Biz@HKUST, Spring 2021 (Issue 64)

Abstract

SPRING 2021.01 www.BM.UST.HK

@HKUST TOWARDS A SUSTAINABLE FUTURE HKUST HK BUSINESS SCHOOL

WORLD CLASS IN ASIA //Contents// Biz GREEN FINANCE @HKUST Towards a Sustainable Future Insights and News from the HKUST Business School 4 Christopher HUI, the Secretary for Financial Services and the Treasury, HKSAR Government lN CitY OF GREEN 8 Arthur YUEN, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA) IN INVESTING IN THE FUTURE 12 MA Jun, Chairman of the Hong Kong Green Finance Association (HKGFA) IN LEADING THE WAY 16 Christine KUNG, Head of International Affairs and Sustainable Finance of the Securities and Futures Commission (SFC) LN SETTING STANDARDS 20 Grace HUI, Head of Green and Sustainable Finance at Hong Kong Exchanges and Clearing (HKEX) IN THE RIGHT INGREDIENTS 24 Albert IP, Chairman of the World Green Organization (WGO) LN CONCRETE RESULTS 28 Eric CORNUEL, President of the European Foundation of Management Development (EFMD) IN TURNING GREEN 34

By Professor Christine LOH Chief Development Strategist Division of Environment and Sustainability at HKUST 50 UNPRECEDENTED RECORD 10· : Kellogg-HKUST Executive MBA sets a new record of

38 42 46 CHINAS CARBON NEUTRALlTY PLEDGE: A NEW DEVELOPMENT AGENDA By Professor ZHANG Chu Head of the Department of Finance and Director of the Center for Investing at HKUST Business School RESEARCH RESPONSI Bl LIT I ES By Professor CHEN Zhanhui and George PANAYOTOV, and PhD student CHU Zhuang Department of Finance at HKUST Business School A CHANGE IN THE WEATHER By Professor Entela BENZ-SALIASI Department of Finance at HKUST Business School CEO and Co-founder of Intense! RISKlNG IT ALL 8' No.1 for ten times 52 RISE AND SHINE Recognition reflects the uncompromising spirit of our faulty and programs 54 CHARTING THE WAY FORWARD Prominent business leaders offered valuable advice to the School in an annual meeting 56 DISTINCTIVE PROGRAM FOR MOTCVATED LEADERS The new DBA program provides rigorous training in conducting practice-based research 58 FINTECH IN ACTION Activities look into the future of fintech in Hong Kong and beyond 60 PARTNERSHlP FOR EDUCATION New alliances open up a new stream of online learning opportunities 61 A TRIBUTE TO A GREAT TEACHER In memorY of a great teacher and friend - Dr Paul Forster HKUST BUSINESS SCHOOL WORLD CLASS INASIA Biz HKUST Green Finance The magazine is available For download or can be delivered via email on request. Published by External & Alumni Relations HKUST Business School The Hong Kong University of Science and Technology Address/ Clear Water Bay, Kowloon, Hong Kong Tel/ (852) 2358 8934 Fax/ (852) 2719 8231 Email/ bmpr@ust.hk

stay Connected From extreme typhoons and flooding in Asia, to the continuing rise of global temperatures and now the COVID-19 pandemic, it is hard to argue that these events pose zero threat to our livelihood and our generations to come. / / From the Dean / / Whether it is looking at the broader economy or from a risk assessment perspective, governments worldwide are now standing at attention and pausing to think of new ways to help mitigate the negative impacts of climate change, and Hong Kong is no exception to that. One of the most obvious ways would be to consider greening the supply chain from financing all the way to manufacturing and consumption. Experts now agree that ethical business practices and green Financial investments can be powerful instruments to influence change. And with China's recent announcement of its plans to become carbon neutral by 2060, Hong Kong is in a unique and perfect position to help deliver on that change, while also making a real impact on home grounds. But For this to happen, we need professionals who are able to operate in a new interdisciplinary environment that marries subjects including environmental science, sustainability, Finance and investment. In this edition on green finance, we take a closer look at what we as educators can do to nurture talent, while delivering on research that will help to give Hong Kong a boost to become the region's premier green Finance hub. We will get to hear from seven distinguished leaders and experts who will share insights into where they think Hong Kong and elsewhere stand in terms of the development of green Finance. Christopher HUI, the Secretary for Financial Services and the Treasury of the HKSAR Government; Arthur YUEN, Deputy Chief Executive at the HKMA; Christine KUNG Head of International Affairs at the SFC; and Grace HUI, Head of Green and Sustainable Finance (Markets) at the HKEX, will talk about what the government, regulatory bodies and operators can do to accelerate green Finance in the city. These include the introduction of best practices, policies, green financial instruments, and many others. Next, we get to hear from experts From the non-governmental side, including MA Jun, the Chairman and President of the Hong Kong Green Finance Association; Albert IP, the Chairman of the World Green Organization; and Eric CORNUEL, the President of the European Foundation of Management Development. They will each share their views on how NGOs and educators play a facilitator role in green finance. Our very own Faculty will also share some cross-disciplinary insights on the subject. Professor Christine LOH, Chief Development Strategist of the Division of Environmental and Sustainability at HKUST and former Undersecretary for the Environment of the HKSAR Government will discuss how China's new development offers a path worth pursuing by all. Then the brilliant minds of our Finance Department will share their expertise on subjects, including green finance research written by Professor ZHANG Chu; how weather derivatives could be a Financial solution to manage climate-related risks by Professor CHEN Zhanhui and Professor George PANAYOTOV along with PhD student CHU Zhuang. And last but not least, how climate change related risk is now a systemic and unpriced risk, authored by Professor Entela BENZ-SALIASI. With all these valuable insights and studies, we hope to contribute to the conversation on what Hong Kong needs to do to further grow into the premier green finance center, not just within the city, but in the Greater Bay Area and beyond. Professor TAM Kar Yan Dean Blz@HKUST A Solution to a Sustainable Future hen it comes to green finance, government oversights and experts agree that Hong Kong still has a way to go until it catches up with its counterparts in the West. But that said, they also think that the industry has been moving forward by leaps and bounds during the last few years, noting that the HKSAR Government issued a Green Bond that was oversubscribed. To keep the momentum going, these same experts agree that the city will need to work on developing a green taxonomy, roll out incentives to subsidize, attract green funds and incubate green investors. The city must also ensure that institutional investors are knowledgeable about ESG, have an assessment capacity, and can develop more green products. 4 Biz@HKUST Biz@HKUST 5 // Cover // Thought Leader Christopher HUI, the Secretary for Financial Services and the Treasury, explains Hong Kong’s unique position in addressing two key pain points in the development of green finance. Hong Kong’s unique status as a comprehensive international financial center and its much-vaunted commercial strengths will be instrumental in helping the city develop as Asia’s green finance hub, says Christopher Hui, the Secretary for Financial Services and the Treasury of the Hong Kong Special Administrative Region Government. Due to its credible and full-fledged financial services, the city is uniquely poised to address two key pain points in the development of the green finance industry. These are quality assurance and standard setting, as well as awareness. “Greenwashing” is becoming a problem everywhere, but Hong Kong is in a good position to curb such behaviour by setting standards, by accreditation, and by developing a broad taxonomy. “This can be our strong point,” Hui says. Setting standards Major steps have been taken towards making this a reality over the past few years. The Hong Kong Quality Assurance Agency (HKQAA), for example, launched a Green Finance Certification Scheme in January 2018 to provide third-party conformity assessments for issuers on green debt instruments such as bonds and loans. City of Green It developed the scheme with reference to international and national standards on green finance, and later twice extended the coverage to include ESG and green funds. As of October 2020, 49 Pre-issuance Stage Certificates and 9 Post-issuance Stage Certificates were issued. Furthermore, the Green and Sustainable Finance Cross-Agency Steering Group was established in May 2020 to provide strategic direction on regulatory policy and market development with a view to elevating all ongoing cross-agency efforts. Hui says that this steering group is important for the development of standards and frameworks for green finance because there are no global standards. “Europe has its own framework, Asia has its own, the US has its own, so what’s Hong Kong’s?” he says. “If there was a global framework that everyone could use as a reference point, then we could improve upon it.” Establishing standards and a framework will promote the growth of the industry. “If you have a framework that allows for the comparison of different standards, that would be important,” he says. Along with government support, developing a green finance market also relies on input from the private sector and individuals. Setting examples As such, the HKSAR Government has been taking concrete steps to develop Hong Kong’s green finance industry through grant schemes and green bonds. In 2018, it launched the Green Bond Grant Scheme, and a year later rolled out the widely successful inaugural Government Green Bond issuance, which was four times oversubscribed. To continue to set an important benchmark for potential issuers in Hong Kong and in the region, the Government plans to issue green bonds totalling HKD$66 billion in the five years from 2020-2021, taking the market situation into account. It also signifies the Government’s support for sustainable development and its determination to combat climate change. “The primary objective of the Government Green Bond Programme (GGBP) is to promote the development of green finance in Hong Kong by encouraging entities to arrange financing of their green projects through our capital markets,” Hui says. Through the issuance of high-quality green bonds that are aligned with standards and guidelines which are widely accepted by investors worldwide, the program also seeks to develop a local green investor base. “GGBP would also be conducive to arousing the interest of the public and enhancing their knowledge and understanding of green bonds,” Hui says. This pain point needs a lot of addressing. “The issue to tackle is that many people think this is just a compliance issue, and that it’s simply about spending money. It’s regarded as a CSR activity that a company must be seen to address. But I think Hong Kong is suited to tackle this pain point,” Hui says. Firstly, because of Hong Kong’s status as a financial centre, its strong rule of law, and its ability to attract investment, many new companies are coming to the market offering green investments. Hui calls it a new dimension of financial services and green investors who specialize in buying green products. “Our ability to attract investors and our ability to expand and grow are generating a lot of interest and awareness in Hong Kong,” he says. “Through standard setting and the government’s sale of green bonds, we are adding to the momentum of Hong Kong’s move to becoming a green finance hub.” 6 Biz@HKUST Biz@HKUST 7 // Cover // Thought Leader // Through standard setting and the government’s sale of green bonds, we are adding to the momentum of Hong Kong’s move to becoming a green finance hub // Christopher Hui Secretary for Financial Services and the Treasury HKSAR Government Government Green Bond Programme The programme has a borrowing ceiling of HKD$100 billion. Its issuance proceeds will be credited to the Capital Works Reserve Fund to finance or refinance public work projects that provide environmental benefits and support the sustainable development of Hong Kong. The Green Bond Framework sets out how the green bond proceeds will be used to fund projects that will improve the environment and facilitate the transition to a low carbon economy. Pilot Bond Grant Scheme The three-year scheme was launched in May 2018 to encourage local, mainland, and overseas enterprises to issue bonds, including green bonds in Hong Kong. It will cover eligible enterprises issuing bonds in Hong Kong for the first time. Steps to Set Examples and Build Awareness FAST FACT Building awareness Next, there is growing awareness that there are externalities, social impacts, and health impacts related to climate change, and the government can’t just keep footing the bill. The public needs to be incentivized to take ownership of their environment and health, and play their part, he says. Hui argues that the pandemic has really driven this point home. “I don’t think green finance is taking a back seat anymore. COVID-19 has helped to bring an awareness to health matters and environmental risks. People used to think these matters didn’t relate to them, but now they realize that the impact is real, and it has hit very close to home,” he says. Hui says that companies should consider ESG and green finance as value creation, and not just a requirement or a responsibility. In terms of a company’s bottom line, it is important to think like a new generation who have experienced a real shift in values from previous generations. The new generation wants to make a positive impact, and work towards the betterment of the Earth and society. They are looking for companies that are doing the same. “Imagine how productive your workforce will be if your values are aligned with those of your workers,” he says. This rings true for investors, too, he adds. Hui says that green finance is taking root in Hong Kong, but forward thinking is required to make it a success. “For it to have longevity, companies must do more than the bare minimum,” he says. “It requires commitment and long-term vision to bring results.” 8 Biz@HKUST Biz@HKUST 9 // Cover // Thought Leader Arthur YUEN, Deputy Chief Executive of the Hong Kong Monetary Authority, talks about how the HKMA as a banking supervisor, an investor and a facilitator, drives and promotes sustainability in the banking sector and beyond. There is no doubt that climate change will become a global issue that needs to be tackled head-on in the coming decade. Every jurisdiction will have a responsibility to help contain the rise in global temperatures, and Hong Kong can play a big part in this, according to the Hong Kong Monetary Authority (HKMA). “Hong Kong is a major international finance center, and we have the infrastructure available to help promote green finance,” says Arthur Yuen, Deputy Chief Executive of the HKMA. “It is important for us to leverage that infrastructure if we believe that financial intermediation is a tool to promote climate change and sustainability concerns.” With Mainland China to its north, and its standing as home to a wide network of funding sources, Hong Kong is in a position to play an intermediary role in the process of greening the financial system. “China has many green projects and sustainability projects, and these will generate investment opportunities for the rest of the world. So Hong Kong needs to bridge the gap between the world and China,” Yuen says. It is expected that it will cost China around 100 trillion yuan (US$15 trillion) over the next three decades to meet the targets arising from its Investing in the Future recent commitment to become carbon neutral by 2060, according to research released by the Boston Consulting Group in October 2020. The Central Government will need to get private investors on board, and this is where investment opportunities will be huge. Yuen says that many investors will still prefer to go through Hong Kong. “We had better get prepared to take advantage of these opportunities,” Yuen says. Ready to help The HKMA is already poised to help, as a banking supervisor, an investor, and a facilitator. As a banking supervisor, the HKMA’s job is to ensure that banks are fully aware of the various financial risks posed by climate change. It must also give banks advice about managing these risks. It would be prudent for banks to consider how to manage their business in the light of these risks. Yuen points out that banks are already facing two specific risks, namely physical risks and transitional risks. In terms of physical risks, natural events like Typhoon Mangkhut can have a real effect on the value of collateral. For example, if a property is prone to typhoon damage, and banks are offering loans using that property as collateral, the risk is greater. Then comes a more long-term and more significant transitional risk. As society begins to move to a lower carbon footprint, the ensuing changes will require new technologies that may make some traditional industries obsolete. The plastics industry may be one of these industries, for instance. While some banks will benefit, the risk exposure remains high for those banks who are lending to companies who may become obsolete in the long run, and therefore won’t be able to repay their loans. “Banks are traditionally more capable of managing short-term risk than longer-term risk,” Yuen says. Moreover, translating such risk into real quantifiable terms is no easy feat. Banks need to translate these risks into monetary metrics that help them to understand the risk in dollars and cents. For banks to manage such risk using numbers, they need to find a way to quantify the physical and transitional risks and translate them into a manageable type of structure. This takes a lot of time. “As a banking supervisor, we have to make sure that the process is accelerated as quickly as possible,” Yuen says. A green point of view Yuen says that it is equally important that the supervisory process itself is attuned to a green point of view, and that must take the risks posed by climate change into consideration. In other words, considerations relating to sustainability need to be part of the supervisory process. The role that the HKMA plays as an investor is also important in promoting green finance. Through the management of the Exchange Fund, the HKMA can play an important role in promoting sustainable finance by adopting a responsible investment mandate. For example, Yuen says that if there are two projects on the go, and one is greener than the other, if the long-term risk adjusted return is similar, “we would give preference to the greener project, and this is our responsible investment mandate,” he says. Yuen says that the HKMA requires its external managers to comply with the 2016 SFC Principles of Responsible Ownership. This encourages investors to determine how best to meet their ownership responsibilities. The HKMA has been working with the International Finance Corporation to address climate change for several years. Its most 10 Biz@HKUST Biz@HKUST 11 // Cover // Thought Leader // China has many green projects and sustainability projects, and these will generate investment opportunities for the rest of the world // Arthur Yuen Deputy Chief Executive of the HKMA The Alliance for Green Commercial Banks The HKMA has signed a new partnership with the International Finance Corporation (IFC), a member of the World Bank Group, to encourage commercial banks in Asia to adopt strategies and targets to become greener. It is the first partner to work with the IFC on this initiative. As the founding member and first regional anchor for the Asia Chapter of the Alliance for Green Commercial Banks, the HKMA will serve as a hub for green finance among commercial banks in Asia. Measures to Support Green Finance Development In 2019, the HKMA announced three sets of measures to support and promote Hong Kong’s green finance development, including three phases to develop green and sustainable banking, support to responsible investment, and establishment of the Centre for Green Finance under the HKMA Infrastructure Financing Facilitation Office. Central Banks and Supervisors Network for Greening the Financial System The HKMA is a member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Members of the system contribute to the development of environment and climate risk management in the financial sector, as well as to mobilize mainstream finance to support the transition towards a sustainable economy. Measures to Drive Green Finance Locally and Globally FAST FACT recent venture, announced in November, is to encourage commercial banks in Asia to adopt strategies and targets which will enable them to become greener. “It’s an exciting project because of its regional perspective,” Yuen says. “It provides research capability insights into the green agenda, it provides guidance on building capacity, and it gives practical guides to commercial banks to make green finance and sustainable finance the core business going forward.” The HKMA also functions as a facilitator. Yuen says that the entire financial system in Hong Kong needs to acquire more information and knowledge about green finance. The HKMA can help to facilitate this process by undertaking more research and sharing its findings with the industry. It can inform about international trends and provide guidance. Universities play a role As an Advisory Council Member of the HKUST’s School of Business and Management, Yuen says this is where the expertise of universities like HKUST is needed, such as enhancing the risk modelling capacity. “We try to hit the biggest pain point of the industry while pushing a green and sustainable finance agenda,” he says. There are several pain points. The proliferation of standards is one, the lack of centralized data is another, and the lack of know-how and training in education systems is yet another. Yuen says that risk due to climate change is very different to traditional risk. It is more forward looking, it is longer term, and it is less quantifiable and less supported by research in terms of quantification. So the field needs people who have financial know-how as well as an understanding of climate and environmental science. That’s where an institution like HKUST, which has a focus on both science and business, can fill the gap. “We need modelling experts who can translate climate risks into financial risk models. I think we are facing a very big shortage of such experts globally,” Yuen says. 12 Biz@HKUST Biz@HKUST 13 // Cover // Thought Leader The Hong Kong Green Finance Association (HKGFA) promotes green finance principles in the region and helps position Hong Kong as an international green finance center. Its founder Dr MA Jun, a veteran economist, banker and leading advocate for green finance, talks about how industry forces should be gathered in Hong Kong, the Mainland and beyond in driving green investment. The robust development of green finance must be a joint effort across the Greater Bay Area (GBA), says Dr Ma Jun, Chairman and President of the Hong Kong Green Finance Association (HKGFA). Organizations like the HKGFA play an important role in bringing together the private sector, the government, and other regulators to develop green finance in Hong Kong. The goal of the HKGFA is to position Hong Kong as a leading international green finance hub by providing greater access and opportunities for Hong Kong’s financial institutions to participate in green transactions in Hong Kong, the Mainland, and in markets along the Belt and Road. The HKGFA is achieving this via seven working groups in key areas: green banking, green insurance, green bonds, ESG disclosure and integration, policy research and dissemination, Mainland-Hong Kong collaboration, and green Belt and Road initiatives. “One of our goals is to create a network by linking potential projects to potential funding,” Ma explains. “We can help facilitate some innovative green finance transactions, because that is not something that a single private sector player can do by itself. That’s because the process requires some changes in regulations and policies and some convening of resources, especially in regard to green standards, disclosure requirements, cross-border transactions, and capacity building. We can add value as an association by utilizing our convening power.” Ma is also a member of the Monetary Policy Committee of the People’s Bank of China, the Leading the Way Chairman of the Green Finance Committee of the China Society for Finance and Banking, and the Co-chair of the Steering Committee of the Green Investment Principles for the Belt & Road. He is passionate about addressing climate change, and believes that green finance can solve some of the pressing climate issues facing the world. Ma thinks that, via mobilizing private capital to participate in green investment, green finance can help achieve environmental remediation, fight climate change by enabling a carbon-neutral society and economy, and enhance resource utilization developing a circular economy. A strategic framework Ma’s conviction inspired him to form a taskforce to help develop a strategic framework for the Chinese central government to green its entire financial system in 2014-2015. The purpose was to encourage private capital to move away from resource-intensive and pollution-intensive investments towards green investments. While China had made good progress building a green economy by taking a top-down, government-led approach, and had the support of its citizens, it still needed financial backing from the private sector to fully realize this goal. China knows it can’t go at it alone, but neither can Hong Kong. This is why Ma believes that cross-border collaboration is a key to shifting China’s economy to carbon neutral. This will also help Hong Kong’s efforts to become a major international green finance center, he says. “Hong Kong’s strength is that it has an open market, where money moves in and out freely, and where international financial institutions and private sector finance have a strong presence,” Ma says. Because many regional headquarters of large global financial institutions are based in Hong Kong, the HKGFA can help to mobilize global green capital for green projects in both Hong Kong and the Mainland. The legal system in Hong Kong is also more conducive to fund raising, especially from international capital markets. “In the past years, with strong support from the SAR Government, Hong Kong has already developed one of the largest regional green bond markets in the world,” Ma says. But Ma points out that Hong Kong still has some way to go, as the city needs a few key elements to establish its international leadership in green finance. These include a taxonomy to define what is green, operational requirements for environmental and climate information disclosure, incentives to encourage green financing activities and incubate green asset managers, more sophisticated green products and analytical capacity for environmental and climate risk analysis, and a carbon trading mechanism. Regulators and asset managers should also work towards building a more solid ESG investment capacity within Hong Kong, he says. An advantageous position Despite these challenges, positioning Hong Kong as a regional green finance hub remains possible, as the city can serve local green finance demand as well as fuel the Mainland’s green strategy. “Hong Kong can lead in financial product innovation, but it will not necessarily lead in terms of the final demand, which must come from the real economy,” Ma says. Ma points to Guangzhou Auto, a joint-venture car manufacturer, as an example. The company was keen to green its supply chain, and went through a screening process that allowed it to pick environmentally friendly and socially responsible suppliers. It then turned to banks to provide low-cost funding to suppliers, with some interest subsidies from the Guangzhou Government. “This is how we organize green supply chain finance to promote the greening of the suppliers around a major buyer. Hong Kong doesn’t have this ecosystem as it doesn’t have a manufacturing base. But we can still provide financing, possible cheaper financing, and become a part of these green supply chains,” Ma says. 14 Biz@HKUST Biz@HKUST 15 // Cover // Thought Leader // China knows it can’t go at it alone, but neither can Hong Kong. This is why cross-border collaboration is a key to shifting China’s economy to carbon neutral // Dr Ma Jun Chairman and President of the HKGFA Founded in September 2018, the HKGFA creates a platform that offers channels and opportunities to facilitate the development of green finance and sustainable investments in Hong Kong and beyond. It aims to mobilize both public and private sectors resources and talents in developing green finance policies, to promote green finance business and product innovation within financial institutions. HKGFA’s main goal is to position Hong Kong as a leading international green finance hub by providing greater access and opportunities for Hong Kong’s financial institutions to participate in green financing transactions locally, in Mainland China and in markets along the Belt & Road. This is in line with the global trend of implementing the UN sustainable development goals and the Paris Agreement. About the HKGFA FAST FACT In recent months, Ma got the ball rolling for the Green Finance Alliance in the GBA. The Alliance aims to incubate green projects that will benefit the GBA by increasing the demand for green finance in Guangdong, and by extending green finance capabilities in Hong Kong and Macau. “Cross-border collaboration is very important for small economies and open markets like Hong Kong and Singapore,” Ma reiterates. “Hong Kong’s green finance services are largely for corporates in other places with different policy and regulatory environment and that’s why collaborative arrangements such as the new Alliance are important. The alliance can bring in government support from different localities, reduce information and regulatory barriers, and boost the confidence of participants.” As green finance takes hold in the region, Ma says there has been a welcome shift in attitude. Many businesses are starting to see the financial opportunities that it presents, and no longer view it as a cost or burden. That is a huge step forward. “China Industrial Bank, for example, has developed a green banking department, and that business has grown by nearly 30 percent per year. That is much faster than a regular banking business,” he says. Furthermore, the non-performing loan ratio related to green lending is only 0.4 percent in China, while it is about two percent for the Chinese banking industry as a whole. “It’s low risk, high growth and it brings more profitability. So why not do it?” Ma says. GBA carbon market and “Carbon Connect” Soon after Chinese President XI Jinping announced China’s carbon neutrality target by 2060, Chief Executive Carrie LAM of HKSAR Government also declared in November that Hong Kong would aim to achieve carbon neutrality by 2050. Carbon trading mechanism is a key instrument for implementing the zero carbon commitment. Ma believes that by including Hong Kong’s power, transport and building sectors into a carbon trading mechanism, it can enhance the efficiency and reduce the cost of decarbonization, compared with many other policy tools such as government subsidies. One of the new ideas that Ma proposed is Hong Kong should consider working with Guangdong and Macao to develop a unified carbon market for the Greater Bay Area. “If Hong Kong does it alone, such a carbon market will not have enough liquidity. Hong Kong should leverage the much larger emission and trading volumes in Guangdong and be part of the GBA carbon market”, Ma says. “Moreover, Hong Kong should aim to establish a ‘Carbon Connect’ mechanism, modelled after the ‘stock connect’ and ‘bond connect’, to allow international investors to participate in the GBA carbon market in a convenient way”, Ma adds. Ma thinks that Hong Kong needs to have “something new” for its green finance market, and the “next big thing” should be the carbon market and carbon connect. 16 Biz@HKUST Biz@HKUST 17 // Cover // Thought Leader To achieve a sustainable future, a huge investment from both public and private sectors will be needed. As a regulator of Hong Kong’s securities and futures markets, the Securities and Futures Commission (SFC) must closely monitor developments and think about how it can contribute to the process, says Christine KUNG, Head of International Affairs and Sustainable Finance of the SFC. Regulators play a part in the development of green finance in Hong Kong and the Greater Bay Area (GBA) because they are involved in the process of setting standards locally, regionally and internationally. With this in mind, the International Affairs and Sustainable Finance (IASF) Team of the SFC of Hong Kong has been working hard to roll out initiatives that will help Hong Kong develop into a hub for green and sustainable finance in Asia. According to Christine Kung, Head of IASF at the SFC, green finance is developing incredibly fast, and is showing no signs of slowing down. The momentum has increased since the announcement by President XI Jinping that China will strengthen its pledge under the Paris Agreement to achieve carbon neutrality before 2060. Kung says that for this to happen, substantial investments in infrastructure and projects will be necessary. Realistically, she says, such funds cannot come from the public sector alone, and we need the private sector to bridge that gap. It is therefore important that both public and private sectors work together to set standards and address issues. “The idea is to have finance flows which are consistent with the pathway towards lowering carbon emissions and climate-resilient development,” Kung says. Hong Kong is in the perfect position to make this happen. “With its involvement in global initiatives, the city is well positioned to intermediate between China and the rest of the world, in particular when it comes to green finance,” Kung says. Setting Standards As a regulator, the SFC must think about how it can contribute to the process locally and globally, and must closely monitor developments in the regulatory world. A hot topic Green finance is a hot topic. At the start of the year, the World Economic Forum released its latest Global Risk Report, identifying some of the risks threatening humanity’s existence. The top five risks were all related to the environment. Extreme climate events, along with the failure to adopt climate change mitigation and adapt to biodiversity loss, pose an existential threat to all life on earth. There is clear evidence that the environment has a direct impact on our food, water, society, and production lines. And we have seen these emerging risks could evolve into full-blown financially material business risks. Business leaders are now becoming aware that climate, and ESG sustainability, can have a tangible impact on their business, and that the impact goes both ways. So, green finance is rising on the agenda for both public and private sectors. The role of the SFC, which regulates Hong Kong’s securities and futures markets, is to work closely with the industry to set regulatory expectations, and to also examine risks from an investor protection angle. “We consider things like physical risks, as well as transition risks,” explains Kung. “Physical risks such as extreme climate can impact businesses, while transition risk is more to do with government policies and how that affects business decisions.” Disclosure is necessary Kung says that these issues can be surfaced through necessary disclosure, and that is one of the SFC’s focuses. The organization believes that only through consistent and comparable disclosure can proper information be provided to investors. Investors also need to be armed with the right information to make informed investment decisions. The regulator published its Strategic Framework for Green Finance in 2018. The framework focussed on several areas: enhancing disclosures for listed companies, investment products and ESG practices of asset managers, especially those relating to climate; facilitating the development of green or ESG-related investment products, supporting investor awareness and capacity building; and promoting Hong Kong as an international green finance centre. The SFC has its work cut out, given that a survey conducted last year showed that only 35 percent of asset managers consistently integrated ESG factors into their processes. “At the end of the survey, we decided we should continue the dialogue with asset managers about taking climate and ESG factors into account, given what’s happened internationally,” Kung says. Positive changes Investors are becoming more interested in investing in businesses that are committed to incorporating environmental and social considerations into their business decisions. According to Kung, ESG related funds increased significantly between 2019 and 2020, rising from 20 to 33. These numbers are expected to continue to rise rapidly. In March 2020, the SFC set up the Climate Change Technical Expert Group (TEG), comprising representatives from the asset management The SFC launched a consultation on proposed requirements for fund managers to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosures to meet investors’ growing demands for climate risk information and combat greenwashing. Under the proposals, the Fund Manager Code of Conduct would be amended and the SFC will set out expected baseline requirements and standards to facilitate fund managers’ compliance. “Addressing the threat of climate change and the associated risks is becoming a major priority on the global regulatory agenda," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "The proposed requirements will help ensure that fund managers properly handle climate-related risks and promote clear, comparable and high-quality disclosures to help investors make more informed decisions." "SFC consults on climate related risks in Fund" SFC website, Oct 29, 2020 18 Biz@HKUST Biz@HKUST 19 // Cover // Thought Leader education by delivering campaigns via a wide range of media. Educators also play a key role, Kung says. “Green finance is an interdisciplinary area that cuts across different disciplines and departments, and it is necessary to develop lateral thinking skills and to have all the experts working together,” she says. Kung recommends that educators continue to have an open mind, and think about collaborations that extend beyond Hong Kong. “Hong Kong actively participates in the international arena which can help to advance green finance in Hong Kong,” she says. // The role of the SFC which regulates Hong Kong’s securities and futures markets is to work closely with the industry to set regulatory expectations, and to also examine risks from an investor protection angle // Christine Kung Head of the International Affairs and Sustainable Finance at the SFC Green and Sustainable Finance Cross-Agency Steering Group The SFC and the HKMA have established a cross-agency steering group to coordinate the management of climate and environmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong, and to support the Government’s climate strategies. Members of the group include the Environment Bureau, the Financial Services and Treasury Bureau, Hong Kong Exchanges and Clearing Ltd, the Insurance Authority and the Mandatory Provident Fund Schemes Authority. International Organisation of Securities Commissions The SFC has been collaborating with authorities overseas with Julia Leung, the SFC’s Deputy CEO acting as Vice Chair of the Board-level Task Force on Sustainable Finance (STF), and co-chair of the STF workstream which is looking to address greenwashing and investor protection issues, as well as asset manager disclosures. The SFC also leads the IOSCO Asia-Pacific Regional Committee’s Green and Sustainable Finance Working Group. Network for Greening the Financial System The SFC is also involved in the network which aims to strengthen the global response that is required to meet the goals set out in the Paris agreement and to enhance the role of the financial system to manage risks and mobilize capital for green investments. Task Force on Climate-Related Financial Disclosures The task force develops recommendations for more effective climate-related disclosures that promote informed investment, credit and insurance underwriting decisions. This enables stakeholders to better understand the concentrations of carbon-related assets in the financial sector and their risks. SFC Participates in Various Green Finance Initiatives FAST FACT sector, information providers, standard-setting bodies and industry associations. The group would provide technical support to help the SFC formulate their regulatory response to manage climate change risks and provide practical guidance to the asset management industry. Kung says they are seeing the EU establishing many regulatory initiatives, and asset managers in Europe will need to make greater disclosures when the European Union’s Sustainable Finance Disclosure Regulation comes into force next year. Given ESG and green finance is relatively new, particularly in Asia, education of the investing public is necessary. The regulator’s Investor in Financial Education Council carries out investor 20 Biz@HKUST Biz@HKUST 21 // Cover // Thought Leader Grace HUI, Head of Green and Sustainable Finance at Hong Kong Exchanges and Clearing (HKEX), outlines what it takes for Hong Kong to become a leading city for green investment. Asia still has some way to go to catch up with Europe and the US when it comes to the green finance ecosystem. But even so, green finance is booming in the region. According to Grace Hui, Managing Director and Head of Green and Sustainable Finance at Hong Kong Exchanges and Clearing Limited (HKEX), the city has all the right ingredients to lead the green change in the region. The only way to go is up, she says. Hui believes that if the right set of regulatory standards is established, along with education, expertise, and a greater availability of ESG-related products, Hong Kong has what it takes to become the green finance hub of Asia. Moreover, Hui says that HKEX has a key role to play. “We have many talented finance professionals in Hong Kong, and we are a super-connector to China and the rest of the world, this makes us an important sustainability influencer,” she says. The first step is to set standards and ensure that there is sufficient disclosure, Hui says. Over the last seven years, HKEX has been working hard to provide an appropriate ESG reporting guide for listed companies. Because of the voluntary nature of the guide at first, companies did not actively participate. The Right Ingredients Since 2015, ESG reporting and disclosure became mandatory and after an upgrade in July 2020, companies must now address ESG issues at the board level. Hui says this is a step forward because listed companies now have to treat ESG reporting as more than a ‘tick-the-box’ exercise. It encourages companies to incorporate ESG risks and opportunities into their overall corporate strategies. “This is important because ESG is often a backward-looking process. The latest update has forced companies to think about what they are going to do in terms of environmental and social KPIs, targets, and so on,” she explains. “So the ESG Guide no longer contains ‘recommended disclosure’ – it only has two levels of disclosure obligations: mandatory disclosure requirements or ‘comply or explain’ provisions.” A giant leap Further to that, HKEX has taken a giant leap towards building Hong Kong’s sustainable and green finance ecosystem by introducing Asia’s first-of-its-kind Sustainable and Green Exchange (STAGE). The online portal is an information platform where investors can find sustainable, green, and social-investment products in one place. STAGE has four purposes. Firstly, to get all the sustainable products on to one page so that investors can find them easily. Secondly, it allows issuers to showcase what they have achieved in terms of ESG. Issuers can outline the purpose of their issuance (e.g. green bond framework) and show how the proceeds of the issuance were used and any resultant impact on the environment, or on society (e.g. post-issuance report). Thirdly, it allows investors to do due diligence and monitor their green investments. Fourthly, and perhaps most importantly, it is an education and advocacy platform for issuers and investors. “This information platform is an important way for us to bring issuers and investors together. We want to bridge the information gap,” says Hui. There is a huge knowledge gap that needs to be filled in Hong Kong. According to a recent Friends of the Earth survey, of 223 respondents surveyed, 82 percent were not knowledgeable about green finance, and 68 percent had never heard of ESG. This is disappointing, says Hui, noting that the HKSAR Government has been active in areas such as promoting the issuance of green bonds. The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have also worked hard to educate the public about green finance. The problem is that there is not a wide enough variety of green or sustainable investment products for, say retail investors to choose from. “We need more products to facilitate the knowledge in sustainable investing,” she says. Private sector to play a part Green finance is important to HKEX because it presents a business opportunity as well as a CSR opportunity. The large amount of financing that is needed to transition to a low-carbon economy means that funding from governments will not be enough, so the private sector will play a big part. Hui says the United Nations (UN) had suggested that US$5 trillion is needed annually just to meet the Sustainable Development Goals of the UN by 2030, and half of that must come from the private sector and donors. “This means more business opportunities for us,” says Hui. “If you look at the 2018 data from the Global Sustainable Investment Alliance, about US$30 trillion is in sustainable investments globally and only 0.8 percent of that is in Asia. So you can imagine the growth potential for Hong Kong and other parts of Asia. It’s a huge business opportunity for Hong Kong as an international finance centre and also for an international stock exchange like HKEX.” 22 Biz@HKUST Biz@HKUST 23 // Cover // Thought Leader signatories to the UN Principles for Responsible Investment – commonly practiced responsible investment approaches in terms of objectives includes “do no harm”. “The ‘do no harm’ would include not investing in tobacco companies, weapons or the coal industry. There are also other approaches such as positive screening, thematic or impact investing. I think we are heading towards mainstream sustainable investing. But we need more of a variety of investment products to help facilitate ESG integration activities,” she says. The future is bright for green finance. Green bonds have exploded in Hong Kong, and that market raised HK$75 billion in 2019, up from HK$2.4 billion in 2015. With China’s commitment to carbon neutrality by 2060, coupled with the fact that China has been one of the largest issuing nations of green bonds, “the only way is up,” Hui says. // The city [Hong Kong] has all the right ingredients to lead the green change in the region. The only way to go is up // Grace Hui Head of Green and Sustainable Finance at HKEX The Sustainable and Green Exchange (STAGE) A sustainable finance platform, the first of its kind in Asia, that promotes visibility, transparency and accessibility to a range of sustainable and green financial products. The goal is to provide investors with access to a comprehensive database of green investment options that are available on Hong Kong’s securities markets. It will also act as a valuable education and advocacy platform that promotes knowledge sharing and stakeholder engagement in sustainable finance. HKEX STAGE Green Finance Initiatives FAST FACT As for CSR, as a leading global exchange, and a member of the UN’s Sustainable Stock Exchange, HKEX wants to make a difference and play a role in managing climate change and making the world more sustainable. We want to do this by facilitating sustainable investments which involve accessibility and transparency. “We need to facilitate information flow between issuers and investors. At the moment, there are said to be certain barriers to investing in ESG, primarily because of the lack of comparable and credible ESG data and possible risk of greenwashing,” she says. “We have to find ways to address this and let investors help support issuers’ transition to more sustainable business practices.” Although it feels like there is still a long way to go, Hui says that Hong Kong is “getting there,” as more bodies like HKEX and the HKMA are making further moves towards more sustainable investing. Both HKEX and the HKMA are The Green Bond Endorsed Project Catalogue HKEX strongly supports the joint efforts of the three Mainland regulators in preparing the Green Bond Endorsed Project Catalogue. The purpose of the catalogue is to harmonise the Mainland’s green definitions and to align it with international standards and practices by excluding the utilization of fossil fuel-based energy in the catalogue. 24 Biz@HKUST Biz@HKUST 25 // Cover // Thought Leader The property and construction sectors can help green finance gain a foothold in Hong Kong. With his extensive experience in both the finance and property sectors, Albert IP, who is the new Chairman of the World Green Organization, an Independent Non-executive Director and a Sustainability Committee Member of New World Development Company Ltd, is connecting the dots between different stakeholders for a better future. For green finance to gain a firmer and wider foothold in Hong Kong, there needs to be continuous collaboration between companies, the government, banks and individuals. Such entities must work together to understand our environmental challenges, embrace IT and integrate it into their businesses. The property and construction industry can take the lead in this area, says Albert Ip, Chairman of the non-profit World Green Organization (WGO). “This is an ongoing process which takes time to sink into the mind and become natural for companies, banks and investors,” he says. Even though the uptake of Environmental, Social, Governance (ESG) and green finance in Hong Kong is in its early stages, the city is moving forward. Many major corporations have already taken the lead, and Ip thinks this is a good sign. “Green finance results from leadership, whether there is a top-down or bottom-up approach,” he says. Ip says that the property and construction industries can set an example by playing a key role in driving sustainability. “Buildings are responsible for close to 90 percent of Hong Kong’s overall electricity consumption. The environmental impact of construction, in terms of waste, noise and air pollution, is material,” says Ip, who is also a Sustainability Committee Member of New World Development Company Ltd and Power Assets Holdings Ltd. To address these concerns, many developers have started to certify new projects to local BEAM Plus or international LEED green building design standards. Such standards provide Concrete Results guidelines for green architecture, site selection, materials, and construction process. Guidelines for success These guidelines have concrete benefits. Tenants welcome such measures, so developers will be able to attract more tenants. Banks can play a part, too, by offering incentives such as lower interest rates to companies which comply with strict sustainability measures. “Costs involved in constructing green projects may be higher, as higher standards must be imposed to combat flooding and climate change issues. Lenders should be more willing to lend to such projects as a result of lower risk,” he says. Ip says that New World Development is an excellent example of how a property developer can lead the change to promote the transition to a low-carbon economy. The company raised its first green loan in 2018, followed by a number of green financing transactions in the city. Since then, other major corporate issuers have also raised similar transactions. This is in line with the objectives of WGO. The organization, established in 2012, focuses on environmental conservation and environmentally related livelihood and economic affairs. WGO is well known for establishing the largest Green Office Scheme in Hong Kong. The scheme engages more than 400 corporations to work towards improving their workplace through sustainability in energy, water, paper use reduction, as well as waste and carbon reduction. Ip believes that these initiatives, coupled with green loans and sustainability instruments, amount to a cost saving proposition. Savings to be made There are savings due to ongoing energy and water conservation initiatives. Green instruments such as sustainability linked loans may offer issuers a price reduction if certain conditions are met. Some of these conditions can include reducing energy consumption per square meter and waste to landfill litres/guest night for a hotel company, says Ip, CEO of Langham Hospitality Investments Limited (LHIL) until April 2019. LHIL raised a Sustainability Linked Loan in 2019, the first in Asia for a hotel company. It is becoming clear that businesses are realizing the benefits of green finance and the low-carbon economy. “Green finance offers many new tools to support businesses today, including green loans, green bonds, and sustainability linked instruments. These help businesses find new avenues to raise capital, and possibly lower borrowing cost,” says Ip. It is no surprise that businesses are becoming more interested in incorporating green financing into their corporate strategies and long-term plans for growth across the board. Looking at official figures, cumulative green bonds issuance in Hong Kong had reached US$26 billion as of May 2020, while the cumulative green bond issuance by HK-based entities had reached US$7.1 billion as of December 2019. Creating shared value Research conducted by Morgan Stanley Capital International in 2020 showed that the stock prices of ESG leaders amongst corporations outperformed laggards by 16.8 percent in the first quarter of 2020. Ip finds that the push for ESG to become a board level matter is exciting. As an Independent Non- Executive Director of New World Development, he is supportive of the company’s mission of “Creating Shared Value”, a call for stakeholder capitalism originated from a 2011 Harvard Business Review article by Michael Porter and Mark Kramer. Ip stresses the importance to stay competitive and resilient by addressing different stakeholders’ needs and thinking long-term. ESG indicators quantify companies’ nonfinancial performance and their effectiveness 26 Biz@HKUST Biz@HKUST 27 // Cover // Thought Leader // Businesses must take ownership of the situation and contribute more to fighting climate change // Albert Ip Chairman of the World Green Organization Independent Non-executive Director and a Sustainability Committee Member of New World Development Company Ltd Green Office Awards Labelling Scheme (GOALS) Established in 2013, the scheme helps offices and retailers to go green in eight stipulated areas of their operations. Offices have to demonstrate that they have made sufficient achievements in greening their workplace practices. If they are able to do so, they are awarded with the WGO’s Green Office Awards Level, Eco- Healthy Workplace label, and a certificate with the United Nations PRME logo. WGO UN Climate Finance and Sustainable Investing Conference (UNESCAP) The conference, organized by the WGO in collaboration with the United Nations Economic and Social Commission for Asia and the Pacific, brings together policymakers, private businesses, those in the financial sector, international organisations, and other relevant stakeholders, to discuss pressing issues concerning the promotion of climate-resilient investment to support Sustainable Development Goals (SDGs) and scale the Asia’s green capital market. Initiatives of WGO and Creating Shared Value FAST FACT of delivering on companies’ vision, mission and value, in addition to pure profitability. Creating shared value enhances sustainability in societal value. Companies that integrate ESG into their strategy and operations are able to address social and environmental issues with their assets and operations. Ip encourages more boards to consider ESG integration as a core business strategy. A new attitude “The new generation cares more about income equality, environment and climate change,” he says. “The younger generation’s attitude towards wealth will change, and they will expect a more supportive approach for environmentally friendly investment portfolios.” Ip feels that regardless of outcomes, businesses must take ownership of the situation and contribute more to fighting climate change. They should also take bold steps to support the global transition to a low carbon economy. “All sectors and stakeholders must work as partners to preserve our future,” he says. The Hong Kong government needs to do more to create an investor environment that is favourable to such goals, and should provide incentives to the private sector to make changes. One good example is the offer of different levels in gross floor area concessions for green and amenity features in domestic and non-domestic developments if they fulfil certain pre-requisites, Ip says. To institute these changes, it is necessary to have an engaged community which wants to build a sustainable lifestyle habit. WGO helps by collaborating with various organizations to increase awareness, and by working with different stakeholders, such as the Coca-Cola Foundation, to engage the public in large-scale programs like plastic bottle recycling and public education. As a Council Member of HKUST and an Advisory Council Board Member of its School of Business and Management, Ip has been playing a key advisory role in higher education development. To facilitate any behavioral change and nurture new talent for green finance, Ip says that our society requires a long-horizon timeframe to see the changes supported by a myriad of behavioral interventions and a young generation armed with interdisciplinary knowledge. Education is the bedrock of any sustainable society and a better future, he adds. 28 Biz@HKUST Biz@HKUST 29 // Cover // Thought Leader Educators play an important and unique role in developing green business. Eric CORNUEL, President of the European Foundation of Management Development (EFMD), explains why and how. When it comes to the development of green finance and green investments, individuals, businesses, and educators all play an important role. This is especially the case for business management schools, according to Professor Eric Cornuel, President of the European Foundation of Management Development (EFMD), a global non-profit accreditation body for business schools and corporate universities worldwide. “Business schools are directly responsible for future education leaders, managers, and entrepreneurs,” says Cornuel. “This segment of the population has an overwhelming responsibility for issues of social and environmental justice.” For this reason, he argues that business schools must take a clear stance on issues such as ethics, sustainability and responsibility, and raise their students’ awareness of the importance of ethical behavior, corporate responsibility, and a respect for sustainable development. Business schools can be role models Cornuel adds that business schools are now considering the relevance and impact of their Turning Green research output on the sustainable development of societies, and in this way can serve as role models. “Measuring the extent to which business schools act as good citizens and integrate these societal issues into their curricula, research, and their internal management practices, is very important,” Cornuel says. There is strong evidence that the development of green finance and green investment is a natural response to a shifting economic paradigm in which doing business is no longer simply about maximizing shareholder returns. A growing sector of the population thinks that businesses should have a broader impact on a larger circle of stakeholders. The release of an updated “Statement on the Purpose of a Corporation” from the Business Roundtable, an association of CEOs of US leading companies, was signed by more than 180 CEOs. They are committed to leading their companies for the benefit of all stakeholders. Rising green investments They aren’t the only ones. The Global Sustainable Investment Alliance reported that at least US$30.7 trillion of funds is being held in sustainable or green investments, and this number continues to rise as governments implement stricter sustainability targets. At an inter-governmental level, there have been significant moves to integrate sustainability into financial policy frameworks to mobilize finance for sustainable growth. Policies include channelling private investment to a climate-neutral economy, providing companies with guidance on how to report the impact of their businesses on the climate, and the establishment of a standard classification system and taxonomy for sustainable activities. Universities, too, are taking a stand. For example, Cambridge University in the UK has established a £3.5 billion endowment fund to enable it to divest from fossil fuels over the next decade. The university aims to ensure that, by 2038, any company in which it invests will have net-zero greenhouse gas emissions. “When it comes to corporate social responsibility and green finance, it is critical to distil tangible actions and outcomes from a mere corporate communications strategy,” says Cornuel. Ensuring a positive ESG impact Environmental, social and governance (ESG) considerations are now often tied to Corporate Social Responsibility (CSR), which is a framework that gives businesses an opportunity to enact change at an operational level, as well as via their corporate strategy. “Green finance is one of the tools which enables funding groups to channel investments to assets which are aligned with a positive ESG impact,” Cornuel says. There are greater transparency, accountability and performance indicators for this space, given that there is no unified measurement system. Because of the shift in rhetoric, businesses need to take ESG considerations seriously as part of their corporate identity. “The current generation of students want to work in companies that combine profits with purpose,” Cornuel says. “Students want to be engaged in the work that the company does. They want to feel proud of the organization, project, or initiative they contribute to. This is a significant change.” Turning back to business schools, should they play a part in fostering students to become leaders who can help to build a greener future? Business schools around the world need to instil a sustainable mindset in their students, says 30 Biz@HKUST Biz@HKUST 31 // Cover // Thought Leader Cornuel advises business schools to heed the Globally Responsible Leadership initiative “Management Education for the World” which highlights the need for a multi-level transformation of education systems. At an individual level, business schools should develop responsible leadership, while at an organizational level, there needs to be a shift to service the common good rather than focusing exclusively on the bottom line. Lastly, on a systemic level, management education should engage in the pro-active transformation of economic systems to improve social and environmental well-being. “From a holistic approach to pedagogy, to immersive projects with local businesses and communities, there is an ample space for schools and institutions to use their distinctiveness and make a positive impact on their environment,” Cornuel says. “Business cannot succeed in a world that fails, and nor can business education,” he says. // Business schools are directly responsible for future education leaders, managers and entrepreneurs, and this segment of the population has an overwhelming responsibility for issues of social and environmental justice // Eric Cornuel President The European Foundation of Management Development EFMD aims to contribute to the advancement of goals related to human rights, responsible management, ethics, corporate sustainability, inclusive economy, poverty alleviation, and the mitigation of climate change. Globally Responsible Leadership Initiative (GRLI) In 2003, EFMD signed a partnership agreement with the United Nations Global Compact and launched the Global Responsibility Invitation, which later became the GRLI. It is a deeply engaged international community that is purposed to promote globally responsible leadership. Made up of a working partnership of global networks, companies, and learning institutions, its ultimate measure is how much of an impact it can make as a whole. EFMD Quality Improvement System (EQUIS) An international accreditation system launched in 2013, EFMD became the first accreditation body to recognize responsible management issues in its accreditation standards. EFMD aims to be an active agent of change in the management development industry by placing issues of ethics, sustainability, and responsibility on the agenda. Business School Impact System (BSIS) A joint venture between EFMD and FINEGE, BSIS uses a data-driven system to identify the tangible and intangible values that a business school brings to its local environment. Part six of the BSIS assessment criteria focuses on societal impact, assessing contributions to CSR, sustainable development, environmental management, and the fostering of diversity. Promoting a Sustainable Future FAST FACT Cornuel. This amounts to more than just having an elective CSR course, he argues. “Ethics, sustainability and responsibility need to be fully ingrained in the school’s culture, leadership, operations, programmes, and research,” he says. The role of EFMD EFMD plays an active role in ensuring this happens through its stringent Quality Improvement System. This strongly advocates that social and environmental imperatives that must accompany business practices today. To receive accreditation, institutions and businesses must comply with a whole host of quality benchmarks and improvement processes. With 954 institutional members, and 30,000 management development professionals in 92 countries worldwide, it is hoping to effect change through its networks and events, its accreditation and development, as well as its international projects. A Role to Play by HKUST he successful development of green finance in Hong Kong also rests on the shoulders of educators and scholars, who must continue to nurture the right talent for this new industry. It has become obvious that green finance is an interdisciplinary subject that requires the knowledge of numerous subjects such as finance, investing, and environmental science. As such, HKUST plays an all-important role in ensuring that the right pools of talent are joining the industry, while making opportunities available to those who wish to upskill. The development of green finance will be a joint effort involving governments, society, professional bodies, and educators, and that is the crux of this series. 34 Biz@HKUST Biz@HKUST 35 // Cover // Insight By Professor Christine LOH Chief Development Strategist Division of Environment and Sustainability of HKUST A unique feature of the pandemic’s massive economic cost, in comparison to other global crises, is that it creates large shocks to demand and supply at the same time China’s pledge on September 22 to achieve carbon neutrality by 2060 was a major piece of good news for the world. Not only that, on September 30, China also called for biodiversity protection. Both announcements were made at the UN, signifying China will work within multilateral systems. The carbon neutrality commitment did not come out of the blue. Government think tanks, universities, and research institutions have been working for years to establish what China needs to do. It is now ‘show time’. Much more will be up for debate, and more decisions made, in the coming years now that the timeline and the absolute reduction target have been set. The Chinese authorities have been planning for change since former Premier WEN Jiabao’s famous criticism in 2007 that China’s economic path was “unbalanced, uncoordinated and unsustainable”. In 2012, China’s ruling party amended its party constitution to add “ecological progress” as a new pursuit. This gave the party as a whole, and party officials, clear direction that they have to put the environment on equal footing with economic growth. In 2013, the Chinese government issued the “Ten Measures to Fight Air Pollution”, which was followed in subsequent years by similar mandates on water pollution and soil pollution. Watershed protection and management has become a key pursuit, as has repairing polluted lands and restoring biodiversity. China has also launched various pilot schemes; one concerning emissions trading, as well as other trials that will shape policy in the foreseeable future, such as ecosystem value accounting. China’s constitutional mandate By 2018, the government was ready to amend the national Chinese Constitution. By adding “ecological civilization” as a constitutional mandate, the country’s political and policy frameworks were in place to put ecological health alongside economic and social developments. It should not be overlooked that the People’s Bank of China published the ground-breaking report, Establishing China’s Green Financial System, in 2015. This was one of the earliest comprehensive reports in the world by a central bank on why and how to reform the financial system in order to raise capital to achieve environmental goals. Significantly, this report was prepared together with the UN Environment Program, which meant China absorbed high-level international thinking in how to “green finance”. Green finance has become a shorthand description of directing capital towards zero-to-low-carbon projects and environmentally sustainable projects. The capital needed is enormous, as much of the world’s economic activities are China’s Carbon Neutrality Pledge: A New Development Agenda Viewed through the lens of decarbonization, China’s new development offers a path worth pursuing by all powered by high-carbon fossil fuels, which are the primary cause of global warming. The green transition needs to be policy-led, which means governments must play a decisive role. China’s way is to set mandatory targets within a legally enforceable regulatory framework which penalizes companies if they fail to meet their targets. By contrast, environmental regulation in free-market economies relies more on market incentives to achieve decarbonization goals. In either case, it is recognized that the market alone cannot turn the ship around without clear and consistent policy and incentives. A multidisciplinary challenge Indeed, green finance is one aspect of a multidisciplinary challenge, since it relates to a large range of actual investments across many sectors of business and markets. The policy reforms that are called for both nationally and internationally require efforts to internalise negative environmental externalities, reward such internalisation, and adjust risk perceptions to boost green investments. What does “internalizing externalities” mean? Infrastructure projects, such as renewable energy or waste-to-energy projects, involve long timeframes with multi-year projections of environmental impacts. At present, there is inadequate expertise built into the financial services industry to make such assessments. Assessments of green investments are still largely based on threshold financial rates of return. To mobilize large amounts of capital for green investment, governments and professionals need to find a way to augment these financial returns by incorporating non-financial or societal returns into total returns, such as lower climate change risks, reduced pollution, improved public health, and so on. There is a lot of innovative work to be done here. Environmental, Social and Governance (ESG) disclosure by listed companies is an example of an emerging trend to show investors how a company is managing such risks, including climate change-related risks. China’s preparations for adopting and implementing ecological civilization policies are well-documented, although the significance of this may not be fully understood by market participants. Within this context, China played a significant role in shepherding the Paris Agreement through the UN process in 2015 – the multilateral treaty for the countries of the world to avoid dangerous climate change by limiting global warming to below 2°C, and to pursue efforts to limit it to 1.5°C. In 2016, as the host country for the G20 governments, China made green finance the key topic of discussion. 36 Biz@HKUST Biz@HKUST 37 // Cover // Insight China’s new carbon neutrality pledge means it is looking at moving towards the 1.5°C limit – a very aggressive target for a country that is the world’s largest carbon emitter. The 14th Five Year Plan (2021-25), which is in gestation, will kick-start the early steps to achieve that goal. Indeed, every succeeding plan will chart the way towards carbon neutrality. A fast transition Essentially, China must replace coal with natural gas during a fast-transition away from high-to-lower-carbon fossil fuels, and then replace natural gas with renewable and nuclear sources. It must also develop new energy sources, such as hydrogen and bioenergy. China has to transform its electricity and industrial sector within the next 40 years. This is nothing short of a total economic and social revolution, since about 58% of China’s energy comes from coal. How much will it cost? According to a report released by a climate change think-tank at Tsinghua University after the pledge was announced, it could cost RMB174 trillion (about US$26 trillion) in total. The cost for transforming the energy and electricity sector is estimated to cost RMB138 trillion from 2020-50, or 2.6% of GDP annually. After lining up the decarbonization pathway in the next decade, China must reduce carbon emissions at 8% to 10% per year from 2030 onward. These are huge numbers by any measure. In order to greatly reduce petrol and diesel for vehicles, China will have to electrify transport at the same time, as well as practice a “circular economy” in production so that resources are reused and recycled. Hong Kong has its work cut out. It can shift from being an international finance centre to being Asia’s green finance hub. Going forward, Hong Kong has to digest and follow the relevant developments in China, as well as internationally, understand the respective regulatory Asian systems, and provide the intellectual and human resource talents to serve the “brown to green transition”. This requires the workforce to understand “sustainability 101” not only in science, engineering and nature conservation, but also in finance, accounting, planning, design and construction, professional services, and public administration. The younger generations are attracted to the environment and they want to innovate to dematerialize their lifestyles towards experiential richness and well-being. China’s new development agenda viewed through the lens of decarbonization offers a path worth pursuing by all. China pledged to become carbon neutral before 2060 during the UN General Assembly on September 22, 2020 ( Source: UN News ) C M Y CM MY CY CMY K 38 Biz@HKUST Biz@HKUST 39 // Cover // Insight By Professor ZHANG Chu Head of the Department of Finance and Director of the Center for Investing, HKUST Business School Financial institutions are playing an increasingly important role in promoting green technologies ESG, or Environmental, Social, and Governance, has become a hot topic recently. In this article I summarize what I have learned about environmental risks from various sources, and provide my thoughts on academic research focusing on green finance. These thoughts reflect my limited exposure to the subject. Environmental Risks Environmental disasters can be understood conceptually as having two extremes in terms of their causes. One cause is mostly natural, while the other is the result of human behavior. An example of the former is an earthquake, and an example of the latter is the radioactive contamination resulting from nuclear power plants. The incidents in Chernobyl, Ukraine in 1986, and in Fukushima, Japan, in 2011, caused catastrophic damage. Another example of the latter is an oil spill. Such spills occurred frequently in the last century, especially in 1991 during the Gulf War. A recent incident was caused by British Petroleum (BP) in the Gulf of Mexico in 2010. Most environmental disasters exist between two extremes of a wide spectrum. Wildlife poaching and excessive deforestation have resulted in huge losses in biodiversity and the deterioration of the ecosystem, upon which human welfare relies. Scientists have depicted a bleak picture for the near future, and called for immediate action. “It is not about saving our planet. It is about saving ourselves,” said BBC broadcaster and natural historian Sir David Attenborough in 2020. Widespread environmental damage caused by human activity has been traced to the greenhouse effect of carbon dioxide emission. The atmospheric concentration of carbon dioxide has increased 45 percent from 280 parts-per-million (ppm) in 1750, when the industrial revolution began, to 415 ppm in 2019. Much of the rise has been attributed to the combustion of fossil fuels (coal, petroleum and natural gas). The signatory nations of the Paris Agreement have been working on research, development, and deployment of green (low-carbon energy) technologies around the clock in order to achieve the goal of carbon neutrality, or net-zero, by 2050, to keep global warming at bay. Green finance Continued environmental pollution is one example of market failure. The traditional view of dealing with market failures is to rely on government through regulations and taxes. Problems like carbon dioxide emissions will need to be solved by the governments of virtually all the world’s nations working collectively. The challenges are obvious, as green technologies are costly to develop, and different nations are in different stages of development, Research Responsibilities Green finance research: More than an opportunity and in different positions in the worldwide production chain, so the incentive for a free ride is high. Most industrialized nations have pledged to achieve net-zero emissions by 2050. China, the largest carbon-emitting nation, also recently promised to reach net-zero by 2060. But the US, the second largest nation in terms of carbon emissions, has been wavering in its membership with the Paris Agreement and the nation has not made a commitment towards achieving carbon neutrality. The job of reducing carbon emissions has been left to corporate executives. Fortunately, some of them are conscientious about environmental issues, and have voluntarily adopted costly green technologies which may generate short-term losses. Many corporate executives are forward-looking enough to understand that green technologies are the future. They realize that a penalty for carbon emissions will be established sooner or later, and that investment is irreversible or partially irreversible. Many companies are making investments in green technologies even though they are not profitable at the current regulatory settings. Financial institutions are playing an increasingly important role in promoting green technologies. Insurance companies suffer directly from catastrophic environmental disasters. Investment companies such as mutual funds and hedge funds are holding nontrivial shares of the so-called stranded assets which are vulnerable to the potential future regulatory changes related to environment protection. Financial institutions are in advantageous positions in driving green technology, as many of their top executives also sit on the boards of directors of manufacturing companies, where they can exert direct influence on investments to ensure they are socially responsible. The transition to green technology often requires financing, and green bonds and loans have been the brightest points of the primary fixed-income markets in recent years, although their share is still small. Green finance research Until recently, green finance research by finance academics remained “an inconvenient void” (Hong, Karolyi and Scheinkman 2020). In economics, Nordhaus (1977) started his pioneering work on the carbon-dioxide problem in mid-1970s, and created a subfield of economics known as environmental economics. This was eventually recognized by mainstream economics with the awarding of the 2018 Nobel Prize. Finance researchers, however, had by and large been watching from the sidelines. In 2017, the editors of The Review of Financial Studies, one of the top-three finance journals, called for a special issue on climate finance in a Registered Reports (RR) format.1 It drew 106 submissions, nine of which were selected by the editors based on the review committee’s recommendations.2 1. In the RR format, authors submit a research plan that designs an experiment, outlines the data to be collected, and describes potential interpretations of what findings may come; reviewers judge the proposed plan on its merit and not on the basis of the findings; and editors offer in-principle acceptance of the paper before final results are known. The goal of RRs is to encourage research in new, important, but risky areas, eliminating concerns of having negative or non-results. 2. One of the 9 selected papers was co-authored by then Finance Department colleague Darwin Choi. Another Finance Department colleague, Prof. Jialin Yu, served on the review committee (not responsible for the selection of Choi’s paper, however). 40 Biz@HKUST Biz@HKUST 41 // Cover // Insight A bulk of the emergent green finance research focuses on issues related to hedging environmental risks. The subject ranges from optimal portfolio decisions to derivative trading with added environmental risk factors. That’s no surprise, as this is where financial economists do their best work, and these subjects are the low-hanging fruits among all the potential ones. While environmental risks have special features that are not usually taken note of in existing theory, the framework already exists, so it’s conceptually straightforward to crack the problems, although these problems are still technically challenging. One strand of green finance research addresses a classic question in empirical asset pricing literature. In terms of financial assets, is environmental risk priced so that investors who bear higher risks will earn higher returns? The results are mixed, as can be imagined. First, they may depend on the sample period, as the question is tantamount to when the environmental risks have been recognized by the market. Second, they may also depend on which type of technology is regarded to be riskier: green technology and brown (dirty) technology, with regard to the uncertainty of green technology policies implemented by governments. There might be some dimensions in which environmental risks do not resemble other financial risks. Rational expectations of the ESG movement now could not have been formed decades ago. Sorting out the conceptual differences is important before cranking out empirical results. There are many unexplored research areas in green finance, especially ones with normative features, like those in environmental economics. Most financial economists working on the empirical side used to document what happened in the past as passive observers. In order to exert influence on the real world and to sway corporate decisions towards adopting green technologies, we will need to think more actively on modeling discount factors that take the future evolution of carbon emission prices into account. These research areas may require us to get outside our comfort zones and to think outside the box. There has been a wide range of applied research into green finance by practitioners. Various ESG-scoring systems have been designed by different institutions. Academic researchers are in an impartial position to design green finance criteria to consolidate and reconcile distinct scores. Such consolidation and reconciliation require rigorous research to support them. Incentive compatible mechanisms are also essential in order to weed out “greenwashing,” a term for opportunistic behavior which takes advantage of green finance schemes. Conclusions In short, green finance has everything to do with economics and finance. Green finance research not only provides an opportunity for us to expand our research scope, it is also an inescapable responsibility. The Department of Finance at HKUST is proud to be making its contribution to this important area that benefits society at large. Reference Attenborough, D. 2020, David Attenborough: A Life on Our Planet, BBC Television. Hong,H., Karolyi, G.A. and Scheinkman,J. 2020, Climate Finance. The Review of Financial Studies, 33, 1011-1023. Nordhaus,W. D., 1977. Economic growth and climate: The carbon-dioxide problem. American Economic Review 67, 341–46. Nordhaus, W.D., 2019. Climate change: The ultimate challenge for economics. American Economic Review 109, 1991–2014. Weitzman, M. L. 2009. On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics 91:1–19. Facebook: hkustmfin Instagram: hkustmfin WeChat ID: hkustmfin 港科大金融学理学硕士 Application Deadline Full-time Mode: Part-time Mode: 1 February 2021 15 February 2021 Admissions operate in multiple phases and on a rolling basis. We recommend that non-local applicants apply as early as possible to allow sufficient time for student visas, personal preparations and arrival in Hong Kong. 42 Biz@HKUST Biz@HKUST 43 // Cover // Insight By Assistant Professor CHEN Zhanhui and George PANAYOTOV, and PhD student CHU Zhuang Department of Finance at HKUST Business School Derivatives contracts will need to be improved to reflect the changes in environmental standards Climate change threatens human societies with long-term catastrophic consequences. These threats must be addressed immediately. A delayed response to climate change will lead to further deterioration and a greater chance of irreversible and catastrophic damage. In this article, we discuss the possibility of using weather derivatives to manage climate-related risks. 1. Diverse climate risks Climate risks are diverse and complex, and are typically divided into physical and transitional risks. Physical risks arise from the direct material, operational, or programmatic impacts of climate shocks on economic activities, and the corresponding impacts on asset performance. Companies that face physical risks may incur direct climate-related costs due to extreme weather events or a rise in sea level. For example, insurance companies are exposed to higher losses from insured properties in coastal areas, while agricultural producers are exposed to extreme weather conditions. Transition risks are associated with the uncertain financial impact of a transition to a net-zero emissions economy. These risks stem from policy changes, technological advances, and changes in householder preferences and social norms, among others. For example, fossil fuel firms can be adversely impacted by carbon pricing or restrictions on carbon emissions. Technological progress and policy changes relating to climate change may also threaten the existing business models of some corporations - for example, electric or fuel-cell-powered vehicles could disrupt the traditional automobile industry. Climate-related physical and transitional risks have affected, or are expected to affect, almost all aspects of the economy. The severity of these climate risks depends on the time span, geographic location, industry sector, and relevant climate mitigation and adaptation moves. If these risks are misunderstood and inadequately managed, they may affect financial assets and threaten the functionalities of the financial system. Furthermore, climate-related risks affect disproportionately low- and middle-income communities, causing A Change in the Weather environmental injustice and undermining social welfare. In sum, the physical and transitional risks due to climate changes and weather conditions present unique challenges which require innovative solutions. Specifically designed derivatives can be among the tools that help to address such challenges. 2. Existing climate-related derivatives Derivatives have been used to manage some climate-related risks for over 20 years. Various over-the-counter (OTC) and exchange-traded climate-related derivatives are currently employed by agricultural, energy and metals market participants, as well as financial institutions. Existing tools include traditional weather derivatives, electricity futures, and relatively new tools such as ESG futures and carbon derivatives based on equity indices. Weather derivatives that help to reduce the risk associated with adverse or unexpected weather conditions have been traded since 1996. The payoff of a weather derivative usually depends on an underlying weather index, such as measures of rainfall, temperature, humidity, or snowfall. Different from the traditional financial markets, the weather derivatives market is incomplete because the underlying assets cannot be stored. Today, weather derivatives are mainly used by companies for hedging purposes to minimize the adverse impacts by unconventional weather, or for speculative purposes by hedge funds and others who are willing to take advantage of these volatile markets. It is clear, however, that these existing derivatives are not designed to manage global climate risks. Instead, they mostly allow risk sharing and the shifting of these risks to market participants who are willing, or better equipped, to handle them. Therefore, a different type of derivative is needed to address the global climate challenge. For example, innovative ESG futures products have been developed recently to address this challenge more directly. ESG ETF and index futures have been actively traded in the recent years, with growing trading volumes and open interest. In the first quarter of 2020, US$45.6 billion flowed globally into ESG funds (Morningstar, 2020). The further expansion of such derivatives products depends on the continued growth of ESG funds and the decreasing costs. 3. Challenges in derivative design and data issues Current weather derivatives face several limitations. First, most weather futures and options listed on exchanges are based on weather indexes which utilize aggregate catastrophic and non-catastrophic weather data from a specific location or region. Although these products can be helpful to manage local exposure to weather-related risks, they cannot address the broader impact of climate risks. Second, current weather derivatives are not very liquid. Investors are reluctant to actively participate in the market, because it is challenging to accurately model potential weather variables and price weather derivatives. Investors understand little about the weather derivatives market and the benefits it can provide. Third, the availability of quality weather data also limits the development of weather derivatives. Reliable and trustworthy data are necessary to measure the environmental attributes and characteristics of the related value chain to design weather derivatives. The ability to accurately quantify climate risk is critical for financial solutions ranging from assessing loan risks to pricing derivatives and developing sustainable financial products. In order to provide reliable, consistent, and comparable data, investors can rely on climate data platforms and climate financial technology solutions. A climate finance laboratory can help centralize climate risk data and analysis, and design innovative financial products. Recently, private firms like MSCI and Trucost have Weather derivativas could be a financial solution to manage climate-related risks 44 Biz@HKUST Biz@HKUST 45 // Cover // Insight been exploring new ways to collect, process, and transmit lifecycle data sets to reveal the market value and risks associated with asset-level environmental characteristics. 4. The promise of climate-related derivatives Given the high demand for financial products to manage climate risk increases, derivatives exchanges are likely to expand, including ways to improve existing products and promoting new products. Derivatives exchanges are seeking to incorporate sustainability related and climate-related attributes into existing contracts. Firms and consumers are becoming increasingly concerned about the sustainability of the products that they make and consume. Therefore, firms want to monitor and better understand their supply chain in order to meet certain sustainability standards. As a result, derivatives contracts will need to be improved to reflect the changes in environmental standards. For example, the recent transition from high-sulfur fuel oil (HSFO) to low-sulfur fuel oil (LSFO) (to comply with the terms of the United Nations International Maritime Organization’s 2020 international agreement) calls for changes in existing derivatives. More recently, some OTC swap contracts have been modified to include new sustainability incentive mechanisms. Reflected first in OTC interest swaps in August 2019, and then in October 2019 in foreign exchange forward swaps, this mechanism reduces one counterparty’s payment in an event that it achieves certain pre-specified sustainability performance target. If applied across derivatives, this mechanism could provide market participants with a financial incentive to improve environmental performance. New futures contracts can also be developed to manage risks in wind and solar power generation, transmission and storage. Electricity prices are usually volatile, which poses challenges for smaller market participants who provide renewable energy. Currently, it is also difficult to receive funding for renewable energy power generation due to the inability to effectively hedge. New financial products would greatly improve the ability of power market participants to manage risks and stimulate the renewable energy market. 5. Conclusion To conclude, we see the potential of using weather derivatives as a financial solution to manage climate-related risks, provide economic incentive to address climate challenges, and improve social equality and welfare. Nevertheless, the further growth and functioning of weather derivatives markets rely on the continuous awareness of climate risk, quality weather data and modelling, and cooperation among various stakeholders. Reference Alexandridis, A., & Zapranis, A. D. (2012). Weather derivatives: modeling and pricing weather-related risk. Springer Science & Business Media. Bank for International Settlements (2020). The green swan. U.S. Commodity Futures Trading Commission (2020). Managing Climate Risk in the US Financial System. Morningstar (2020). Global Sustainable Fund Flows. 46 Biz@HKUST Biz@HKUST 47 // Cover // Insight By Professor Entela BENZ-SALIASI CEO and Co-founder of Intensel* Adjunct Associate Professor, Department of Finance at HKUST Business School The big question is whether climate risk is priced into a property valuation Risk related to climate change is a systematic and unpriced risk. It is the biggest threat to business and society today. Losses related to the climate are now four times higher than in 1980s. According to Aon, 2019 losses reached US$232 billion, and they are projected to increase fast at 30% per year. More importantly, only US$71 billion of that is insured, leaving US$161 billion as a direct loss to taxpayers and business1. This is the main reason why regulators are now pushing hard for mandatory disclosure on climate risk. A series of countries have now introduced clear disclosure requirements which will target the biggest players in each country, especially in the financial sector where these risks concentrate. Closer to home, typhoons and storm surges, that is, strong winds and coastal flooding, are the main culprits when it comes to damage in the HKSAR. According to research from the Environmental Bureau of Hong Kong, an extreme flooding disaster may affect the low-lying area of Hong Kong every 5 to 10 years if the sea level rises by 3.5 meters in 20402. As per the report, Hong Kong will experience long wet summers with heavy rainfall. All this is in addition to more frequent and more severe typhoons. As a consequence, buildings and infrastructure will be under additional stress. Super-typhoon Manghut caused HK$3.1 billion3 in insurance claims (90% claims on property damage alone), a figure that does not account for taxpayers’ money and the losses of SMEs. It is therefore important for both the asset owner and the government to develop new, greener, and stronger designs to withstand potential losses. The 2019 report from Geophy4 placed Hong Kong’s US$110 billion worth of REITs at the highest level of risk, given the exposure of very expensive real-estate market valuations to coastal flooding. For example, 25% of Sun Hung Kai Properties, at a value of US$56 billion, is classified as high risk. Other variables are important It is important to explain that economic losses caused by climate events such as typhoons, storm surges, floods, and so on, are not just a function of climate risk. The losses depend on two other equally important variables, which are the economic activity generated at that location, and the country’s level of preparedness to protect against climate events. The economic activity itself is a function of GDP, inflation, asset valuation, as well as a function of socioeconomic factors such as urbanization, population, and so on. As per the third dimension, the country level of preparedness determines potential losses. It is intuitive to assume that countries with higher GDP have the best infrastructure in place to mitigate climate risk. For example, China, Vietnam, Indonesia, and the Philippines top the ranking on climate related risks, especially given the exposure to typhoons and rainfall and river flood risks. Singapore has the least amount of climate risk although it does have exposure to rising sea levels. However, once we factor in resilience, that is, the country’s Risking it All We lack a mechanism that can measure climate risk and translate it into financial risk. That must change. preparedness to deal with climate risk, China’s climate value risk drops below that of Indonesia, Vietnam, and the Philippines. The same logic applies when analyzing two locations which have equal exposure to risk but different levels of activity and urbanization. In other words, we should by no means limit ourselves to climate risk without taking the exposure and the vulnerability of the asset in that given location into account. Moving beyond theory and high-level concept, climate risk is mispriced, and mostly not a factor of business decisions in company valuations. We therefore lack the main mechanism, that is, the channel that will measure and translate climate risk into financial risk. Too few enablers We have very few enablers relevant to climate risk. This is because climate risk solutions rely on deep climate science and financial modelling, as well as big data and the power of supercomputers. Without strong financial support from government, business, and society, these are difficult solutions to bring to the market. What does a climate-risk solution look like? Let’s take a real estate company investing in a specific location. The climate-risk solution company will assess various risks, such as storm surges from typhoons, flooding by rainfall, flooding from a river, extreme temperatures, landslides, extreme rain, and so on. From the figure below, one can see that near-water locations have a high risk (red) while others have a low risk (white) even if they are within a 1-kilometer area. The big question is whether climate risk is priced into a property valuation. The answer is simple. It is not, and the reason is lack of climate risk information. But if the data is available, it is simply not smart to buy or develop a property that will be frequently inundated by problems by 2030. Ten years might seem like a long period, but once climate risk data is delivered to the market, repricing will be immediate. In Florida, a recent study5 indicates that coastal properties already dropped by 5% in value since 2018, purely due to coastal flooding concerns. By 2045, billions of dollars in property will be destroyed due to rising sea levels, according to US federal mortgage giant Freddie Mac6. The above analysis shows that the Central district of Hong Kong is prone to high flooding risks related to extreme rainfall and storm surges. Taking account of the infrastructure, specifically the drainage system, many buildings such as Exchange Square, the International Finance Center, and so on, are at high risk. Given the level of economic activity generated in this area, it is important to include climate risk in the core of risk management strategies. Reference 1. Weather, Climate & Catastrophe Insight, 2019, AON 2. Hong Kong Climate Change Report 2015, Environmental Bureau 3. Hong Kong Maritime Hub: “Hong Kong insurers recount the cost of typhoon Mangkhut”, Aug 2, 2019 4. Climate Risk, Real Estate, and the Bottom Line, Geophy 2019 5. Neglected No More: Housing Markets, Mortgage Lending, and Sea Level Rise, Benjamin J. Keys & Philip Mulder, NBER 2020 6. New York Times: “Florida Sees Signals of a Climate- Driven Housing Crisis:, Oct 12, 2020 *Intensel, a startup that provide climate risk analytics is able to address concerns related to climate risk as well as the climate value at risk not just for Hong Kong and Asia, but also globally. Intensel is focused on the application of AI, Machine Learning, and Geospatial Technologies in hazard modelling at granular level along with the development of first-of-its-kind ready-to-use Software as a Service (SaaS) platform to provide climate risk intelligence to potential clients. Super typhoon Mangkhut caused large scale damages around the city in 2018. 48 Biz@HKUST Biz@HKUST 49 // Cover // Insight Accurate estimates are necessary Unlike ESG, climate-risk estimates must be granular and accurate. That means we simply cannot work with proxies or generalizations. For example, we analyzed a Shanghai-based property and found that despite being near the river, the flood risk was low, due to the property’s elevation. Nonetheless, by 2050, under a business-as-usual scenario, this property, like many in Shanghai, will be subject to typhoon winds reaching 279km/h, and will incur significant damage, and also business interruption. These future loss projections, given their likelihood, should be part of business strategies and property valuations. Last but not least, extreme temperatures must be considered. Many Asian cities will experience a big temperature increase during the summer months. That will require more energy use, which will result in significantly more electricity costs, and a higher carbon footprint. A smart company will start cooling efficiency and energy efficiency measures now, before it is too late. Only stress-tests scenarios and forward analysis can reveal the extent of climate risk and any opportunities resulting from it. The other point we need to clarify, not least to answer climate sceptics, is the accuracy of the predictions. Climate science is very complex, as it consists of an ensemble of models with a high degree of interdependency. Hence the accuracy or prediction is, and will always be, challenging. But so is the asset pricing. No one can predict the next crisis, neither the timing nor the magnitude. The best we can achieve is a rough estimate. Similarly, we cannot expect to perfectly predict what will happen in 2030 in terms of climate change. But there is a high volume of research which provides some estimates on what climate change in 2030 might look like should CO2 emissions and equivalents continue down a certain path. Each path has a probability that is also time variable. We will probably not experience a 1.5 degree rise in temperature, and will have to deal with a much more severe reality of a rise of 2 to 3 degrees by 2100. The implications are existential for our society, let alone the economy. In a nutshell, we should not focus too much on one scenario, but should consider a variety of possible scenarios. That is why it is crucial to prepare a forward-looking analysis with a stress-test like the one presented below. Climate risk is a real risk, but it also offers immense opportunities. Those who have the data and the information come out on top, and ride the trend. Hopefully governments will learn to lead, and look beyond a four-year to five-year plan. Climate solutions should not be a privilege of those who can afford them, they should help the economy and society as a whole. Figure 1: Stress-tests for a HK based property, Intensel Limited 2020 50 Biz@HKUST Biz@HKUST 51 // Feature 2002 & 2003 Kellogg-HKUST Executive MBA 1998 1st Joint EMBA in Asia Top Ten 2007 2009 2011 2010 2012 2016 2018 2013 2017 Sets Unprecedented Record of World #1 TEN TIMES FOR According to the Non-local Higher and Professional Education (Regulation) Ordinance, the Kellogg-HKUST EMBA program is an exempted course. It is a matter of discretion for individual employers to recognize any qualification to which this course may lead. Source: Financial Times Global EMBA Rankings 52 Biz@HKUST Biz@HKUST 53 // Feature Rise and Shine Three MSc Programs Amongst the Top in the Asia Pacific Despite the challenging times, our faculty and programs have received continued recognition and accolades. These reflect their uncompromising spirit and contributions to business education and their professional fields. Three HKUST MSc programs triumph with leading positions in the Asia Pacific Region in the QS Business Masters Rankings 2021 NSFC Excellent Young Scientist Scheme Best Phenomenon-based Paper Award Global Influnence Eduniversal Ranking 2020 Best Management Science Paper Editor of the Journal of Pension Economics and Finance Associate Editor of RAND Journal of Economics Fellow of the Association for Psychological Science Fellow of the World Economic Forum Global Future Council Associate Professor YU Man from the Department of Information Systems, Business Statistics and Operations Management (ISOM) has been awarded the 2020 NSFC Excellent Young Scientist Scheme (EYS). Organized by the National Natural Science Foundation of China, the scheme is one of the most prestigious honors for young scientists in China. Professor LI J.T., Chair Professor of the Management Department and Lee Quo Wei Professor of Business, has received the Best Phenomenon-based Paper Award organized by the Journal of World Business. His coauthored paper “The belt and road initiative, cultural friction and ethnicity: Their effects on the export performance of SMEs in China” was selected as the first runner-up. Associate Professor WANG Jing’s paper “Female Hiring Bias Revealed in Online Job Markets” has won the INFORMS ISS Best Management Science Paper in Information Systems (IS). This is a prestigious award given to only one of the many papers published in Management Science (IS) every year. Meanwhile, she has been appointed as Associate Editor of the editorial board for the MIS Quarterly - one of the top two journals in IS. Professor Albert PARK, Head and Chair Professor of the Department of Economics, has been appointed Editor of the Journal of Pension Economics and Finance (JPEF). JPEF focuses exclusively on the economics and finance of pensions and retirement incomes. Associate Professor HUA Xinyu has been appointed as Associate Editor of RAND Journal of Economics. Widely known as the top journal in the field of industrial organizations, the journal specializes in the behavior of regulated industries, the economic analysis of organizations, and more generally, applied microeconomics. Associate Professor Melody CHAO of the Department of Management has been selected as a fellow of the Association for Psychological Science (APS). APS is a leading international organization dedicated to advancing scientific psychology across disciplinary and geographic borders. Deans of the best 1,000 business schools in 154 countries have recommended the HKUST Business School as one of the Top-3 Business Schools in Far East Asia. According to the Eduniversal Business Schools Ranking 2020, the HKUST Business School was selected as the Top Business School in Hong Kong because of its strong global influence, and one of the Top-3 Business Schools in Far East Asia. Headquartered in Paris, Eduniversal is a global ranking and rating agency specializing in higher education. Every year, it rates the top 1,000 business schools in 154 countries according to their international reputation, at a national and global level, and by nine geographical zones. Assistant Professor LEE Byoungchan has been selected as a fellow of the World Economic Forum Global Future Council on the New Agenda for Fiscal and Monetary Policy from October 2020 to September 2021. The council focuses on developing new thinking on the monetary and fiscal policy tools to support an inclusive economy – a global change under the current unprecedented economic situation. Master of Science in Finance Recognized as No.1 - Master of Finance Program in the Asia Pacific for the 4th consecutive year in the QS Business Masters Rankings 2021, the program emerged from the integration of the MSc in Investment Management and MSc in Financial Analysis programs. Master of Science in Global Operations The QS Business Master Rankings has newly introduced a new Masters ranking in Supply Chain Management to its portfolio in 2021. Recognized as No. 1 in the Asia Pacific region in the first launch of the QS Business Masters Rankings: Supply Chain Management 2021, the program offers the M2M Double Degree Master’s option with Yale and FGV EAESP. It allows students to study at two leading business schools in two countries, and to graduate with two master’s degrees. Master of Science in International Management Recognized as Top 5 - Master in Management Program in the Asia Pacific region in QS Business Masters Rankings 2021: Management, the program in collaboration with CEMS offers dual qualification with global alumni and career development network. It allows students to study and interact with global-minded peers from 33 leading business schools all over the world. Meanwhile, the M2M Double Degree Master’s option is available with Yale, HEC Paris and FGV EAESP. 54 Biz@HKUST Biz@HKUST 55 // Feature (Guangzhou) Project, with its first phase of construction scheduled for completion by mid- 2022. Following a presentation made by Dean of the Business School Prof TAM Kar Yan, members offered many solid recommendations for the School not only to build on its strengths, but also ride on the new wave of opportunities in the challenging post-COVID economy. Charting the Way Forward The HKUST Business School Advisory Council consists of 30 prominent business leaders. Its annual meeting is one of the most important occasions where the School administration receive their valuable advice and guidance in charting the way forward. HKUST Business School Advisory Council This year’s meeting was held on October 8, 2020. For the first time, it was organized on campus in a hybrid mode where members could attend in person or online. Joined by almost all members, the meeting was presided by the Council Chairman Dr Hans Michael JEBSEN. The half-day meeting started with remarks made by HKUST President Prof SHYY Wei and Provost Lionel NI. They introduced the latest developments of the University. Members expressed great interest in the exciting HKUST CHAIRMAN Dr. Hans Michael JEBSEN, BBS Chairman Jebsen Group MEMBERS Mr. Louis McDaniel BOWEN Chairman and Chief Executive Officer Asia Capital Management Limited and China Advisors Limited Mr. Adriel CHAN Wenbwo Vice Chair Hang Lung Properties Limited Dato’ Seri CHEAH Cheng Hye Co-Chairman and Co-Chief Investment Officer Value Partners Group Ltd Mr. Philip CHEN, GBS, JP Non-Executive Director Hang Lung Properties Limited Mr. Eric FOK Kai Shan Vice President Fok Ying Tung Group Dr. William FUNG Kwok Lun, SBS, OBE, JP Group Dupty Chairman Fung Group Ms. Wendy GAN Non-Executive Director Chinney Alliance Group Limited Mr. Benjamin HUNG Pi Cheng, BBS, JP Regional Chief Executive Officer, Greater China & North Asia Chief Executive Officer, Retail Banking & Wealth Management Standard Chartered Bank Professor Albert IP Yuk Keung Trustee, Board of Trustees Washington University in St Louis Mr. Keith KERR, SBS, JP Chairman The Development Studio Ltd Ms. Teresa KO Yuk Yin, BBS, JP China Chairman Freshfields Bruckhaus Deringer Mr. Manoj KOHLI Country Head - Softbank India Softbank Group International Mr. Anish LALVANI Chairman Euro Suisse International Ltd Dr. Jack LAU Chairman Swanland.AI Limited Mr. David LEE Director Lee Kum Kee Company Limited Mrs. Margaret LEUNG, SBS, JP Independent Non-Executive Director Hong Kong Exchanges and Clearing Limited Ms. Nisa LEUNG, JP Managing Partner Qiming Venture Partners Dr. Vincent H. S. LO, GBM, GBS, JP Chairman Shui On Holdings Ltd Mr. Maximilian Y K MA Chairman Lee Heng Diamond Group Mr. Anthony NIGHTINGALE, CMG, SBS, JP Director Jardine Matheson Holdings Ltd Mr. Wai Kwong SECK Chief Executive Officer Eastspring Investments Mrs. Kathryn SHIH Former President Asia Pacific and Member of Group Executive Board UBS AG Board Member Julius Baer Mr. Sukanto TANOTO Chairman RGE Pte Ltd Dr. James E. THOMPSON, GBS Chairman Crown Worldwide Holdings Ltd Mr. Andy TUNG Non-Executive Director Orient Overseas (International) Limited Mr. Douglas WOO Chun Kuen Chairman and Managing Director Wheelock and Company Ltd Mr. Thomas Jefferson WU, JP Former Deputy Chairman and Managing Director Hopewell Holdings Ltd Mr. Arthur YUEN Kwok Hang, JP Deputy Chief Executive Hong Kong Monetary Authority Mrs. Betty YUEN SO Siu Mai Vice Chairman CLP Power Hong Kong Ltd 56 Biz@HKUST Biz@HKUST 57 // Feature Distinctive Program for Motivated Leaders The newly launched DBA program provides rigorous and professional training for participants to develop a portfolio of skills in conducting practice-based research The new Doctor of Business Administration (DBA) Program being launched by the HKUST Business School will give senior executives the chance to conduct meaningful research in areas that have a real impact on their industries and on society at large. “Committed to academic excellence, HKUST has rapidly risen in recognition in its short history and become one of the most respected business schools in Asia,” says Professor Tam Kar Yan, Dean of the HKUST Business School. “We are pleased to present our new DBA Program, which attests to our 30 years of ongoing commitment in driving rigorous research and global influence.” The four-year part-time program, for which classes start in September 2021, is designed as a rigorous academic journey, which offers exposure to the latest business research trends, teaches the methodology needed to research and write a thesis, and provides expert supervision as students work towards that goal. Along the way, the general learning environment will see original ideas discussed, tested and developed into far-reaching insights, which can improve management decisions and enhance organizational effectiveness. Dean TAM Kar Yan (left) and DBA Program Academic Director Prof ZHENG Shaohui of the HKUST Business School And, as they progress, students will benefit from other strengths the School can offer – an internationally renowned faculty, proven excellence in research, an interdisciplinary approach to exploring new topics, opportunities to network with leading business figures, and consistent top rankings for its executive education programs. “For many years, we’ve been receiving enquiries from alumni and industry leaders about offering a DBA Program at HKUST,” says Professor Zheng Shaohui, DBA Program Academic Director. “So, we see a big demand out there, and at the same time, with our globally recognized research excellence, we are well positioned to create more significant impact on the business world.” The curriculum requires students to complete 55 credits, with the focus on coursework and thesis proposal in the first two years and on thesis research and short residential programs thereafter. Classes will generally be taught over long weekends, and the initial 16 modules, including core subjects and electives, cover subjects ranging from applied statistics, business economics and strategic management to information systems, financial accounting, operations and supply chain management, etc. “When students first apply, we want to know roughly what kind of research problem they intend to work on,” says Zheng, who is also Head of the School’s Department of Information Systems, Business Statistics and Operations Management. “In general, it should be related to their company or industry, but could have some broader implications. The focus can change later on, but to find eligible participants for the program, we want to make sure applicants have given it serious thought and have a strong commitment to their areas of research. Therefore, during the admission process, we will closely discuss with applicants their research interests.” To illustrate, he notes a proposal might center on ways supply chains and marketing campaigns are responding to change, or fintech’s impact on certain aspects of the banking system. There are few limits though, provided a topic meets the main academic criteria. And given how the business world is evolving, it seems likely that research proposals will increasingly bridge disciplines, examining for instance the impact of IT on operations or the interface between AI and marketing. “Many of our faculty are working on interdisciplinary research problems, so we will also provide students with this kind of opportunity,” Zheng says. “If necessary, they could have, for instance, one supervisor from finance and one from information systems.” For the third- and fourth-year residential programs, there will be three key objectives: to support regular, face-to-face interaction with supervisors and faculty members; to create a forum for networking and sharing experiences; and to interact with business leaders in various industries. “Our aim is to nurture talent in applied business research and expose them to all the latest developments,” Zheng says. “A program like this is a long-term investment. Therefore, anyone applying should be clear about the time commitment and the tremendous efforts required to complete this highly challenging yet rewarding DBA journey.” “The program seeks to admit a highly selective group of senior executives who are motivated to learn and share their experience, and are committed to go through this professional doctoral training with our faculty and their peers.” Our aim is to nurture talent in applied business research and expose them to all the latest developments Basic requirements for admission include a bachelor’s degree, but preferably a master’s, at least 12 years’ experience at managerial level, and a high standard of English. The application deadline for non-local students is May 2021, and for local students with no visa considerations it is a month later. Full course information and further details are available at http://www.dba.ust.hk/. DBA Admission Read the Report 58 Biz@HKUST Biz@HKUST 59 // Feature “Fintechstic” was another activity series. Held between October 12 and November 7, Fintechstic was a series of fun-filled activities co-organized by the school, gini and Tap & Go by HKT, with support from AngelHub and InvestHK. Around 200 students and alumni participated in an online quiz challenge, workshops, and a case competition. These month-long activities prepared our young generation for the fast-changing fintech industry and helped them gain a hands-on experience of the latest trends and opportunities. Fintech in Action HKUST x University of Chicago Webinar Attracted Activities in Support of HK Fintech Week Industry Report on Virtual Banks and Insurers 10,000 Viewers The global slowdown caused by COVID-19 disruptions has advanced digital transformation for many businesses. This gave tech-heavy industries like fintech an opportunity to grow and expand. The School launched different activities for both students and industry practitioners to look into the future of fintech in Hong Kong and beyond. HKUST and the University of Chicago co-presented the webinar “Thrive Amidst Disruptions: The Role of Fintech Post COVID-19” in September. The webinar attracted 10,000 viewers and featured prominent academics and leaders in fintech. Professor KC CHAN of WeLab Bank, Professor HE Zhiguo of the University of Chicago, Alvin KWOCK of OneDegree, and Professor TAM Kar Yan of the HKUST Business School took part. The event was moderated by Benjamin QUINLAN, Chairman of the FinTech Association of Hong Kong. Hong Kong Fintech Week is a major annual event led by InvestHK to promote fintech development in the city. With a mission to nurture future talent for the industry, the School organized a series of activities that echoed events in Fintech Week. These activities included Hong Kong’s First Blockchain-themed Case Competition – the HKUST x HashKey Blockchain Business Model Challenge, which took place on October 30-31. This first-of-its-kind case competition in Hong Kong was joined by 80 students and alumni! To understand the perception of the public towards virtual banks and insurers in Hong Kong, HKUST’s Fintech Research Team launched its second industry report under the Fintech Research Project, “The Adoption of Virtual Banks and Insurers”. The report features findings from a survey conducted between May and July 2020, and seeks to uncover the opportunities and challenges these virtual service providers face in the early stages of business. The report highlights key observations drawn from over 2,200 respondents in different demographics. A wide range of insights related to public products and service appeal, success factors, and measures to facilitate user adoption, are featured with the aim of supporting virtual banks and insurers who are adapting their business models. The insights will also help them align their branding with the public’s perception of it. Topics discussed included competition between traditional banks and virtual banks, trust and security concerns, the public’s sentiment towards fintech, and what is needed to drive the transformation. Although changing the public’s mindset about fintech services takes time, the disruption and changes that the pandemic brought indicates that mindsets can change when forced to do so. Soon, fintech will likely dominate our everyday lives and will exist in the form of a fully digitalized set of financial services. 60 Biz@HKUST // Feature A Tribute to a Great Teacher Members of the HKUST Business School are extremely saddened by the passing of a great teacher and friend Dr Paul Forster on December 2, 2020. Paul joined HKUST in 2000. With his passion for social impact and sustainable business, Paul taught business ethics and environmental strategy. Since 2016, he held a joint appointment as an Associate Professor of Business Education at the Department of Management and a Senior Lecturer at the Division of Environment and Sustainability. Paul was a highly valued member of the Business School. He demonstrated great support and care for students, and also played an active role in promoting international case competitions. With his passion and dedication to teaching, Paul received multiple honors and teaching awards over the years, including the Franklin Prize Teaching Excellence Award twice and the Interdisciplinary Programs Office Teaching Excellence Award. Paul actively participated in many different programs and teaching activities at the Business School, including Program Director for Global Business, Associate Director for UG studies, and Co-Director of the BSc in Environmental Management and Technology Program. During his 20 years of service at HKUST, he was an unwavering supporter of many university-level initiatives. He was the Program Director (Global Learning) at the Global Student Office and also joined the Sustainability Network to promote a sustainable smart campus. As a highly respected member of our School and the University, his passing is a great loss to the HKUST Community. Our deepest condolences go to Paul’s family. Partnership for Education Our new alliances with academic and corporate partners open up a new stream of opportunities for students Gearing up for Online MBA Courses The HKUST Business School is delighted to become an alliance partner with the Future of Management Education (FOME). This is an alliance of like-minded business schools who share a vision that online learning should have the same transformational impact as the very best face-to-face courses. The FOME Alliance strives to develop leading technology for online learning and explore new business education models. The HKUST Business School is honored to be a part of this prominent alliance alongside other leading international institutions, including Imperial College Business School (UK), ESMT Berlin (Germany), the University of Melbourne (Australia), and the Ivey Business School (Canada). The partnership will boost HKUST’s position in promoting online education. To meet the growing demand from business professionals in Asia and allow them receive a high standard of further education with flexibility, our School plans to develop a set of core courses in MBA, for part-time MBA first. Our new partnership with FOME also follows HKUST’s decision to work with the leading online education company called Insendi to deliver HKUST’s first-ever online MBA courses. New Fellowship Program with ICMA We are pleased to announce a new industry partnership between the Department of Finance and the International Capital Market Association (ICMA). The partnership has launched the new ICMA Young Fellowship Program open to all year 3 and 4 undergraduate Quantitative Finance (QFIN) students. The program provides professional exposure for students in the financial industry and helps them develop important skills, knowledge, and awareness related to practical issues in the market. The program also supports ICMA’s mission to raise its standards and promote inclusion in the industry. This year, the program will offer ten scholarships (each worth HK$25,000+), exclusively for HKUST students. Awardees will also gain additional knowledge on securities operations, fixed income markets, and qualify for ICMA certificates. In addition, they can gain access to the entire ICMA learning management system and participate in three online courses at ICMA, free-of- charge. HKUST BUSINESS SCHOOL

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