Exploring the Future of Markets: Part 2 – ESG Becomes Part of the DNA of Markets
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Written By
Jul 22, 2022
10 mins

In June 2022, as HKEX marked its 22nd anniversary as a listed company, we sat down with senior executives from across the business to reflect on the progress of our organisation over the past two decades, and explore the key drivers and trends impacting our markets and the global exchange landscape.

Data, ESG, technology and clients were the four themes that jumped out. In the first part of this “Future of Markets” series, we explored how the world of data looks set to evolve over time, becoming richer and more integrated into business and daily life. In this edition, we turn our attention to ESG and take a look at how markets will start to “walk the walk”, find innovative ways to transition to net zero and embed ESG into almost everything. We also explore the key role that exchanges will play in this journey.

A unique position

Demand for ESG investing has grown considerably over the years, driven by a collective calling to address the anticipated devastating consequences of climate change. This was further accelerated by the coronavirus pandemic, which saw the adverse impact of social and health risks come to the forefront. In 2022, investors no longer make decisions purely by looking at financial performance, they seek assurances from a strong risk culture based on sustainability and broader community responsibility.

Investors look at everything in totality – if you just give them financial data and a healthy balance sheet, they no longer see this as enough to assess the company’s long-term success and future prospects.
  Head of Policy and Secretariat Services for HKEX’s Listing Division, Katherine Ng
 

This is evident in the growth of ESG assets as well, which Bloomberg predicts could surpass US$50 trillion globally by the end of 2025, up from US$35 trillion in 2020. This, coupled with growing sovereign, corporate and popular support for ESG-focused financial products and solutions, is fueling a wholesale change in both appetite and demand across global markets.

But despite its growing momentum, there are ongoing challenges and limitations around the adoption of ESG practices and standards by both corporates and investors. This is especially true in Asia, where the range of ESG products and the amount of capital committed to ESG assets lag behind that of Europe and North America, which already have sophisticated frameworks and a diverse set of products in place.

And although Asia is nascent as a market, the opportunities here are significant, with demand expected to grow exponentially as the region seeks to offset its carbon footprint to move to net zero. Asia Pacific accounted for 52% of global carbon dioxide emissions in 2020 according to BP’s 2021 Statistical Review of World Energy – meaning any progress it makes will be significant in the global effort to create a more sustainable world.

Here, global exchanges will have a key role to play in driving the ESG agenda. This exchange is committed to advancing this pressing need for adoption and disclosure of ESG principles, and in turn enabling corporates to “walk the walk” by fully embracing ESG and transitioning to net zero, and facilitating the further development of a sustainable finance ecosystem.


Hong Kong: Fully embracing ESG

There are varying degrees of maturity around ESG among the 2,500+ listed issuers in Hong Kong – some have dedicated teams in-house to report on ESG impact, while smaller organisations with fewer resources can struggle with identifying the right data points and building their frameworks.

“As both a market operator and regulator, our role is to support all our listed issuers – big or small – on their ESG journeys. That means we will continue to help issuers get a better grasp of ESG factors, the impact on their business, and how to incorporate it into their strategies. Companies must know what and where their risks are, and have a plan to deal with those risks,” says Katherine.

Initiatives such as HKEX’s ESG Academy help bridge that knowledge-gap by providing education and insight on ESG matters, allowing business leaders to better understand topics such as materiality assessment, target setting and reporting boundaries. “We are continuing to devote our time and resources to this space as there is still a lot of work to do in building market awareness, understanding and adoption across the board,” adds Katherine.


Creating ESG-related standards and disclosure regimes is also important because it will influence issuers, helping them to think more sustainably and improve their ESG credentials.
  Head of Listing, Bonnie Y Chan
 

HKEX put this into action when it became the first exchange in the world to ban single-gender boards for new IPO applicants in January 2022, with all listed issuers mandated to follow suit by the end of 2024. “More actions like this will accelerate the diversity journey of our issuers and uplift governance standards,” adds Bonnie.

Global markets are still far away from having a consistent set of ESG standards and disclosures for corporates to follow; and it will take time for different jurisdictions to both build and align their frameworks. “It's a bit like the evolution of auditing and accounting principles. At the beginning, each jurisdiction had their own standard and it took time for the International Accounting Standards Board and the International Financial Reporting Standards to agree on a single set of standards that was accepted and adopted globally. Eventually, everyone adopted that and the same will apply to ESG,” adds Katherine.


Facilitating the transition to net zero

The future of markets will also see an increase in new tools and instruments that support the realisation of carbon neutrality goals, with exchanges playing a key role in helping develop such markets. 

One product that’s getting increasing traction is carbon credits – instruments that allow corporates to offset their carbon footprint by “purchasing” projects that reduce or remove emissions elsewhere, such as those that focus on afforestation or carbon capture. 

The carbon marketplace is only just starting really, and there is an opportunity for us to develop it and give people access. We don’t know when the market will take off, but the upward trajectory is clear and we are in a great position to support it.
  Co-Head of Markets, Glenda So
 

HKEX is taking action in this space, working closely with the Guangzhou Futures Exchange and the China Emissions Exchange, among others, to explore opportunities in carbon finance in the Greater Bay Area. HKEX has also announced the formation of a new Hong Kong International Carbon Market Council in July 2022, partnering with a number of leading corporates and financial institutions in the region to explore carbon opportunities in Hong Kong, Mainland China and beyond.


Embedding ESG into everything

In addition to enabling issuers to become more ESG-minded and transition to net zero, exchanges are well positioned to support investors’ growing appetite for sustainable investing by widening the range of ESG products on offer and embedding ESG into every single part of the financial ecosystem – whether it’s a new product, data and analytics, insight or a listing.

“Ultimately, there will be very few products without an ESG lens in the future. If the security you issue is not contributing to a green, social, or sustainable project, or aligned with an ESG-centric company, then the pricing for it will be higher,” adds Glenda. “So you are either going to be green or transitioning to green – otherwise you will pay an extremely expensive price and eventually price yourself out of the market.”

Platforms such as HKEX’s Sustainable and Green Exchange (STAGE) will be key to providing transparency and disclosure on such ESG products and credentials as they proliferate in the market.  Over 100 sustainability-linked bonds and exchange traded products were listed on STAGE by the end of June 2022, up from 64 a year earlier. This rise of ESG-centricity will have knock-on effects.


The momentum in ESG investing is inevitable and will spill into creating an integrated sustainable finance ecosystem, whereby standards, data, products, hedging tools and liquidity all operate to mutually reinforce each other to support the needs of all stakeholders.
   Co-Chief Operating Officer & Co-Head of Markets, Wilfred Yiu
 

An invigorating task

In a world where ESG investments are growing, corporates are adopting net-zero strategies and investors are demanding evermore detailed disclosure standards and diversified product choices, exchanges have a unique role to play. As trusted connectors providing transparency, liquidity, choice and execution certainty – exchanges are perfectly poised to facilitate the growth of ESG and the sustainable finance ecosystem.

“ESG is a complex topic and one that is evolving every single day, but it’s exciting too. It’s exhilarating to see ESG gradually become part of the DNA of finance; and it’s incredibly invigorating to be able to think about what is right and beneficial for our markets and the future of our world at the same time,” concludes Katherine.