How city can be a hub for sustainable finance

Hong Kong can act as the testing ground for mainland carbon products while showcasing them to international investors

Despite the many challenges and limitations brought on by the pandemic, Hong Kong’s financial regulators have continued to find opportunities to preserve its status as one of the world’s leading financial centres.

Following the launch last year of schemes to bridge China and international markets, policymakers in Hong Kong and their mainland counterparts have been stepping up efforts to position the city as a sustainable finance hub.

This development also feeds into Hong Kong’s most recent budget, which tagged green and sustainable finance development as a key initiative in Hong Kong’s Climate Action Plan 2050.

There is no other financial centre in the world better placed to tap into China’s massive – but still nascent – carbon emissions trading market, estimated to be three times bigger than the European Union’s and set to grow by another 70 per cent by 2025.

Hong Kong can play to its traditional strengths: bridging China’s carbon markets with the rest of the world by offering regional expertise and market understanding that cannot be found elsewhere. Hong Kong can act as the testing ground for mainland carbon products – like carbon trading indices – showcasing them to international investors.

It’s worth stepping back and considering the scale of this opportunity. In less than a year of operation, China’s carbon emission trading scheme is already the largest carbon market in the world by volume. Some estimates put the size of China’s 2021 carbon market programme at 4,500 megatonnes

(Mt) of carbon dioxide, compared to 1,500Mt of CO2 in the European Union.

Current projections by the Shanghai United Assets and Equity Exchange suggest more than 8,000 companies from eight sectors will eventually be able to trade allowances for CO2 emissions by 2025, bringing China’s coverage to 7,800Mt of CO2.

The ingredients for a thriving carbon market in Hong Kong are already broadly in place. However, one should not confuse ingredients for a recipe. The global impetus to reduce carbon emissions and a sense of the opportunities available mean that globally relevant carbon markets will be hotly contested and fiercely competitive.

China’s financial opening continues unabated and with Hong Kong’s leading position as an international financial centre and an advantageous location in the Greater Bay Area, the idea of a unified carbon market that bridges Hong Kong to the world is certainly compelling and there for the taking. This same opening can be Hong Kong’s point of difference relative to other carbon markets.

A robust trading infrastructure will be needed for the listing and trading of carbonrelated products, registries for post-trade services and collection and dissemination of information. Doing this through smart contracts can digitalise the carbon credit life cycle and enhance transparency and traceability of the registry.

The evolution of Hong Kong as a capital gateway has been marked by the many financial bridges it has established with the mainland. In the coming decades, we also expect Hong Kong to establish itself as a regional climate hub for the mainland.

Achieving the status of being the region’s premier carbon trading and sustainable finance hub is a goal that is within reach for Hong Kong, and one worth pursuing.