By Prof. Seen Meng Chew and Prof Carlos Lo
Dr. Xue Pang provided research assistance.
November was a very busy month for two of the hottest business topics these days: climate change, and financial technology.
World leaders gathered at the United Nations Climate Change Conference in Glasgow to debate climate issues and negotiate green deals.
And in Hong Kong, there were numerous events in conjunction with the city’s fintech week, including The Chinese University of Hong Kong’s fifth fintech conference.
There are tremendous opportunities for Hong Kong’s financial sector if it successfully adjusts itself to ride on the dynamic growth of fintech and green industries.
The first focus area of the Hong Kong Monetary Authority’s (HKMA) Fintech 2025 strategy is stated clearly: all banks go fintech.
Hong Kong’s banks are some of the most profitable in the world, and one may think the current system will work just fine for many more years. However, as technology continues to advance and evolve at breakneck pace, there is simply no room for complacency. With the financial sector contributing more than 20% to Hong Kong’s gross domestic product, it is essential for the city to continually upgrade and modernise its financial services or risk losing its financial hub status in Asia to rivals such as Singapore.
It is this realisation that prompted the Hong Kong government to hand out eight virtual bank licences and four virtual insurance licences in the last two years – the most among major Asian cities.
The development of China’s central bank digital currency (CBDC) is regarded as one of the most advanced in the world. Hong Kong is following closely; HKMA is exploring the potential of introducing e-HKD in future. In fact, it has been working with the Bank of Thailand since 2017 on a project on wholesale CBDC. In early 2021, the Project Inthanon-Lionrock was expanded to include the central banks of China and the United Arab Emirates. The four central banks are investigating the use of CBDC for cross-border fund transfers, international trade settlements and capital market transactions.
Cross-border fund transfer is a costly and time-consuming process involving multiple intermediaries. If CBDC could be used to transfer value efficiently and instantaneously across geographic boundaries with minimum hurdles, it would mark a significant breakthrough in the international payment system.
Some experts point out that the technology to enable cross-border CBDC is already here, but the key challenge lies in reconciling different regulatory frameworks and technology platforms between countries.
There is also much talk about digital assets gradually becoming a mainstream asset class. Despite volatilities, the prices of bitcoin and some cryptocurrencies have surged substantially in 2021, while non-fungible tokens (NFTs) have shown how broad and versatile their industry application could be; from artwork to songs to legal documents, almost anything could be tokenised into an NFT.
More merchants and entities are now accepting cryptocurrencies for payment. In October 2021, Wharton Business School announced that it would be the first US university to accept cryptocurrency as payment for its online blockchain and digital assets course.
In light of the emerging importance of digital assets, Hong Kong’s Securities and Futures Commission (SFC) has issued several statements regarding its position on security token offerings and virtual asset trading platforms (VATP) over the last two years. In December 2020, it awarded its first VATP licence to OSL Digital Securities. Such moves underscore the regulator’s serious attitude towards digital assets, and its efforts to create a regulated and healthy ecosystem for the safe trading of these assets.
Regulated digital exchanges can boost the liquidity of cryptos and growth of this new asset class, developing new business opportunities on top of Hong Kong’s highly sophisticated capital market infrastructure, and ensuring the city’s financial service offerings can cater to the needs of both traditional companies and the burgeoning digital industries.
As the acceptance and use of digital assets become more institutionalised, both the soft and hard infrastructure for their trading and custody need to be developed quickly. Traditional financial firms have to invest in new technologies and develop new digital products. More broadly, it’s important for Hong Kong’s financial industry to be nimble enough to transform and modernise so that it can maintain its status as Asia’s financial hub.
Green finance has become a highly popular theme in many business forums in recent years.
In China, the green finance market began developing almost a decade ago. Its earliest green finance products were green loans in 2012, when the banking regulator issued green loans guidelines.
In 2016, the People’s Bank of China became the first central bank to issue guidelines for establishing a green financial system. The guidelines aim to reduce the carbon footprint by using incentives and restraints in the financial, fiscal, and environmental areas. Financial institutions were also encouraged to innovate and develop new financial instruments and services that could address the problems of maturity mismatch, asymmetric information, and inadequate analytical tools for green investment.
Subsequent to these initiatives, several provincial and local governments followed suit and issued green finance guidance.
The rapid development of the green finance industry in China generates enormous opportunities for Hong Kong as the bridge between China and the international market. According to data from the Climate Bonds Initiative, cumulative green debt issuance in Hong Kong amounted to more than US$38 billion as of end-2020. Mainland Chinese entities continued to drive the market, with issuance totalling $7 billion in 2020 alone, or 60% of the total.
In January 2021, the Hong Kong government announced the issuance of $2.5 billion of green bonds under its green bond programme, comprising $1 billion five-year, $1 billion ten-year and $500 million 30-year debt. It was the first 30-year green bond offering by an Asian government.
With the overarching goal of achieving carbon neutrality by 2060 in China and 2050 in Hong Kong, these moves have triggered positive responses from the industry. Major firms such as New World Development are now seriously considering long-term sustainable issues and formulating strategies to transform their production and operations in order to move from a shareholder-value maximisation focus to a shared-value creation system.
Meanwhile, banks, seeing this as a booming business opportunity, are setting up sustainable finance divisions that provide financing solutions to support the growth of green projects and industries. The stock exchanges of Hong Kong, Shanghai and Shenzhen have launched sustainable and corporate social responsibility indices to help investors select firms based on their sustainability performance. With better access to information, investor awareness of sustainability issues has improved and their appetite for green stocks and bonds has also increased in recent years.
While the rapidly expanding green finance sector will have a discernible impact on the supply and demand and cost of financial capital, challenges remain in terms of market efficiency. Globally, there is a lack of uniform measurement and disclosure standards for firms’ sustainability performance. Pricing and trading of green financial instruments are inefficient without high quality performance data.
Green finance is also a key component of environmental, social and governance (ESG) investing. The market needs many more ESG experts to analyse information, and a more efficient mechanism to signal proper market value of sustainability engagement. Both investors and business practitioners also need to clearly understand the linkage between sustainability performance and long-term business competitiveness in order to create higher market value for businesses.
Role of universities
Apart from having the right government policies, the primary ingredient for the success of any new industry is human capital. Universities play a critical role in nurturing the new generation of fintech and green finance talent to feed the growth of these highly promising areas of the financial industry.
Universities in Hong Kong have been responding to these market trends by adding modern business and engineering courses, including fintech analytics, machine learning for finance, data mining and big data management to their curriculums in recent years. They are also investing significant resources to equip young professionals with cutting edge technical skills and up-to-date business knowledge.
Universities are also working to incorporate sustainability elements into courses as they now count for a sizeable weight in many college ranking exercises. Major business schools have introduced sustainable finance courses, or even full degree programmes in sustainability and green finance.
Partnering with industry
Fintech is a dynamic subject which evolves and progresses rapidly. Therefore, classroom learning must be complemented with practical industry work to ensure that students acquire the most relevant market knowledge when they join the workforce. Universities need to collaborate more closely with companies and the business community to ensure that their research agenda and teaching materials correlate with industry developments.
In this regard, The Chinese University of Hong Kong (CUHK) has been working closely with Cyberport and The Hong Kong Science and Technology Parks Corporation to provide business practicum projects and internship opportunities for students. We have co-developed credit carrying courses with these corporations, and some of our students have started companies with their support.
Developing relevant business indices
CUHK business school established the Centre for Business Sustainability in June 2018 to develop a local benchmark for business sustainability ratings and rankings, and extend knowledge transfer activities to promote business sustainability engagement, responsible investment and ESG communication.
The Centre has developed several indices to monitor and analyse the sustainability performance of companies in this region, including the Hong Kong Business Sustainability Index, the Greater China Area Business Sustainability Index, the Greater Bay Area Business Sustainability Index, and the Small and Medium Enterprise Business Sustainability Index.
Each year, a knowledge transfer conference and a training workshop takes place to leverage academic and industrial expertise to enhance sustainable finance theories and practices, calling for more social awareness of innovative and responsible investment.
In April 2021, the CUHK business school started to develop a Corporate Innovation Index that will serve as a management and assessment tool to cultivate an innovation culture, and to enhance technology adoption among large corporations and SMEs in Hong Kong.
It’s more important than ever for universities to pool resources from various faculties to develop the most pragmatic degree programmes in these new fields. For fintech, companies need professionals who have both the technical digital skills, and an agile business mind that understands how to improve business models using new technology. So it makes perfect sense for business schools to work with the engineering faculty to develop programmes where students are required to take a combination of courses in engineering, computer science and business.
The CUHK launched a fintech undergraduate programme in 2017 and a Masters programme in 2018 where students take courses at both faculties. The faculties have also collaborated to organise the CUHK fintech conference in the last three years.
We will also need the law, business, and environmental science faculties to jointly design comprehensive degree programmes in green finance. This is still a relatively young field, and it will take some time before universities in Hong Kong and China build up the capacity and resources to offer these programmes on a large scale. The curriculum developed by leading universities in the US and UK could be used as a reference to develop something similar here.
As fintech and green finance continue to evolve, it’s no easy task to transform the university curriculum to equip future graduates with the most relevant and practical knowledge. But with the support of government incentives, we believe that most universities in this region are moving in the right direction.
Fintech and green finance offer many exciting opportunities for graduates. If Hong Kong can ensure sufficient supply of the right talent in these industries, its position as the financial centre of Asia will be strong and secure.
Prof. Seen Meng Chew, Associate Dean (External Engagement), CUHK Business School
Prof. Carlos Lo, Director, Centre for Business Sustainability, CUHK Business School
Dr. Xue Pang, Postdoctoral Fellow, Centre for Business Sustainability, CUHK Business
This article was originally published in Asia Asset Management magazine AAM25+ Special Anniversary Edition 2021 E-MAG