The Hong Kong government’s inaugural Retail Green Bond drew enthusiastic response from investors when it opened for subscription last week. The bond has an initial tranche of HK$15 billion (US$1.9 billion), with the option to increase to HK$20 billion if there is demand. The government last July doubled the size of its green bond programme, initiated in 2017, to HK$200 billion. After selling just over HK$57 billion to institutional investors since 2019, the investment product is now available to small investors. Besides supporting sustainable development, the proceeds will be used to combat climate change through initiatives to transition Hong Kong to a low-carbon economy. But which projects qualify, how is the money allocated, and how can investors know the environmental benefits they will generate? Here is what you should know about the government’s green bond programme. What type of projects are funded by the bond proceeds? The bond proceeds fund nine types of projects. They are renewable energy, energy-efficiency upgrades, pollution control, waste reduction and recycling, water and waste-water management, biodiversity conservation, clean transport, green buildings and climate-change adaptation. While they exclude all fossil-fuel projects, biomass-energy projects will be limited to those using municipal solid waste, food waste and sewage sludge as feedstocks. How ‘green’ are these projects and are environmental benefits guaranteed? There is no guarantee on the environmental benefits for projects funded by the bonds. This is because the projects have varied sustainability attributes and carry different implementation risks. “Although the proceeds … will be used to fund projects that fall under one or more of the ‘eligible categories’ as set out in the green bond framework, there is currently no market consensus on what precise attributes make a project ‘green’,” the retail green bond circular said. “Adverse environmental and/or social impacts may also occur during the design, construction, commission and/or operation of such green projects.” How are the bond proceeds allocated? A steering committee reviews and approves green bond issuances to ensure the projects submitted by government departments are eligible and the fund allocation is appropriate. It is led by the Financial Secretary, the Secretary for Financial Services and the Treasury, the Secretary for the Environment and a deputy chief executive of the Hong Kong Monetary Authority. The allocation takes into account the projects’ environmental benefits assessed on technical approaches, compliance with relevant standards and comparison against benchmarks. The proceeds will only be used to pay for project expenditures within the previous two and the next two financial years from the bond issuance date. What principles are adopted to guide green bond issuances? The government has published a green bond framework . It covers use of proceeds, project evaluation and selection, management of proceeds and impact reporting. The framework incorporates the government’s goal to achieve carbon neutrality by 2050 and its four decarbonisation strategies of net-zero electricity generation, green buildings, green transport and waste reduction. Vigeo Eiris – a sustainability research unit of credit ratings agency Moody’s – said the framework is aligned with the green bond principles published by the International Capital Market Association. How were the proceeds from previous government green bonds spent? According to the Financial Services and the Treasury Bureau’s latest green bond report , the US$3.5 billion raised from two green bonds issued in May 2019 and February last year have been allocated to 14 projects. Some 40 per cent was earmarked for waste management and resource recovery projects, 39 per cent for green buildings, 12 per cent for water and sewerage management works and 9 per cent for energy efficiency and conservation projects. They include two plants in North Lantau and the northern New Territories that use anaerobic digestion technology to turn food waste into biogas to produce electricity and compost. They can reduce an estimated 109,000 tonnes of greenhouse gases emission annually by preventing methane emissions in landfills and by reducing carbon dioxide emitted by burning fossil fuel used to generate electricity. Also included are two giant district cooling systems featuring an underground water pipe network at Kai Tak, which are projected to save 96,500 tonnes of carbon dioxide emissions annually as a result of electricity savings. Hong Kong’s carbon dioxide emission was estimated at 68 million tonnes in 2020, according to BP. How can ‘green-washing’ be avoided? To avoid reputational risk of “green-washing” – overrated sustainability benefits – the government should adopt the “additionality principle” in selecting projects, said Albert Lai, climate strategy leader at Deloitte CarbonCare Asia. This means the proceeds should only fund projects that would not have been invested in the normal course of business had there been no green bond issuance. “This is the surest way to give retail bond investors the environmental return they expect from their money,” he said.