Hong Kong Taxonomy for Sustainable Finance: Consolidating the green finance ecosystem

1. The World Meteorological Organization has confirmed that 2023 is the warmest year on record, with annual average global temperature approaching 1.5°C above pre-industrial levels. Data also show that since the 1980s, each decade has been warmer than the previous one, and the past nine years have been the warmest on record.  Extreme weather is clear evidence of accelerating climate change and reminds us of the urgent need for decarbonisation. In response to climate change, every global citizen has a responsibility and the financial industry should also play its part. Today, the Hong Kong Monetary Authority (HKMA) announced three measures to promote the development of green finance, including the publication of the Hong Kong Taxonomy for Sustainable Finance (Hong Kong Taxonomy), which provides the industry with an assessment tool for green finance; the upcoming launch of the beta version of a physical risk assessment platform (assessment platform) to improve data availability; and the announcement of details regarding the expansion of the scope of the Green and Sustainable Finance Grant Scheme to cover transition bonds and loans. While my primary focus here is to introduce the Hong Kong Taxonomy, I will also briefly mention the other two measures.

Hong Kong Taxonomy

Why was the Hong Kong Taxonomy developed?

2. Why do we develop the Hong Kong Taxonomy? This goes back to the Paris Agreement. In 2015, the United Nations Climate Change Conference (COP 21) held in Paris adopted the Paris Agreement, under which countries committed to undertake measures to reduce emissions, with a view to achieving the goal of keeping global average temperature increase well below 2°C relative to pre-industrial levels and pursuing efforts to limit it to 1.5°C. To achieve this goal will require significant amount of capital to develop solutions to combat climate change and to support the transition of carbon-intensive activities.  According to market estimates, Asia alone will require US$66 trillion in climate investments in the next 30 years.  Therefore, addressing climate change requires the support of the financial industry, which in turn will bring about enormous opportunities.
3. As more and more capital is directed towards tackling climate change, the financial industry and investors are increasingly concerned about the effective use of their capital such as whether the projects being financed can bring positive environmental benefit, and whether the level of emission reduced can meet the climate goals of the Paris Agreement, etc. A taxonomy provides the industry with an assessment tool for green finance and facilitates the identification of green economic activities, thereby preventing greenwashing behaviour.
4. As such, in recent years, the market has started to discuss the application of a green taxonomy. Examples of application include the labeling and disclosure of financial instruments (e.g. bonds), where the financed projects are assessed to ensure that they are aligned with the green definitions under the taxonomy. A green taxonomy is therefore an integral part of the green finance ecosystem. It enables investors to look for green investment opportunities and make informed decisions, thus facilitating the mainstreaming of sustainable finance flows.

How was the Hong Kong Taxonomy developed?

5. In Hong Kong, one of the key action items of the Green and Sustainable Finance Cross-Agency Steering Group (CASG) has been to explore the development of a local green classification framework for use across financial sectors. While Hong Kong’s physical footprint is small compared to other countries or cities, as an international financial centre, we can leverage our role as "super-connector" to facilitate the flow of green finance.  In view of the differences in economic structures, developments, and approaches to addressing climate change among regions, currently there is not yet a globally recognised green taxonomy.  As a connector, we hope that the Hong Kong Taxonomy can align with mainstream taxonomies in the market, allowing the industry to use it while having regard to the standards of other mainstream taxonomies.
6. It thus follows that the Common Ground Taxonomy (CGT) developed by the International Platform on Sustainable Finance (IPSF)¹ can serve as a key reference for our work. The CGT compared the taxonomies of China and the European Union (EU), providing clarity and transparency regarding the commonalities between them.  This helps reduce transaction costs of cross-border investments and facilitates sustainable capital flows in the global market.  However, as the CGT has included jurisdiction-specific industry classifications and criteria, it is not possible to directly incorporate the entire CGT into the Hong Kong Taxonomy without any modification.
7. Given the above, with the support of an international not-for-profit organisation working to mobilise global capital for climate action, we have been working to develop a taxonomy which is interoperable with the CGT, and seek feedback from the market and relevant stakeholders. To facilitate the use of the Hong Kong Taxonomy, activities are mapped with the Hong Kong Standard Industrial Classification (HSIC), as well as those in the CGT, China’s Green Bond Endorsed Projects Catalogue and the EU’s Taxonomy for Sustainable Activities.  This enables users to identify whether an industry is covered by these taxonomies.  When formulating the green criteria for each activity, we made reference to mainstream taxonomies in the global market including the CGT, and adopted the relevant metrics and technical screening criteria.  For example, for electricity generation using solar photovoltaic technology, the Hong Kong Taxonomy incorporates criteria related to photoelectric conversion efficiency taken from the CGT.  On the other hand, to cater for local circumstances, technical screening criteria of the construction sector include standards which are based on industry standards widely used in Hong Kong such as the Building Environmental Assessment Method Plus (BEAM Plus).  Taking into account the circumstances in Hong Kong such as the major sources of emissions, relative share of green investment and coverage of the CGT, the Hong Kong Taxonomy currently encompasses 12 economic activities under four sectors namely power generation, transportation, construction, and water and waste management.

What are the applications of Hong Kong Taxonomy?

8. We believe that the Hong Kong Taxonomy could raise awareness about green finance, promote common understanding on green economic activities, and facilitate green finance flow. We encourage the financial sector to use the Hong Kong Taxonomy as a foundation to assess the greenness of projects and assets when labelling and developing products, as well as making disclosures.  According to market analysis, referencing the CGT can reduce transaction costs when engaging in cross-border financial transactions.  As the Hong Kong Taxonomy aligns with the CGT, we believe that it can leverage similar advantage to facilitate the industry to assess how their projects meet the requirements of other mainstream taxonomies and evaluate their level of “greenness”, thereby effectively promote cross-regional green finance flows. In the long run, we will consider how the Hong Kong Taxonomy can be incorporated into banking supervisory policies.  We will maintain communication with the banking sector in this regard.

What is next?

9. The Hong Kong Taxonomy will be enhanced in phases. After releasing the first phase, we will commence the second phase of development, mainly along the following two areas:
   1. Expand the coverage of the taxonomy to include more sectors and activities. For example, by building upon the other activities in the CGT, such as renewable energy like hydro power, hydrogen-related activities like its generation and storage, and green electrical installation activities like green lighting upgrades.
   2. Identify transition activities. “Transition activities” generally refers to economic activities which are not yet considered as green, or even deemed as carbon-intensive, and thus have to decarbonise.  Examples include heavy industries like steel and cement manufacturing.  These activities often involve high emissions which are hard-to-abate.  Identifying transition activities and setting reduction target are thus important in mainstreaming transition finance and achieving global climate goals.  
10. Although Hong Kong does not have much carbon footprint in transition activities, we can leverage on our role as an international financial centre to support the need for transition financing, which is particularly acute in Asia, a region that accounts for over half of global energy consumption. With a view to encouraging relevant industries in the region to make use of Hong Kong’s financing platform as they move towards decarbonisation, we will soon be expanding the scope of subsidies under the Green and Sustainable Finance Grant Scheme to cover transition bonds and loans.  The scheme has been providing subsidies to green and sustainable debt instruments issued in Hong Kong since 2021, and has been well received by the industry².  The Financial Secretary put forward in the 2024-25 Budget to extend the scheme by three years to continue to foster the adoption of sustainable finance and promote good market practice.  In developing the relevant details, which we will announce later today, we have taken due account of the experience of implementing the scheme as well as the views from the market and industry participants.  The scheme is expected to be extended seamlessly upon the expiry of the existing scheme on 10 May 2024.

Physical Risk Assessment Platform

11. Apart from financing green projects, the financial industry also needs to properly manage climate risks. As a banking supervisor, the HKMA has all along strived to enhance banks’ capabilities in climate risk management.  Although some banks have begun strengthening their climate risk management frameworks, overall they still face numerous challenges, in particular a lack of physical risk-related data and analytical tools for conducting climate risk assessments and stress tests.  To make it easier for the industry to obtain granular data for conducting physical risk assessments and to improve the industry’s capability in understanding and assessing physical risks, we developed a cloud-based platform, which includes a database of more than 40 public data or data sources related to physical risk, to assist the industry in assessing the potential impact of physical risks on residential and commercial buildings in Hong Kong under different climate scenarios.  We will launch the beta version of the assessment platform shortly and plan to release the final version early next year, after taking into account user feedback from the industry and incorporating local climate data.
12. We will continue our collaboration with relevant stakeholders to enhance the financial industry’s resilience against climate risks and leverage Hong Kong's role as an international financial centre to contribute to the sustainable development in Hong Kong and the world.

Arthur Yuen
Deputy Chief Executive
Hong Kong Monetary Authority

3 May 2024