The effect only applies the first time a company issues a green bond because by the second green bond, their environmental credentials have already been factored in by the market. But the findings have wider implications beyond these firms. China on board Governments have started to promote green bonds and other forms of green financing through policies and regulations and the research lends support to that approach. Hong Kong and Singapore, for instance, provide subsidies to companies that issue green bonds. “Our findings suggest such government-led policies can work and should be encouraged,” he said. The evidence that green investment is profitable is also timely for markets. Mainland China only just squeezed into the study, having issued its first green bond in 2016. But it is now among the top two issuers in the world. Although China allows firms to mix green bond accounts with other company accounts, it also has the most companies in the world that adhere to the international standard of separate accounting. The Chinese government is also using other financial instruments to promote better environmental performance – and in separate research, Professor Tang has shown that this approach is having the desired effect. In 2017 Beijing announced five pilot ‘green finance zones’ that earmarked incentives and special funds for environmentally friendly industries. Professor Tang looked at the spill-over effects in nearby cities and found they worked even harder to improve their environment than the green finance zones, as measured by available data on pollution and greenhouse gas emissions. “The reason is that they want to be named a green finance zone in future. This has real benefits because they will get money faster through the green channel, and local government officials may believe it could help in getting promoted,” he said. Failure of traditional finance Professor Tang sees the success of green finance zones and green bonds as a response to the failure of traditional finance. “When banks or bond markets give loans in the A new approach to financing is found to benefit both shareholders and society. GREEN BONDS ARE ON THE MONEY traditional way, they only care about getting their money back. This makes companies more short-term oriented because they have to pay back the interest and the principle. I have done other research that shows when companies get loans in this way, they pollute more. So that form of financing increases pollution. “With green finance, the lender cares about more how the money is used. They might lend $100 and instead of getting $110 back, they will ask for $107 and require the company to put the extra $3 towards reducing their pollution,” he said. Professor Tang himself is committing to green finance by making it a major focus of his research going forward. He is particularly keen to apply academic rigour in a way that keeps this fast-growing field on the straight and narrow. “It’s important to do it right. I want to be critical about ‘greenwashing’ by those who try to get a free ride by saying they will make changes but don’t follow through,” he said. When banks and other institutions lend money, their chief aim has long been to get paid back in full, with interest. But over the past decade or so, a new kind of financing has emerged – the green bond – to support companies that are trying to have a positive impact on the environment. The green bond market is worth more than US$700 billion globally and research by Professor Dragon Tang Yongjun shows it is rewarding shareholders. Green bonds require companies to take extra steps when seeking a loan. They must lay out specifically how the project will be environmentally friendly and produce an assessment verified by independent parties. In most cases, they are required to keep a separate account for the project so the funds will not be used as working capital (Mainland China is an exception to this), and issue separate progress and final reports on the project’s impact. Professor Tang and his PhD student, Yupu Zhang, collected data from 132 publiclylisted corporations in 28 countries that issued their first green bonds between 2007 – when green bond issuance started – and 2017, to see how share prices were affected. The results were very good news for investors: share prices for these firms rose by 1.4 per cent to 1.7 per cent on average within three weeks around the announcement of green bond issuance. “The green bond is a signal that the way the company is doing business may actually make it more valuable. To be environmentally friendly is more difficult than business as usual. Managers have to put in more effort and work harder. So there will be a fundamental change to the company,” Professor Tang said. With green finance, the lender cares about more how the money is used. They might lend $100 and instead of getting $110 back, they will ask for $107 and require the company to put the extra $3 towards reducing their pollution. PROFESSOR DRAGON TANG YONGJUN HKU’s Faculty of Business and Economics signed a memorandum of understanding with Climate Bonds Initiative to jointly provide training on green finance for students in Asia. 28 The University of Hong Kong Bulletin | May 2020 29 RESEARCH
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