Race for green finance hub

Financial centres compete for huge capital flows to finance net zero transition

Over 70 countries have set target dates for achieving net zero carbon emissions since the 2015 Paris Agreement, which is expected to drive trillions of dollars into green bonds, loans, investment funds and related instruments to finance the transition. Financial centres around the world are actively competing for the capital flows, setting their sights on becoming green finance hubs.

Green finance entails creating structured financial products or services to address climate or environmental issues. These products have existed for many years, albeit in small volumes. But in 2021, the market ballooned to US$540.6 billion globally from $5.2 billion in 2011, a more than 100-fold increase in ten years, according to a report published last year by TheCityUK in collaboration with BNP Paribas. This included various activities in the green finance ecosystem across bonds, loans, equity capital markets, and emerging growth areas such as venture capital and private equity. 

Despite this exponential growth, green finance only accounted for 4% of global financing activities in 2021, pointing to enormous opportunities for further growth.

The Global Green Finance Index (GGFI) published by London-based financial think-tank Z/Yen Group ranked London as the world’s top green finance centre for the last two years.

Compiled twice a year since 2018, the index assesses the quality and depth of green finance offerings in financial centres worldwide. The latest edition, released in April 2023, incorporated 150 quantitative measures and input from nearly 5,000 finance professionals through a global survey. 

“London outdid all other cities in terms of its talent pool, built infrastructure and quality of life. Its professional services firms and policy environment were also seen to be the most supportive for green finance among all centres, even though New York’s capital markets were considered to be more liquid,” according to GGFI.

New York was ranked number two on the list. All the others in the top ten are Western European and US centres, even though not all of them are mainstream financial centres.

Only five Asia Pacific centres feature among the top 20, including Singapore in 11th spot, Sydney (13), Seoul (15), Wellington (18) and Shanghai (20). Tokyo and Hong Kong, two prominent financial centres in the region, ranked 31st and 37th, respectively. 

Asia is key

The Asian region is a critical contributor to the global race to net zero. Since 2019, it has been generating more than half the global carbon dioxide emissions, with China accounting for 27%. There is a huge demand for financing green transition projects and innovative solutions in the region. 

McKinsey noted in an article in September 2022 that more than 15 countries and 670 companies across Asia Pacific have set, or are committed to setting, emission-reduction targets, creating new investment opportunities in green technology. It estimates that the addressable market size for green businesses in Asia will reach $4 trillion-$5 trillion by 2030.

Meanwhile, the Asia Pacific green bond market has emerged as the second largest in the world, surpassing North America but trailing behind Europe. 

Despite a global slowdown last year, the region raised $120.83 billion through green bonds, almost one-quarter of the world total of $487 billion, according to S&P Market Intelligence data. China led the region with $76.25 billion, followed by Japan ($12.42 billion), South Korea ($7.63 billion) and India ($1.94 billion). Analysts predict a bullish outlook for green bonds worldwide in 2023.

In addition to the debt markets, green loans are also gaining traction. The volume of green and sustainable bank loans in Asia Pacific reached $98 billion in 2021. Notably, green loans made up 22.5% of loans in the Southeast Asian region. 

Ambitious Japan

The lure of business opportunities has prompted several Asian financial centres to vie for a leading role in the region’s green economic future.

Tokyo for one is actively pursuing this aspiration. At the Nikkei Virtual Global Forum held in October 2021, Tokyo Governor Yuriko Koike highlighted that promoting sustainable finance is one of the three pillars of the city’s “Global Financial Centre: Tokyo Vision 2.0”, and a key update to the original vision created in 2017.

Tokyo’s government plans to support issuance of green bonds by covering some associated costs and attracting fund managers and financial technology startups with green finance expertise to base their businesses in the city. It’s also pushing the administration of Prime Minister Fumio Kishida for tax reforms and other measures to make the city more appealing to foreign talent.

However, Tokyo faces various obstacles that are hindering its efforts, such as lack of clarity on green debt issuance rules, resistance to adopt a harmonised green taxonomy with the European Union, and the conservative nature of Japanese investors. 

At the FinCity Global Forum in February 2022, Seiji Kihara, deputy chief cabinet secretary and a key adviser to Kishida, proposed that rather than green finance, Tokyo should position itself as Asia’s hub for transition finance to enable “brown” companies to raise capital for investing in technologies that reduce emissions.

He argued that many Japanese and Asian manufacturing companies cannot easily switch from fossil fuels to alternative technologies, and that Tokyo’s financial market should be the hub providing them with transition financing.

The proposal drew support from FinCity Tokyo Chairman Hiroshi Nakaso, a former deputy governor of the Bank of Japan. “Japan can play a different role from other Asian financial hubs, such as Hong Kong, which is the gateway to China, and Singapore, which is a connection point for Southeast Asian countries,” he said.

This shift in strategy has sparked new debate and only time will tell whether this will advance Tokyo’s aspiration.

Hong Kong versus Singapore

Meanwhile, Hong Kong and Singapore are making significant strides to become the region’s green finance hubs.

Hong Kong has demonstrated great market depth. In 2022, it was Asia's top centre for issuing green and sustainable debts, raising $27.8 billion. The Hong Kong Exchanges and Clearing (HKEX) remained the largest venue for China’s offshore green bond listings last year, accounting for 43% of the volume from China-domiciled issuers. Banks in the city also issued $52.7 billion green and sustainable loans. 

This February, Hong Kong became the first government issuer in the world to sell a tokenised green bond, in a HK$800 million ($100 million) offering.

Meanwhile, Singapore is Southeast Asia’s green financing hub, accounting for over 60% of the region’s green financing activities in 2022. The city state raised $8.1 billion in green and sustainable debts, including the government’s inaugural issuance of a 50-year S$2.4 billion ($1.75 billion) green bond. Its banking system also issued over $12 billion in green and sustainable loans.

Singapore is leading the region in policy support, having established a green taxonomy, a green and sustainable finance grant scheme, green bond principles, environmental, social and governance skills training subsidies, mandatory ESG disclosure requirement, and government sustainable debt issuance.

Hong Kong has made progress in implementing five of the six areas, and is still working on the sixth – a green taxonomy – according to a report by Moody Investors Service in April.

Singapore has also created two carbon credit trading bourses: AirCarbon (ACX), a blockchain platform, and Climate Impact X (CIX), a joint venture between the Singapore Exchange, Temasek Holdings, DBS Bank, and Standard Chartered Bank. 

As of December 2022, CIX had auctioned 420,000 carbon credits while ACX had transacted more than 16 million carbon credits, according to a report in Singapore daily The Straits Times. McKinsey estimates that the value of the global carbon trading market will reach $50 billion by 2030.

Hong Kong, meanwhile, launched a voluntary trading platform on the HKEX in October 2002. 

Other Asian financial cities such as Beijing, Shanghai and Seoul will continue to focus primarily on their domestic capital markets and issuers. 

Many see green finance as the new battleground between Hong Kong and Singapore in their ongoing competition to be the pre-eminent financial hub in Asia. But there are ample business opportunities in green finance for both to thrive. In fact, much stronger collaboration is needed between them, as well as other centres in the region, to harmonise regulations and green taxonomies, share best practices, develop common standards, and explore mutual recognition agreements. This will be crucial to the progress of the region’s sustainability markets for the benefit of all.

*This article was published in Asia Asset Management’s September 2023 magazine under the same title.