Hong Kong: Rethinking Finance

Hong Kong: Rethinking Finance

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Demand in the financial sector is shifting as the social contract evolves between financial institutions and the people they serve. Hong Kong, as the epicentre of Asian banking, corporate finance, and asset management, is helping to shape this new era.

Two key financial issues dominate current social thinking. One is financial inclusiveness, and the role that technology and innovation can play in extending the reach of financial services to underserved customers. The other is greater awareness of environmental, social and governance (ESG) issues, including sustainable or “green” finance, in which investments are determined in whole or in part by sustainable development projects and initiatives, such as those that promote environmentally responsible investments or stimulate low-carbon technologies.

While access to financial services is not widely regarded as a basic human right, it has been argued that its contribution to social stability and economic equality mean that it should not be considered a privilege. As a result, financial inclusion, defined by the World Bank as full access by individuals and businesses to useful and affordable products and services that meet their needs, such as transactions, payments, savings, credit and insurance, and delivered in a responsible and sustainable way, is widely considered essential to Hong Kong’s development.

The rise of ESG

ESG and financial inclusiveness are challenges that broaden opportunities. According to the Global Sustainable Investment Review 2018, assets managed under sustainable investment strategies in Europe, the United States, Japan, Canada, Australia and New Zealand totalled US$30.7 trillion, a 34% increase since 2016. Global sustainability challenges such as climate change, environmental degradation, labour rights, and privacy and data security are introducing new risk factors for companies and investors.

Hong Kong investors are significantly interested in issues such as sustainability, according to Schroders, the investment bank. Of those aged 38 to 50 – Generation X – 63% always consider sustainability factors when selecting an investment product, compared with 49% of Millennials (18 to 37 years old) and 48% of Baby Boomers (aged 51 to 70).

“The guiding principle is that we will give priority to green and ESG investments, if the long term return is comparable with other investments on a risk-adjusted basis.”

Howard Lee, deputy chief executive of the Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) is leading by example to incorporate ESG principles into the investment processes of the Exchange Fund, Hong Kong’s HK$4 trillion (US$ 512 billion) assets under management, Howard Lee, HKMA deputy chief executive, said in a recent speech. “The guiding principle is that we will give priority to green and ESG investments, if the long term return is comparable with other investments on a risk-adjusted basis,” he told the Hong Kong Investment Funds Association (HKIFA) annual conference in November 2019. In fact, recent data by Morgan Stanley show that ESG investments tend to have better risk-reward payoffs than typical investments. The bank found that while there is no consistent or statistically significant difference in total returns existed between ESG-focused and traditional mutual funds and ETFs, sustainable funds may offer lower market risk.

That makes ESG, like financial inclusion, a challenge that is also an opportunity. “ESG risk has become too significant to be ignored in the investment decision-making process,” said Mr Lee. “Assets or companies with high ESG risk will see diminishing value over time and might risk becoming stranded assets.” By integrating ESG factors into investment, the Exchange Fund aims to get better risk-adjusted return in the long run, the HKMA has noted. Hong Kong can use its geographical advantage to promote ESG development as, in recent years, mainland China has been actively promoting a green economy.

In December 2019, Hong Kong Exchanges and Clearing Limited (HKEX) released updated disclosure requirements for ESG reporting, including mandating the disclosure of board’s governance on ESG issues, requiring disclosure of targets for important environmental key performance indicators as well as significant climate-related concerns that have affected or could affect the issuer, and upgrading the disclosure obligation of all “social” key performance indicators. ESG risks are becoming increasingly important for bank regulators, both credit and equity investors, and other stakeholders, according to Moody’s, the bond rating agency. It noted in a recent report that factors such as investment in environmentally harmful industries, misconduct issues, and governance failings can affect bank credit strength.

There is significant interest among Hong Kong asset management firms to step up their ESG efforts, such as the management of environmental and climate risks, according to the Hong Kong Securities and Futures Commission. A 2019 survey found that 83% – 660 out of 794 – asset management firms surveyed said they consider at least one ESG factor when evaluating a company’s investment potential.

“Evidence indicates that retail investors are starting to embrace ESG investment.”

Sally Wong, chief executive of the Hong Kong Investment Funds Association

Typically, new investment concepts and ideas tend to be taken up by pensions and institutional investors because they have the resources to identify and analyse the emerging opportunities and risks. “Evidence indicates that retail investors are starting to embrace ESG investment,” said Sally Wong, chief executive of the HKIFA, which issued a roadmap in 2019 for the asset management industry to promote sustainable and green finance. “We fully support the HKEX initiative to further beef up ESG disclosures. Only with meaningful data from listed companies can investment managers make informed decisions when they integrate ESG into the investment and risk process.”

With its support or participation in the Task Force on Climate-related Financial Disclosures, the Focusing Capital on the Long Term and the United Nations-supported Principles for Responsible Investment, Hong Kong is leveraging its status as a vital international financial centre and becoming integral to the global network of emerging green and sustainable investment commitments.

A track record of inclusion

The HKMA fosters advocacy of financial inclusion and encourages the banking industry to put the spirit of financial inclusion into practice when developing their business strategy to fulfil their social responsibilities. Conventional banks in Hong Kong have flexibly and pragmatically utilise new technologies and operation modes, for example mobile branches and video teller machines, to address the banking needs of residents living in remote areas and public housing estates. In 2017 the HKMA also worked with banks to develop a plan to open new physical bank branches and introduce mobile branches in public housing estates and remote areas to enhance the access to basic banking services in those areas. The plan was successfully completed in 2019. The Hong Kong Association of Banks and EPS, a popular cashless payment system in Hong Kong, introduced a service in 2018 to allow cash withdrawals by the elderly without the need for a purchase. Currently, the cash withdrawal service for the elderly is available at over 330 convenience stores and all 167 post offices and mobile post offices in Hong Kong.

Virtual banks, eight of which have been licensed in Hong Kong since 2019, are expected to further broaden the customers’ access to banking services, individuals or SMEs, as promotion of financial inclusion is one of the policy objectives for their introduction in Hong Kong. This role is exemplified by the HKMA’s explicit requirement that virtual banks are not allowed to impose minimum account balance requirements or charge low-balance fees on customers. Both Ant Financial, an affiliate company of China’s conglomerate Alibaba, and Airstar Bank, a joint venture of Hong Kong based AMTD Group, one of Asia’s largest independent asset management firms, and Xiaomi Corporation, a Beijing-based internet company, have said financial inclusion is a core tenet.

In August/September 2019, a majority of retail banks removed fees for personal saving accounts in Hong Kong, such as minimum balance requirements and the related low balance fees, and counter transaction fees. Among them, HSBC said the change would benefit more than 3 million of its retail banking customers in Hong Kong. Moody’s estimates removing the fees will reduce the HSBC’s net profit by less than 1%. “The move will help them defend their market share, particularly among younger and technology-savvy retail banking customers, who we expect the virtual banks to target as customers when they launch their operation,” the agency concluded.

To further facilitate access to banking services by businesses and to enhance customer experience, with the encouragement of the HKMA, some banks launched in 2019 a new tier of bank accounts for business customers, namely Simple Bank Accounts, which has enhanced customer experience and provided an additional option for business customers who require only basic banking services. This is helpful to business customers such as start-ups which cannot readily furnish certain information/documents required for opening traditional accounts and do not require full range of banking services initially.

Encouraged by the HKMA, the banking industry in Hong Kong has also promulgated practical guidance to further facilitate access to banking services by customers with physical disabilities, visual impairment or hearing impairment in 2018, with individual banks implementing such enhancements. The HKMA, together with the banking industry, jointly published information on banking services in seven languages commonly used by the ethnic minority community in 2017 to help ethnic minority customers better understand their rights and responsibilities when using banking services.

Financial inclusion can also mean ensuring that low-income consumers and marginalised groups can use the full range of new products such as fintech apps. For example, foreign domestic workers is a group that would benefit from greater financial inclusion. Alipay Hong Kong and GCash, a mobile wallet created in the Philippines, launched an online remittance service between Hong Kong and the Philippines, helping the 200,000 Filipinos living in Hong Kong.

In many aspects, Hong Kong has been a first mover in inclusion initiatives. In 1999, the government created Hong Kong’s Tracker Fund (TraHK), an exchange-traded fund designed to provide investment results that correspond to the performance of the Hang Seng Index, rather than offload its stock holdings to institutional investors. This provided an avenue for Hong Kong savers to invest in the city’s economic future.

“The launch of TraHK started a channel for a wider range of investors to gain exposure to the Hong Kong stock market in an easy and cost-efficient way.”

Ray Chan, head of SPDR ETFs, State Street Global Advisors, Hong Kong

“The launch of TraHK started a channel for a wider range of investors to gain exposure to the Hong Kong stock market in an easy and cost-efficient way,” said Ray Chan, head of SPDR ETFs Hong Kong at State Street Global Advisors. “We are very pleased to see the remarkable growth of the TraHK as its investor base continues to grow and broaden into various market segments.”

The financial services sector has found more ways of supporting inclusive growth, particularly with successive advancement of fintech. Through fintech and other developments, financial inclusion goals can be achieved, not just through improving access for retail banking, but also through reducing barriers for cross border transactions and facilitate international trade, cementing Hong Kong’s position as a global financial services leader.