Sustainable Finance

Speaker: Winnie Fan, Managing Director of Sustainable Finance (Corporate Banking) ,

Deputy General Manager, Global Corporate Banking Department, Bank of China (Hong Kong)

October 2022 Reminder: To borrow or not to borrow? Borrow only if you can repay!
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Why Sustainability Matters?
Climate Related Risk

Climate Related Risk

climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires

Physical Risk Transition Risk

Acute: Policy and Legal Reputation

For example, storms and flooding For example, change in the PUE
damages buildings and infrastructure, requirement for new data centre to For example:
leading to higher insurance premium; further lowered from 1.35 to 1.3 by
2023 or GFA benefit for green building.

Chronic: Technology Market

For example, negative impact on For example, electric vehicle to replace For example, change in end user
agriculture through changes in average gas powered car. demand, particularly millennials, favour
temperatures, ground- sustainable products and companies
level ozone concentrations; that share their values

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Source: Wikipedia https://en.wikipedia.org/wiki/Climate_risk
Why Sustainability Matters?
Investment Needs for Decarbonization

Investment Needs for Decarbonization

Globally

IEA’s Scenario US$100tn by 2050

NGFS’s Scenario US$275tn by 2050

China

NDRC’s Estimate CNY 139tn by 2060

Tsinghua’s Estimate CNY174tn by 2060

ASEAN

UNCTAD’s Estimate US$4.5tn by 2030

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Source: UNFCC https://lce.tsinghua.edu.cn/info/1042/1237.htm
Sustainable Finance

Global Market Snapshot Banking Solutions Challenges & Remedies

Loan Market Product Overview Greenwashing

Bond Market Case Studies Additional Certification Cost

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Sustainable Finance
Global Market Snapshot
1H22 Green & SLL loan volume at USD336bn, down 2% yoy
The market remains slow amid the uncertain market, yet,
sustainable lending has shown more resilience in loan
space, with USD97.4bn of issuance in 3Q22, at par with the
year-ago pace.
Sustainability-linked instruments are welcomed by
corporates with interest incentives when the pre-agreed
sustainable KPIs are met.
Source: Refinitiv LPC Green Lending Review July 2022 & August 2022
Cumulative GSS+ volumes reached USD3.3tn in 1H22
Rising interest rates and high volatility resulted in decreased
bond issuance, including Green Social Sustainability (“GSS+”)
volumes. Half-yearly GSS+ volumes reached USD417.8bn,
which represents a yoy decrease of 27% against H1 2021.
Transition instruments are gaining traction. The
development of common ground definitions and guidelines
for transition finance will play a key role in strengthening the
integrity and transparency of the transition bond and SLB
markets, paving the way for rapid scaling.
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Source: Climate Bond Initiatives August 2022
Sustainable Finance
Hong Kong Market Overview

Green and sustainable finance has been a major growth segment of Hong Kong’s debt market

Green and Sustainability Debt issued in Hong Kong in 2021 Industry Composition of Green and Sustainable Bond arranged
in Hong Kong in 2021

Green and sustainable loans are another rapidly growing and
increasingly important form of green financing.
Total green and sustainable debt (including both bonds and
loans) issued in Hong Kong quadrupled from a year ago to
reach US$56.6 billion in 2021.
Source: HKMA https://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb202203/fa1.pdf
The volume of green and sustainable bonds arranged in Hong
Kong amounted to US$31.3 billion in 2021, accounting for
one-third of the Asian green and sustainable bond market.
Around 90% of the issuance in Hong Kong was by private
sector issuers, with real-estate developers and financial
institutions each taking up more than one third of the market.
Over 80% of the bonds by issuance size were issued by the
Chinese mainland entities.
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Sustainable Finance
Product Overview

Support Clients’ Transition to

Low-Carbon Economy

EV Loan
Corporate Banking

Retail Banking

Capital Market

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 Sustainable Finance
Product Overview
Green/Social Transition Sustainability-linked

• Certain types of Green/Social Projects:

• Financing new projects
• Refinancing existing Green Project (within 36 months) • Projects which help the company's transition towards reduced
Use of Proceeds • General corporate purposes
• Acquiring Green/Social enterprise environmental impact or lower carbon emissions
(If the above projects are running through subsidiary, the fund allocation
shall be adjusted by the shareholding ratio)

• Green Loan Principles

• Green Bond Principles • Sustainability-linked Loan Principles
International Standard • Social Loan Principles • ICMA Climate Transition Finance Handbook • Sustainability-linked Bond Principles
• Social Bond Principles
• The Sustainability Bond Guidelines

• Renewable energy, energy efficiency, green building, clean

Project Type • Transition towards environmental friendly N/A
transportation etc.

• Pre-issuance: Obtain SPO, Third-party Certification, Assurance for the

• Pre-issuance: Obtain SPO, Third-party Certification, Assurance for the Green Framework
External Review structuring
• Post-issuance: Regular disclosure, assured by external party
• Post-issuance: Verification on fulfilment of KPIs by external party

• Disclosing funds allocation before the proceeds are fully allocated

Reporting • Annually disclose the progress of KPIs before the assessment day
• Impact reporting is recommended

KPI N/A • For example, linked with carbon emission or renewable energy utilization

Financial punishment may apply if issuer fails to meet the KPIs in assessment day:
Punishment N/A • Increase in coupon
• Premium added when redemption made

• Matured market with board investors base • Normally Green Investor would support reliable and challenging • Matches with the issuers with long-term sustainability goals
Advantages
• Precedent from various industries transition plan (Such as aligning with Paris Agreement or SBTi) • No restriction on the loan purpose, applies to all sectors

• No market consensus for the definition of transition

• Might take time to prepare the Green Framework and External Review • May be accused as “Green Wash” • KPIs have to be meaningful and challenging
Disadvantages
• Restriction on the loan purpose, favor project based • Might take time to prepare the Green Framework and External • Might take time to build the data inventory
Review
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 Sustainable Finance
Case Study: Green Loan

2022 One of the Largest Green Syndication Loan in Hong Kong: Other Eligible Green
Hysan and Chinachem Projects

Highlight: Energy efficiency &

• USD1.66bn 5-year green syndication loan for the development of a commercial project in Renewable energy
Causeway Bay

Project Features: Clean transportation

• A number of sustainable features including 60,000 sq ft of green landscape in the form of
an urban park, footbridge connections to enhance connectivity and walkability, as well as
measures to enhance resource efficiency in areas such as energy consumption, renewable Eco-efficient adapted products,
energy, waste management and water conservation; production technologies and
processes

• Targeting for completion in 2026, the Project aims to obtain the highest ratings of green
and wellness certificates internationally and locally, including China Green Building Label,
Leadership in Energy and Environmental Design (“LEED”) certification from the United Sustainable water and wastewater
management
States Green Building Council (“USGBC”) and BEAM Plus certification from the Hong Kong
Green Building Council (“HKGBC”).

Third Party Certification: Pollution prevention and control

• Hong Kong Quality Assurance Agency
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 Sustainable Finance
Case Study: Sustainability-linked Loan

Sustainability-linked Trade Solutions: Manufacturer of Consumer

Other Common KPIs
Products

Highlight: Real Estate & Infrastructure:

• Sustainability-linked features extend to trade facilities (Import Loan), it aims to • GHG emissions intensity
support a manufacturer of sustainable sourcing of materials used for • Energy intensity
manufacturing of consumer products • Waste intensity
• Water intensity
KPIs: sustainable materials application, reduction in GHG intensity • Sustainable building certified area
• Increases usage of sustainable materials for example, green polyethylene Transportation:
which is made from renewable resources such as use of corn, wheat, sugar • Total direct energy consumption Total
cane etc.. This contributes to the reduction of greenhouse gas emission with packaging material intensity
roughly 2- 3 tones of CO2 captured for each ton of green polyethylene • Nitrogen oxides (“NOx”) emissions
produced. • Driver Safety
• Invest in energy efficiency technologies and the use of electrical equipment in • Warehouse Safety
the factory. Telecommunication:
• Particulate matter (“PM”)
Third Party Certification: • Scrap materials recycled
• Hong Kong Quality Assurance Agency • Scrap metals recycled
• WEEE disposal (pieces)
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 Sustainable Finance
Challenges and Remedies

Challenge Remedy

Greenwashing: According to the EU Taxonomy Regulation, 1. Education

greenwashing refers to the practice of gaining an unfair 2. Integrate ESG governance into the existing risk
competitive advantage by marketing a financial product as management procedures and controls
environmentally friendly, when in fact basic environmental 3. Regulator and Industry guidance (e.g. common ground
standards have not been met; taxonomy)

Additional Cost Incurred (e.g. Green certification cost, 1. HKMA Green and Sustainable Finance Grant Scheme
verification cost)

Source: EUR-Lex https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32020R0852 11

Disclaimers:

(a) This material is prepared for general information purposes only and does not have
any regard to the specific investment objectives, financial situation and the particular
needs of any specific person who may receive it. Besides, this material is not an
investment advice and does not constitute any offer or solicitation to offer or
recommendation of any investment product;

(b) Any views and opinions expressed represent the views of the author(s) and do not
necessarily reflect the views of Bank of China (Hong Kong) Limited ("BOCHK");

(c) BOCHK has based this material on information obtained from sources it reasonably
believes to be reliable. However, BOCHK does not warrant, guarantee or represent,
expressly or by implication, the accuracy, validity or completeness of such information.

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 MSCI ESG Research LLC:
Highest “AAA” rating,
making BOCHK the highest
rated bank in Hong Kong
(2011).
Hong Kong Business Sustainability Index (HKBSI):
Ranked Third
HKBSI Greater Bay Area Business Sustainability Index The Financial Times and Nikkei Best Bank for CSR in Hong
(GBABSI) : Ranked Second Asia and Statista: Asia-Pacific Kong in Asiamoney’s 2022
HKBSI Greater China Business Sustainability Index Climate Leaders 2022 Best Bank Awards
(GCBSI): Ranked Third

3 Awards in 2022 Hong Kong ESG 4 Outstanding Awards 2021 HKQAA -

3 Awards in Bloomberg “ESG Leading
Reporting Awards (HERA) : Hong Kong Green and Sustainable Environmental Campaign
Enterprise Awards 2021”
• Grand Award - Excellence in ESG Finance Awards : Committee, Hong Kong
• ESG Leading Enterprise Awards
Governance • Largest Single RMB Green Bond Awards for Environmental
• Leading ESG Initiative Awards
• Grand Award - Excellence in Social • Largest Amount of Green Bonds Excellence (Servicing and
• Theme Awards - Crisis
Positive Impact • Largest Single Blue Bond Trading):
Management
• Commendation - Best ESG Report • Greatest Number of Green and • Gold Award (2020)
(Large-Cap) Sustainability-linked Loan, Green
Loan e-Assessment

THANK YOU 13