Why Hong Kong’s latest RBC rules are driving insurer interest in green bonds

Introduction: Why green bonds matter now

Green bonds have evolved from a niche sustainability instrument into a core component of global fixed income markets. For insurers, they represent more than an ESG commitment and offer a strategic lever to help optimize capital efficiency under emerging regulatory frameworks.

Since July 2025, the Hong Kong Insurance Authority (HKIA) has taken a decisive step to embed sustainability into its Risk-Based Capital (RBC) rules, granting preferential treatment to recognized green bonds. This regulatory shift is not just a compliance milestone; it signals a broader transformation in how insurers look to balance financial resilience with climate leadership.

As Asia positions itself as a hub for sustainable finance, understanding the mechanics of these incentives—and the standards that underpin them—is critical for insurers seeking both regulatory and investment advantages.

1. RBC framework and latest regulations

The HKIA’s requirements for green bonds within the Risk-Based Capital framework represent a significant evolution from past regulations that treated all fixed income instruments uniformly. Previously, RBC rules focused only on credit quality, duration, and diversification without distinguishing between conventional and sustainable instruments.

The latest HKIA guidelines introduce preferential capital treatment for “recognized green bonds”, applying a 90% multiplier to the stress factor for credit spread risk. This adjustment reduces capital charges compared to conventional bonds, creating tangible efficiency gains for insurers.

By formalizing green bond requirements, the HKIA aims to incentivize insurers to integrate sustainability into their portfolio construction without necessarily compromising solvency objectives. With the formalization of the green bonds’ requirements and guidelines, insurers can potentially bring in another layer of efficiency within their core fixed income portfolios.

We take a closer look at the impact of spread risk charge adjustments for such designated green bonds by illustrating the trend of duration-rating-spread charge interplay. The chart below shows the estimated spread charges for various durations and ratings of specified credit indices (using an average approach for the relevant indices) in order to proxy how specific bond charges may could evolve – and we have applied a 0.9x factor to these indices to indicate the potential estimated charge for an equivalent green bond (the solid lines represent the estimated spread charge for non-green bonds and the dotted line immediately below each solid line represents what the estimated spread charge would be for an equivalent designated green bond). Please note that this is an illustrative example onlyⁱ:

Incorporating designated green bonds into portfolio construction can help reduce the overall spread charge of such a portfolio (compared to using only non-green bonds) as indicated above. Of course, it remains important to ensure portfolio metrics remain in-line with requirements – and the selection of green bonds, we expect, can help manage such targets.

One potential approach could be to screen for appropriate green bonds during security selection and assess them relative to non-green issuances (while maintaining overall diversification) taking into consideration achievable yields, robust credit analysis, and other bond characteristics that are important (e.g., liquidity, callability, etc). This approach fits very well with our thesis that insurers should always be looking for efficiencies in their portfolio construction – with the caveat that all sources of risk that might be introduced must be understood and managed appropriately.

We expect this will lead to insurers looking much more intensely at such relevant bonds with a corresponding increase in exposure to green bonds in insurers’ portfolios over time – reinforcing Hong Kong’s position as a green hub in the region. Over time, this could also reshape portfolio construction, issuer engagement, and data transparency in APAC.

2. Asset owner demand and sustainability strategies

Asset owners, particularly insurers, are increasingly integrating sustainability into their investment strategies. Based on Invesco’s analysis of APAC insurers, we find that approximately 45% have publicly announced details on their allocation to green bonds today – higher than pension funds and sovereign wealth funds. For insurers, liability matching often means that fixed income is a primary focus for asset allocation, representing typically around 55% of asset allocation.¹

To date, APAC insurers allocate green bonds typically as part of a broader approach to sustainable investing. This can be through bottom-up ESG/climate risk integration, or through targeted allocation to low-carbon or sustainable investments. In Figure 3 we share examples of how two major APAC insurers approach sustainable investing.

As insurers portfolios allocate to green instruments, they will also need the ability to assess what meets a “recognized green bond” to determine whether that allocation meets the requirements for presential capital treatment. The requirements are as follows⁴:

• 100% of proceeds allocated to green activities (as defined by one of the recognized bond principles listed below).
• A published pre-issuance external report to ensure transparency.
• Independent and qualified third-party verification to mitigate greenwashing risks.

Investors may apply their own internal frameworks to evaluate an issuer’s sustainable finance credentials against criteria like those outlined in the HKIA’s Recognized Green Bond Requirements. For instance, Invesco’s Sustainable Bond Framework Scorecard assesses issues across key dimensions such as:

• Use of Proceeds (score out of 4)
• Management of Proceeds (score out of 2)
• Reporting (score out of 2)
• External Verification (score out of 2)

Total: Score out of 10

In the below table we map out how the HKIA’s requirements for recognized green bonds can be mapped to Invesco Fixed Income’s Sustainable Bond Framework scorecard.

The use of such frameworks enables investors to embed green and sustainable finance assessments directly into the investment process. This ensures that the evaluation of instruments—such as green bonds—goes beyond reliance on labels, supporting a more rigorous and substantive analysis of their environmental integrity and alignment with recognized standards.

In addition, investors can leverage market tools to operationalize preferential treatment rules within sustainable fixed income strategies. For example, Bloomberg has introduced a dedicated data field—HKIA_Sustainable_Indicator — which flags whether a green bond meets HKIA’s valuation and capital eligibility guidelines. This enables portfolio managers to integrate regulatory alignment directly into investment workflows on behalf of clients.

3. Mapping IFI’s Sustainable Bond Framework to HKIA’s RBC rules and pricing of greenium

Rising insurer demand for green bonds over time brings a critical challenge: determining which bonds truly qualify as ‘green’ under regulatory and market standards. This is where robust frameworks—such as Invesco Fixed Income’s proprietary approach—play a pivotal role in helping investors unlock capital efficiencies.

Invesco Fixed Income (IFI) employs an in-house Sustainability and Green Bond Framework, developed in collaboration with Invesco’s Global ESG team, to evaluate and select green bonds for inclusion in portfolios. This framework aligns with the International Capital Market Association (ICMA) Green Bond Principles and emphasizes a scorecard-based assessment to ensure bonds fund environmentally beneficial projects while mitigating greenwashing risks.

The IFI framework assesses a bond using detailed criteria, including the use of proceeds, the management of proceeds, the quality and clarity of reporting, and the degree of external verification or certification. 

It ensures green bonds are evaluated not just by their label but by the actual impact and alignment with environmental goals, especially the UN Sustainable Development Goals (SDGs). The process incorporates macro factors such as policy, growth, and inflation, but overlays sustainability objectives to inform portfolio construction.

Green bonds are defined as fixed-income instruments where proceeds are exclusively allocated to projects supporting environmental sustainability, such as renewable energy, energy efficiency, clean transportation, or climate adaptation initiatives that contribute to climate change mitigation (aligned with the EU Taxonomy where applicable). 

Eligibility for inclusion requires bonds to meet both bond-specific criteria (via the scorecard) and broader portfolio-level ESG standards. Below is a breakdown:

1. Bond-specific scorecard assessment

The IFI Sustainable Bond Framework is a proprietary scorecard designed to evaluate the sustainability credentials and integrity of green bonds before investment, with a focus on robust ESG integration and alignment with global standards.

Green bonds are scored out of a maximum of 10 points across four key pillars, based on the issuer’s Green Bond Framework documentation. Only bonds scoring 4 or higher are eligible for inclusion. The scorecard ensures transparency, accountability, and alignment with United Nations Sustainable Development Goals (UN SDGs), particularly those related to climate action (SDG 13), clean energy (SDG 7), and sustainable cities (SDG 11).

This scorecard enables differentiation between high-quality green bonds (e.g., those with strong verification and impact metrics) and lower-quality ones, influencing pricing (e.g., “greenium” premiums) and portfolio weighting.

2. Broader ESG and sustainability standards

Even if a bond passes the scorecard, it must align with IFI’s overarching ESG integration framework to avoid “no significant harm” (DNSH) to sustainability objectives and ensure portfolio-level contributions to environmental goals. This framework ensures green bonds not only meet industry standards but also drive real-world environmental impact, supporting IFI’s commitment to responsible investing across portfolios.

Greenium and ESG incentives

The framework also acknowledges the existence of a “greenium” — a yield differential paid in the market for genuine sustainability impact versus standard (“vanilla”) bonds. It considers the structural features in sustainability-linked bonds, like step-up coupons if the issuer fails to achieve sustainability objectives but emphasizes that analysis should be based on both credit fundamentals and evolving ESG factors.

Investment process and reporting

IFI's credit teams closely monitor ESG risks and ensure credit spreads sufficiently price in downside risks, including those related to sustainability concerns. The framework is dynamic, allowing for ongoing engagement with issuers about project goals, ESG data, and the evolution of sustainability programs. External frameworks such as the ICMA Green Bond Principles and Social Bond Principles serve as part of the benchmark for the IFI proprietary framework’s compliance review.

Engagement and exclusions

IFI emphasizes issuer engagement, transparency, and tailored analysis over a “one-size-fits-all” model, preferring detailed reviews to blanket index inclusion. Exclusion decisions can be made where green or sustainable bonds fail to meet high reporting, verification, or impact standards.

Conclusion

The HKIA’s latest regulatory developments alongside growing asset owner demand for green bonds signal a structural shift in how insurers are integrating sustainability into their fixed income portfolios.

IFI’s Sustainable Bond Framework acts as a rigorous filter to ensure that Invesco’s investments in green bonds align with real-world environmental objectives, market standards, and investor expectations for sustainability. The framework enhances portfolio construction and lowers Risk-Based Capital (RBC) requirements for insurance companies. It streamlines the integration of sustainable fixed-income assets, enabling portfolio managers to build resilient, diversified portfolios that balance yield, risk, and environmental impact.

Insurance companies face RBC mandates to hold capital proportional to investment risks (e.g., credit, market, interest rate). The IFI framework indirectly mitigates these by favoring low-risk green bonds, which often qualify for favorable regulatory treatment, freeing up capital for underwriting or growth.

Looking ahead, the formalization of green bond requirements provides insurers with a clearer framework for identifying instruments that may qualify for preferential capital treatment. This could support more deliberate integration of recognized green bonds into core fixed income portfolios, particularly where they align with duration, rating, and spread charge objectives. While the potential for efficiency gains is evident, actual portfolio impact will depend on the availability of qualifying bonds, issuer transparency, and the consistency of third-party verification.

Over time, we expect insurers to be able to refine their investment processes—both top-down and bottom-up—to incorporate these considerations more systematically. This development could also influence how insurers engage with issuers and data providers to ensure transparency and consistency in green bond classification - especially in markets like Hong Kong, where regulatory guidance is evolving to support sustainable finance integration.

Investment risks

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When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.