IEMS - Thought Leadership Brief #75

4 SUMMER 2023 NO.75 / THOUGHT LEADERSHIP BRIEF Lionel Mok is a PhD Candidate at HKUST studying the development of sustainable finance policy frameworks. His research is focused on the dynamics underpinning governments’ efforts to develop sustainable finance taxonomies. Lionel also works as a research analyst for the HKUST School of Business Management and is conducting research to support the development of Hong Kong as a green and sustainable finance centre. Concurrently, he serves as a consultant for the Climate Bonds Initiative and simultaneously as the programme lead for the sustainable finance and ESG team at the Civic Exchange. He was formerly a consultant for the International Finance Corporation. He holds an MSc from University College London and an MA from the University of Hong Kong. On the other hand, it must be recognized that within some markets, the ability to report carbon intensity of an asset may be marred by data availability and there will be a need to rely on certain proxies or labelling systems. In such situations taxonomies and green finance can help define how the real-economy should report in the future, but at the same time we may have to accept that such proxies are currently the best available option and will have to suffice for the time being. Over time, in order to keep apace with international best practice, the taxonomy may also need to expand to cover other environmental objectives – this might include challenges such as biodiversity, circular economy and adaptation/resilience to climate change. At the very least, there will be a need to ensure that projects which are shown to contribute to climate change mitigation, do not cause significant harm to other environmental objectives and considerations. Regulators may also need to develop strategies to ensure that the taxonomy and green bond market is proportionately and effectively regulated. Who will verify green bonds? What credentials will be required and who will verify the verifiers? Finally, it will be worth remembering that taxonomies alone will not solve our market failure and they will only be as useful as the policy environment which surrounds them and ultimately rest on the extent to which it is the government’s prerogative to use finance to fix market failure. Policymakers might want to consider how complimentary policies such as more favorable taxation policies or lower subscription fees for green investors might encourage more institutional investment in green bonds. Additionally, reviewing the industrial policies in the real economy which can impact issuers’ credit ratings (such as removing fossil fuel subsidies or providing more policy certainty for green sectors) may also help to level the playing field for climate aligned investments. This will require a wider understanding of the linkages between environmental economics and climate finance. Zooming out even further, development of taxonomies should be considered in context of the wider debate on climate finance and economics. While green bonds may be a powerful tool for mobilizing capital, they will likely become even more effective when complimented with other economic and financial tools such as carbon prices. Consistency and coordination between industrial and financial policies will be vital. Read all HKUST IEMS Thought Leadership Briefs at T: (852) 3469 2215 E: W: A: Lo Ka Chung Building, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon With Support from