With trillions of dollars pouring into sustainable funds, bonds and related instruments, becoming a green finance hub has become a key goal for many financial centres.
Governments and regulators do not publicly admit it, but they compete fiercely with each other. That makes sense: the regulatory environment is the number one area affecting the uptake of green finance, according to the Global Green Finance Index (GGFI). The initiative has been ranking financial centres on their sustainability credentials since 2018.
London topped the GGFI charts last year, published in October (see chart below), following a raft of new UK government initiatives focused on sustainability over the past 12 months. With its introduction of climate risk reporting for corporates and pension funds to its sale of the first green gilt in 2021, Britain wholeheartedly embraced its role as host of Cop26 in November.
London’s position as a mainstream financial centre, deep sustainability talent pool, vibrant ESG rating market and robust investor and non-governmental organisation (NGO) community would all have counted in its favour, says David Uzsoki, Geneva-based sustainable finance lead at the International Institute for Sustainable Development, a think tank headquartered in Canada.
Claire Dorrian, head of sustainable finance capital markets at the London Stock Exchange Group, also cites as positive factors the city’s cross-asset, whole-market offering being “centred around supporting the rise of the green economy” and its consistent regulatory framework.
What’s more, London benefits from the ‘Brussels effect’ – whereby non-EU companies wanting to do business with EU entities must comply with the bloc's rules – more so than anywhere else outside the EU.
Such factors saw the English capital prevail in the GGFI’s list despite Britain being relatively late to the sovereign green debt party. Poland sold the world’s first green government bond in late 2016, and France, Fiji, Nigeria, Indonesia and Belgium (in that order) followed suit long before the UK.
As of 11 January, governments had issued €145bn of green bonds, with France, Germany and the UK the biggest issuers, with €40bn, €24bn and €19bn, respectively, according to Capital Monitor sister company GlobalData.
On a separate note, the UK is home to more companies with approved science-based net-zero targets than almost any other country, shows recent Capital Monitor analysis. The research also indicates a correlation between the net-zero plans of governments and the corporates headquartered in the same countries as those administrations.
Policy support is key
However, a strong standing in mainstream finance does not guarantee a high GGFI ranking; New York sits 13th, Tokyo 22nd and Frankfurt 34th. With regulation cited the most important factor, the US’s slow take-up of sustainable finance policy would appear to have taken its toll, likewise Japanese regulators’ reported reluctance to align with international green finance standards.
However, Hubertus Väth, managing director of Frankfurt Main Finance (FMF), an organisation that promotes the German city as a financial centre, says Frankfurt will be climbing the GGFI ranks “very soon”. Sustainable finance is a central focus for FMF after a successful post-Brexit campaign that convinced 59 London-based financial institutions to shift their EU headquarters there.
Väth hastens to point out that the GGFI, with around 775 respondents, is far from a definitive source, but he concedes that it provides a helpful yardstick for what remains a nascent area in many financial centres.
Frankfurt received a major boost in November with the news that the newly founded International Sustainability Standards Board (ISSB) would be based there – a decision for which it fought tooth and nail. Väth says it was a highly strategic move supported by the upper echelons of the German and wider EU government, including the European Parliament, European Commission, European Central Bank and former German chancellor Angela Merkel.
A broad ecosystem of political support is essential to any green finance centre, agrees Uzsoki. “Even if it’s the private sector mainly driving sustainable finance, you need to see real buy-in from politicians. It’s not enough to just say you care about sustainability any more – greenwashing is much better understood now, so you need regulation in place to truly compete.”
Real economy regulation is also seen as important. “Typically, the sectors most impacted by the energy transition – like national energy grids – are beholden to government policy,” says Gabriel Wilson-Otto, sustainable investing director at Fidelity in Hong Kong.
“They don’t have complete flexibility to determine their own capital allocation. That means disclosure and broader policy are an increasingly important consideration from an ESG perspective,” he adds. "And in countries that are getting ahead of this, you can have more meaningful discussions with issuers.”
Sustainable finance regulation may have been popularised in Brussels but has now spread far and wide. The EU’s sustainable taxonomy sits at the centre of the bloc’s green finance strategy, and there are now taxonomies in place or being developed in Canada, China, New Zealand, Russia, Singapore, the UK and numerous other markets (see map below).
Differing sustainable finance priorities
Of course, any one financial centre will struggle to cover all bases. The importance of sustainable finance considerations will vary by issuer, financial institution or intermediary.
“There are so many factors that constitute a green financial centre, and everyone will have their own different methodology – it could be local emissions, infrastructure, labour conditions, green products or the quality of disclosure,” says Giorgio Botta, senior associate for sustainable finance at the Association for Financial Markets in Europe (Afme).
In Europe, prospective green bond issuers might lean towards Paris, where most green bonds are sold, or London for the sheer size of the market there. Sustainable funds are more likely to be domiciled in Ireland or Luxembourg.
Hong Kong or Singapore, meanwhile, impose lower costs for debt issuers because of their competitive green bond grant schemes. But the largest market by far is China, which accounts for 36% of the entire green bond universe analysed by non-profit organisation and debt certifier the Climate Bonds Initiative. Yet China is a domestic issuance-heavy market seen as unlikely to become a leading hub for international issuance.
Green debt issuers tend to follow other green debt issuers. But Uzsoki says he would pay more attention to the quality of sustainability performance of local companies and investors than to the quantity of issuance. Still, size clearly matters, he adds, citing the fact that London beat Amsterdam on the GGFI ranking for the first time last year.
In any case, there looks to be plenty of sustainable capital-related business to go around – and no shortage of financial centres cashing in.
The landscape in Asia
Beijing, Shanghai, Shenzhen, Guangzhou and Qingdao all rank higher than Hong Kong and Singapore on the GGFI. China may be the country generating the most emissions, but it is also home to the biggest emissions trading scheme and green bond market in the world.
Regulators and trade associations tend to cooperate rather than compete on sustainable finance, in part due to the Brussels effect, says Matthew Chan, head of policy at the Asia Securities Industry & Financial Markets Association (Asifma).
“There are so many areas [of sustainable finance] and there’s so much to do,” he adds, “and we have to think about the needs of Asia-Pacific, rather than try to superimpose European standards onto a region they weren’t designed for."
For instance, regulators in Thailand and Malaysia have focused heavily on tailoring sustainability disclosure to the local market, Wilson-Otto says.
While regulatory harmonisation is typically the goal, there is a growing school of thought that the push for harmonisation may be a distraction from getting work done quickly – and that there is simply not enough time to wait for regulators to meet in the middle.
All this being said, there is something that financial centres should bear in mind. When companies consider where to set up operations, there are many more critical factors for them than the sustainable finance environment, says Uzsoki, such as the location of one’s investors or clients and the broader regulatory environment, including local tax conditions.
Sustainable finance talent
Living standards and social environment also count when it comes to attracting and retaining sustainability talent.
Hong Kong is a case in point. The Chinese territory has long enjoyed a high position on the international financial centre league tables, but extreme restrictions targeting ‘zero-Covid’ are fast tarnishing that reputation, as Asifma wrote in an open letter to the government late last year.
Similarly, Bloomberg economists downgraded their economic growth outlook for Hong Kong on 22 February – citing the same Covid and travel-related reasoning – concluding that its loss is Singapore’s gain.
Hong Kong’s approach to Covid is also compounding widespread international concerns over Beijing’s growing political encroachment on the territory.
Financial hubs might be well advised to get the fundamentals right before seeking to establish a green finance niche. Without a strong regulatory framework, consistent policy and international best practice, jurisdiction is less likely to attract genuinely long-term sustainable capital, regardless of the other benefits it offers.
This article originally appeared on Capital Monitor.