Hong Kong. “The ecosystem for sustainable finance for SMEs is still maturing. The government has lowered the minimum loan size threshold for external review subsidy under the Green and Sustainable Finance Grant Scheme from HK$200 million to HK$100 million, which is an important step,” Wong explains. “The Climate and Environmental Risk Questionnaire for non-listed companies and SMEs developed by CASG and CDP (a non-profit organisation) has also enhanced climate data availability and sustainability reporting for non-listed corporates and SMEs in Hong Kong,” he adds. Chan argues that sustainable finance can reach the SME market through increasing requirements on listed and international corporations, which may require their suppliers (which may be SMEs) to report on sustainability matters. LAWYERS TO STEP UP With an ever-increasing regulatory regime supporting strong market growth for sustainable finance, lawyers in the arena are expected by clients to go beyond the simple knowledge of compliance, documentation, and regulations. “Finance lawyers are expected to not only be well-informed of the current state of law in relation to sustainable finance, but also to have a grasp of current market trends which will shape the law in the future,” Yu of Mayer Brown says. The goal for the authorities has always been to set up a global finance hub in Hong Kong. To this end, the Hong Kong Monetary Authority (HKMA) has been working on creating a local “green taxonomy” framework for classifying economic activities considered environmentally friendly or sustainable, and the next step will be broadening that to include transition financing. The Green and Sustainable Finance Cross-Agency Steering Group, a body established in May 2020 by financial regulators in Hong Kong such as the Securities and Futures Commission and the HKMA, has identified the development of transition finance is a key initiative for 2024. “It is expected that there will be further developments of the local green classification framework as well as tools and technology that support data collection and analysis,” Wong says. “With the sustained enthusiasm of industry players and the support from the government and regulators, we expect the sustainable finance market in Hong Kong to remain robust in the years to come,” Chan adds. “There are various factors that can support Hong Kong’s development into a green finance hub. There is strong commitment and support from the Hong Kong government to develop Hong Kong into an international centre for green technology and finance. Further, Hong Kong has close ties with Mainland China, and could scale access to international finance for Mainland China.” — Dion Yu, Mayer Brown Image: Lee Yiu Tung/Shutterstock.com
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