Why Hong Kong could be the answer to world’s urgent need for climate finance

With its deep and open capital markets, early lead in green finance and backing from China, Hong Kong is arguably the best-positioned among leading international finance centres to facilitate meeting the world’s need for new ways to pay for climate adaptation

Eric Stryson

Published: 3:45pm, 14 Aug 2023

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The world needs new ways to pay for climate adaptation, and Hong Kong should lead the way. Dystopian headlines of extreme weather are becoming daily reminders of our urgent need to adjust to changing conditions.

Last week, scientists released a dire report on melting Antarctic ice and abnormally high winter temperatures in the southern hemisphere. Societal adaptation to a changing climate includes retrofitting infrastructure, securing food systems, cooling or even relocating cities and more. It will require enormous levels of funding.

By 2030, the United Nations Environment Programme estimates developing countries alone will need US$300 billion per year for adaptation. Meanwhile, the International Monetary Fund projects the need will exceed 1 per cent of GDP in 50 low-income and developing economies.

With its deep and open capital markets, early lead in green finance and backing from China, Hong Kong is arguably the best-positioned among leading international financial centres to facilitate meeting these needs. However, bold and creative new approaches are required.

This past July was the hottest on record, but the fear is that it might be the coolest July for the rest of our lives. If we stopped burning fossil fuels tomorrow, the cumulative greenhouse gases in the atmosphere would continue heating the planet for decades to come.

Even a rich city like Hong Kong needs to adapt. Rising sea levels are a serious concern, as are storm intensity, heat stress and new disease vectors. Food security will be paramount, as will protecting the supply lines that transport our food.

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The global low-carbon transition, as estimated by the COP27 Implementation Plan, will require US$4 trillion to US$6 trillion a year, yet an upper estimate puts climate finance flows in 2021 at just US$940 billion. Despite the growing need, the capital shortfalls are striking. Public and multilateral development funding are insufficient.

Private capital will need to play a much larger role, but it is still limited by demand for market-level returns and aversion to the risks associated with poor countries. Overcoming such barriers will become central to global finance. Countries need to prepare for extreme, unpredictable weather even as resources continue to be mobilised for reducing carbon emissions.

Attempts to “crowd in” private-sector funding for adaptation include collaboration with the public sector to reduce risks through what is known as “blended finance”. Still, the Climate Policy Initiative has reported that while around US$300 billion in private finance has gone to projects in mitigation – renewables, energy efficiency or carbon removal, as examples – just US$1 billion has gone towards adaptation.

Financing decarbonisation makes commercial sense, even if upgrading the built environment is more immediate in reducing suffering and saving lives. Of the 425 heat deaths in Maricopa county in the southwestern US state of Arizona last year, 56 per cent were among unhoused people and all those who died indoors lived in buildings without cooling.

A digital sign in front of Chase Field displays the time and temperatures as high as 113 degrees Fahrenheit (45 degrees Celsius) in Phoenix, Arizona, on July 18. Photo: AP

Climate adaptation has for too long been seen as a development problem of poor countries, something to be addressed by donor funding or concessional finance. It is rapidly becoming everyone’s problem, as well as a defining opportunity for a financial centre such as Hong Kong. The best minds in economics, finance and public policy should be mobilised and given incentives to make climate adaptation and infrastructure financing profitable.

Climate resilience should be incorporated into private-sector investments in facilities, supply chains and even community infrastructure. In capital markets, mechanisms to facilitate financial contributions to practical adaptation would be more tangible than net zero pledges and carbon offsets.

Rapidly evolving technologies such as decentralised finance could play a role, albeit in ways we might not expect, and be aligned with Hong Kong’s aspirations. Artificial intelligence could be deployed in better pricing and mitigating risk or reducing administrative barriers to accessing funding.

The Green Climate Fund, created as part of the Paris Agreement, is an example in which low-income countries have been persistently locked out because of its onerous accreditation requirements.

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Hong Kong can pioneer new approaches, in large part because it is China’s international finance centre. Speaking at the Paris Climate Summit, President Xi Jinping said China would promote cooperation in areas such as disaster prevention and climate-smart agriculture and help others in their financing capacity.

Many countries that are part of China’s Belt and Road Initiative are also among the most vulnerable to climate change. One can imagine solutions such as yuan-denominated debt-for-adaptation swaps. This would be in keeping with China’s goal of internationalising the renminbi and creating multilateral cooperation platforms for offshore transactions in yuan.

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Hong Kong is better positioned than rival international financial centres to help close the estimated US$25 billion gap for adaptation finance in Asia. Singapore has the advantage of being in Southeast Asia, though it lacks many of Hong Kong’s advantages as a global finance centre. Dubai could move up the ranks by leveraging its proximity to Africa given the continent’s massive need, which will undoubtedly be on the agenda at COP28 this November.

A key element of high-quality development for Hong Kong is transitioning to a low-carbon economy and preparing for the extremes of a changing climate. Development of its international financial centre will mean enabling more of the world to meet their adaptation financing needs as we advance into a climate of uncertainty.

Eric Stryson is managing director of the Global Institute For Tomorrow

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