[ESG Monthly Report] Opportunities for Hong Kong's Financing Market under the New Guidelines of the International Capital Market Association

On June 25, the International Capital Market Association (ICMA) announced^[1] the "Guidelines for Green Enabling Projects" and the "Guidelines for Sustainability-Linked Loan Financing Bonds", as well as other updates. The "Guidelines for Green Enabling Projects" emphasize that a great number of Green Enabling Projects, key to the value chain of Green Projects, are not themselves explicitly considered green but remain critical to these eligible Green Projects.

To meet the standards, green enabling projects need to:

·       Necessary for an enabled Green Project’s value chain;

·       Green Enabling Projects should not lead to locking-in high GHG emitting activities relative to other technologically feasible and/or commercially viable solutions;

·       Clear, quantifiable and attributable environmental benefit;

·       Demonstrate that they are appropriately managing identified environmental and social impacts and risks.

ICMA now allows green bonds to be applied to green enabling projects if the criteria are met the standards of the "Guidelines for Green Enabling Projects" and the "Green Bond Principles".

In addition, the " Guidelines for Sustainability-Linked Loan and Bond (SLLBs) " was jointly formulated with the Loan Market Association (LMA). These guidelines define a specific bond instrument aimed at assisting issuers in financing or refinancing qualified portfolios of sustainability-linked loans (SLLs) in accordance with the LMA's Sustainability-Linked Loan Principles (SLLP).

Opportunities for China and Hong Kong

According to information^[2] from the Ministry of Industry and Information Technology, China is the world's largest manufacturing country, with the manufacturing industry accounting for approximately 30% of global value-added manufacturing and maintaining the top position globally for 14 consecutive years. Therefore, there is significant potential for benefiting from green enabling projects in various manufacturing industries. 

As an international financial center, Hong Kong provides a financing platform for Chinese enterprises. Chinese enterprises can finance projects that meet green enabling standards through Hong Kong's financing platform and enjoy the benefits of Hong Kong's Green and Sustainable Finance Grant Scheme. Issuing green bonds or green loans in Hong Kong can attract global investors who support sustainable and green development, thereby contributing to the achievement of global carbon neutrality goals. With green enabling projects included in the category of ICMA's green bonds, the potential issuance of green bonds and projects will increase. Financial institutions also have the opportunity to finance or refinance their own sustainability-linked loans through the issuance of sustainability-linked loan and bond financing.

Lianhe Green's Insights

·       The "Green Enabling Projects Guidelines" present new opportunities for Chinese enterprises in the manufacturing and mineral industries' green project supply chains. These guidelines align to a certain extent with China's "Green Bond Support Project Catalogue (2021 Edition)," providing greater recognition for these industries' contributions to green development. Examples include the industrial component manufacturing industry and the production of building insulation materials.

·       Compared to the "Green Bond Principles," the "Green Enabling Projects Guidelines" impose higher requirements on issuers in terms of environmental and social disclosure, and they require third-party assessment and certification agencies to conduct more in-depth environmental and technical assessments of green enabling projects. Taking lithium as an example, it is a key raw material for manufacturing lithium-ion batteries for electric vehicles, while neodymium is an important component of permanent magnets in wind turbines and electric vehicle motors. Third-party analysis is needed to assess critical raw materials, as well as the technical and environmental impacts. These assessments ensure that the environmental and social impacts of green enabling projects are adequately considered and transparent.

Lianhe Green's Services for the New Guidelines

Lianhe holds a leading position in domestic capital market credit ratings and has professional teams, qualifications, and equipment in green finance, carbon asset management, and environmental testing. Lianhe Green is a partner of the European Federation of Financial Analyst Societies (EFFAS) in mainland China and has multiple Certified ESG Analyst (CESGA) instructors and analysts. Lianhe Green can help enterprises identify green enabling projects and relevant certification requirements, provide second party opinions that comply with the "Guidelines for Green Enabling Projects", certify that the enterprise's projects do not involve carbon lock-in, evaluate and analyze the environmental benefits of the projects, including quantified environmental benefit indicators, environmental impact assessment of potential negative social or environmental impacts of the projects, and provide relevant external certification services to enhance the credibility and market recognition of the projects.

Through these support services, Lianhe Green will assist enterprises in better accessing green financing and implementing projects in the Hong Kong financial market under the new guidelines, thereby promoting the achievement of sustainable development goals.