When the Hong Kong Monetary Authority’s Exchange Fund tries to determine what counts as a responsible investment, there are no shortcuts, Kenneth Lim writes.
A resource-intensive assessment process is required to ensure the credibility of claims about sustainability, especially as being green has become fashionable in financial markets. Furthermore, the pursuit of environmental, social and governance (ESG) objectives need to be balanced against mandates and risk parameters.
“To be honest, it’s a lot of hard work…You just have to talk to many people,” says Leong Cheung, Chief Strategy Officer for the Hong Kong Monetary Authority’s (HKMA’s) Exchange Fund Investment Office.
That labour is necessary because the one unwavering constant in responsible investing is change. Be it the evolution of responsible investing itself, the energy transition challenge in Asia or policy volatility around the world, Cheung has embraced the dynamism of crafting sustainable investing strategies.
From Risk to Opportunity
When HKMA unveiled its Sustainable Finance Action Agenda in October 2024, it marked eight years since the central bank and financial sector regulator embarked on its responsible investment journey with the adoption of the Hong Kong Securities and Futures Commission’s Principles of Responsible Ownership.
Those principles outline best practices on how investors should promote long-termism and engage with investee companies, but they are non-binding, voluntary and broad. Since then, the Exchange Fund has ratcheted up the sophistication of its commitments, aligning itself with global initiatives such as the Principles for Responsible Investment, the Network of Central Banks and Supervisors for Greening the Financial System and the Task Force on Climate-related Financial Disclosures.
HKMA also began climate-related disclosures in 2020, and in 2022 set net-zero emissions targets that included achieving net zero by 2050 for the Exchange Fund’s investment portfolio. About HK$1.4 trillion of the Exchange Fund’s HK$4 trillion total assets were allocated to public market assets held under the investment portfolio and a strategic stake in Hong Kong Exchanges and Clearing as at end-2023. The investment portfolio returned 6.4 per cent in 2023.
The new Action Agenda – which formalised the net-zero target and a commitment to support climate transition in Asia – signaled a shift in the Exchange Fund’s approach towards responsible investment. While HKMA’s initial approach to sustainability all those years ago was undertaken from a risk-mitigation lens, sustainability today is also seen as a source of returns opportunities, Cheung says.
You’re seeing businesses that seize opportunities around [climate action], and those could be new opportunities. Some of them are risk mitigation as well, but we do see, especially on the private equity side, very interesting opportunities on that front
Climate change and climate action has given rise to potential centres of growth in areas such as materials, power transmission, carbon storage and biofuels, he says. The availability and sophistication of data has improved, and regulatory and policy support has strengthened.
“You’re seeing businesses that seize opportunities around those, and those could be new opportunities,” he says. “Some of them are risk mitigation as well, but we do see, especially on the private equity side, very interesting opportunities on that front.”
For instance, HKMA announced in November that it was entering into a strategic climate investment partnership with multilateral development institutions, including Asian Development Bank, Asian Infrastructure Investment Bank and International Finance Corp. One of the general partners supporting the initiative, Actis GP, aims to deploy at least US$500 million in Asia in sectors that include renewable energy infrastructure, energy solutions and sustainable transportation.
Careful Selection
As at end-2023, about 10 per cent of the investment portfolio is now in the sustainable investment space, Cheung said. Building up that segment has taken painstaking rigour.
For a start, HKMA is careful not to rely too much on quantitative screens for sustainability because these could be overly simplistic. For instance, using a shortlist of key performance indicators could paint a picture of a portfolio that is very green, but the portfolio might be overly concentrated in certain geographies or asset classes, Cheung explains.
Instead, the Exchange Fund uses a hard-core, fundamental approach that examines ESG or climate-related risks and opportunities associated with an investment.
“It’s too soon to say I’m only looking at certain KPIs (key performance indicators) or certain numbers like the percentage of sustainable investments. You might not really be solving the real-world problem,” he says.
The climate transition in Asia is one of those real-world problems that can be challenging to fit in neat sustainability buckets. The region has an abundance of industries and companies with high greenhouse gas emissions, and it is widely recognised that helping these carbon-intensive businesses to decarbonise is essential to mitigating global warming.
But simplistic emissions screens could keep capital away from these companies, which would make it more difficult for them to transition towards net zero.
You want the appetite and open-mindedness to look at some investments, maybe predominantly in Asia, and say, ‘How do we use our capital to accelerate real-world impact
“You want the appetite and open-mindedness to look at some investments, maybe predominantly in Asia, and say, ‘How do we use our capital to accelerate real-world impact?’,” Cheung says.
He sees general consensus of support in Asia for the climate transition, because many countries in the region have significant exposure to climate impact on biodiversity and agriculture. However, the pace at which the transition happens needs to respect local circumstances.
“This part of the world is very diverse,” Cheung says. “Asia is one term, but Asia has many currencies, time zones, languages. They can be moving at quite different paces as well. So you do need to respect each country’s jurisdiction on pacing. Not every economy is ready to do very drastic things.”
Striking the balance between funding green businesses and financing the transition of brown businesses requires “a lot of internal iterations”.
“It’s not static, ‘Let’s figure out three things and forget everything else and focus on those three things and we’ll all solve the world’s problems.’,” he says. “I don’t think we’re quite there yet.”
Volatile Rules
Looking ahead, Cheung is also anticipating changes in the broad policy environment.
While acknowledging that the policy direction under US president-elect Donald Trump – who has expressed opposition to a major climate infrastructure initiative launched by his predecessor – will significantly affect the world’s largest economy, Cheung expects some climate momentum to remain.
For instance, a number of US states, both red and blue, have also been pursuing climate change-related opportunities. Global financial markets and data quality have also become more sophisticated about driving climate action.
“Will these things all of a sudden, because of one term of government, completely change course and go away?” Cheung says. “I personally feel like they’re more sticky than probably one would think. And a lot of these investments, once made, it’s not like tomorrow they’re not going to use them.”
Global asset owners can play a part in supporting the change as well, by continuing to demand progress from their investments.
“The major asset owners collectively play an important role,” Cheung says. “If you talk to any asset manager, if one asset owner asks them to do certain things, they will politely say, ‘Yeah, yeah, yeah, we’ll do it.’
I do come across conversations where people say, our boss says that we’re long-term investors, but every quarter they still come to us and ask why is your performance not up to the market
“They’ll be very diplomatic and get into a sales kind of mode. But if 10 asset owners say that we want that thing, they’ll be very serious about that.”
Better policy support can help to bring private capital to the table. For instance, policy could help to create opportunities with the potential for reasonable financial returns, or provide concessionary capital to improve the risk-reward balance for private funders.
“For private capital, the ultimate apple is really financial returns,” Cheung says.
Investors also need to have their own internal conversations to chart a path that is consistent with their own mandates.
“I do come across conversations where people say, our boss says that we’re long-term investors, but every quarter they still come to us and ask why is your performance not up to the market?” Cheung quips.
“My advice: You do need to have very meaningful discussions with your board. What do we mean by short-term or long-term? And then what kind of strategic goals that they have, and what kind of compromise they’re willing to accept? If they’re not willing to accept any compromise, they will have to do what we do, which is just to work very hard to then find out the ones that match both objectives.”
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