Phase 2 of Hong Kong Taxonomy for Sustainable Finance: advancing the development of green finance

1. Over a year ago, we launched the first phase of the Hong Kong Taxonomy for Sustainable Finance (Taxonomy), providing market participants with an assessment tool to support informed decision-making in green and sustainable finance, addressing greenwashing concerns and scaling up relevant capital flows. The Taxonomy references mainstream standards and reflects the local contexts, ensuring it meets the needs of the local market while also aligning with the priorities of global investors. It is encouraging to see some banks and corporates have already adopted the Taxonomy. At the time of the launch, we indicated that the next phase would expand the Taxonomy to include more economic activities, including transition elements.
2. The second phase will begin with sub-phase 2A and gradually extend to 2B and beyond, making our Taxonomy a living document. Today, the HKMA has, as planned, released the prototype of Phase 2A of the Taxonomy¹ for public consultation. We welcome the industry to actively provide feedback to refine this pivotal tool.

What are the new elements in Phase 2?

3. Phase 1 of the Taxonomy provides clear definitions for 12 economic activities under four sectors. Phase 2A further enhances the framework in the following ways:
   •  Building on the four sectors covered in Phase 1 (namely power generation, transportation, construction, and waste), two new sectors — manufacturing, and information and communications technology — have been added, bringing the total number of sectors to six. The total number of economic activities has also increased from 12 to 25.
   •  In addition to green definitions, the Taxonomy now incorporates criteria for transition activities for the first time, addressing growing market demand for transition investment. 
   •  A new “Climate Change Adaptation” category has been added to meet rising financing needs for adaptation and to enhance the society’s resilience to physical risks and extreme weather.  This makes the Taxonomy one of the first in the region to include the “climate change adaptation” objective, underscoring our commitment to keeping up with the latest climate science and further reinforcing Hong Kong’s important role in promoting the development of green and sustainable finance.

4. While the first enhancement above may be straightforward, the concepts of “Transition Activity” and “Climate Change Adaptation” may still be unfamiliar to some and warrant further explanation.

Transition activities

5. Generally speaking, transition activities refer to economic activities that do not currently meet the green criteria, but can significantly reduce emissions in the short term or have the potential to transition to low-carbon activities over time. For example, certain hydrogen production methods may not meet the green criteria due to their level of carbon emissions, but through the use of low-carbon energy or carbon capture, their carbon emissions can be reduced to meet specific reduction targets within a defined timeframe. Classifying such activities as Transition Activity will help channel capital towards them, accelerating the overall decarbonisation process.
6. Phase 2 of the Taxonomy further categorises “Transition” into “Transition Activity” and “Transition Measure”. A “Transition Activity” refers to an economic activity that is progressing towards “green” based on a decarbonisation pathway within a defined timeframe or significantly facilitates carbon emissions reduction. A “Transition Measure” focuses on specific technologies, processes, equipment or materials that support decarbonisation. Examples include upgrading equipment or adopting new technologies to electrify the manufacturing process. It is important to note that Transition Activity does not apply to new developments (such as new production lines) in order to avoid carbon lock-in² arising from investing in long-lived carbon intensive infrastructure.
7. In defining Transition Activity, we have drawn on international mainstream standards to facilitate interoperability, while also taking into account the specific needs and challenges of the Asian region. For instance, Transition Measure in the manufacturing sector references industry practices and standards from the Mainland and other jurisdictions. This inclusive and balanced approach provides clear guidance for market participants and reflects the practical context of low-carbon transition in the region, facilitating a pragmatic and effective transition to the low carbon economy.

Addition of Climate Change Adaptation

8. Addressing climate change requires a dual approach of “mitigation” and “adaptation”. In Phase 1, we focused on “Climate Change Mitigation”, which means reducing carbon emissions to address climate change. In Phase 2A, we introduce a “Climate Change Adaptation” category which involves actions that help prevent, adjust to, or reduce the impacts of climate change. While their goals differ, both are essential to addressing climate change effectively.
9. As global warming intensifies, extreme weather events are becoming more frequent. In Hong Kong, for example, extreme rainfall events have surged. The daily rainfall recorded on 5 August this year broke the historical record for the highest daily volume in August³. Living with climate change and strengthening resilience against extreme weather events has become more urgent and necessary than ever. However, according to the estimates from the United Nations Environment Programme⁴, the global annual funding gap for climate adaptation ranges from US$187 billion to US$359 billion, posing significant challenges to advancing adaptation efforts. The new category of “Climate Change Adaptation” in the Taxonomy seeks to facilitate capital flow towards relevant adaptation projects, support effective management of physical climate risks, and serve as a model to raise awareness on climate adaptation— laying the foundation for scaling up investment in this area.
10. Given the localised nature of climate change adaptation, Phase 2A concentrates on the climate risks in Hong Kong and the surrounding areas, initially targeting flood risks and water stress. It introduces relevant adapting measures such as installation of water resource monitoring equipment. Looking ahead, we will consider expanding the scope to other climate risk areas based on experience, and evolving climate risks and market needs. This step-by-step approach will help the market build experience and capacity in this emerging field over time.

What’s next for the Taxonomy?

11. The Taxonomy is currently for voluntary use, aiming to provide a clear, usable, and science-based assessment tool for defining green, sustainable, and transition activities. We aim to support market capacity building, improve data capabilities, and encourage wider adoption. With these objectives in mind, we will closely monitor the usage of the Taxonomy and challenges related to it. In the long run, we will explore how to incorporate the Taxonomy into banking supervisory policies and maintain ongoing dialogue with the banking industry on this matter.
12. The Taxonomy will be gradually refined and updated. We have been engaging with a broad range of stakeholders, and we are now conducting a public consultation on the Phase 2A prototype. The feedback will be instrumental in shaping the Taxonomy in this phase, as well as its future development in Phase 2B and other subsequent phases. We value your feedback and encourage you to share your thoughts to enhance and promote the Taxonomy.

Arthur Yuen
Deputy Chief Executive
Hong Kong Monetary Authority

8 September 2025