The Hong Kong Monetary Authority publishes consultation on prototype of a Green Classification Framework for Hong Kong

On 30 May 2023, the Hong Kong Monetary Authority (HKMA) published a discussion paper seeking market feedback on the “Prototype of a Green Classification Framework for Hong Kong”. The discussion paper outlines the HKMA’s current thinking on a local green classification framework (i.e. a taxonomy) for Hong Kong SAR (the Green Classification Framework).

The Green Classification Framework is, in effect, a taxonomy developed by the Green and Sustainable Finance Cross-Agency Steering Group – which is co-chaired by the HKMA. The HKMA also commissioned the Climate Bonds Initiative to support the development of the Green Classification Framework. It is based on the Common Ground Taxonomy, being the taxonomy developed by the International Platform on Sustainable Finance which identifies common ground or areas of convergence between the green/ESG taxonomies in the EU and China.

The aim is for the Green Classification Framework to be adopted in the local market and provide a standardised framework for classifying and labelling financial products and investments based on their environmental sustainability. This is intended to help facilitate investor decision-making and “underpin Hong Kong’s instrumental role in bridging green financial flows between the Mainland and the rest of the world, and hence strengthening Hong Kong’s status as an international green finance hub”. The Green Classification Framework is also intended as an analytical tool to compare how green activities are defined across the EU and China’s taxonomies.

What has been published?

The following two documents have been published:

• the “Discussion Paper” which outlines the structure and core elements of the proposed prototype Green Classification Framework (the Discussion Paper); and
• the “Annex to the Discussion Paper” which sets out a prototype spreadsheet providing a summary of the activities, three layers (explained below) and interoperability with other taxonomies (the Annex).

Who is the Green Classification Framework aimed at?

The Green Classification Framework is intended for use by a wide range of stakeholders, including investors, issuers of financial products as well as regulators.

What is being proposed?

Core principles 

The Green Classification Framework is intended to provide the financial sector with consistent and internationally recognised definitions of “green” and “environmentally sustainable” activities. It will be based on the following five core principles:

• alignment with the Paris Agreement;
• a proof from greenwashing;
• interoperability with other taxonomies;
• science-based criteria and thresholds; and
• foundations of Do No Significant Harm and Social Safeguards.

Layering and decision tree

The prototype Green Classification Framework has three “layers” of depth to provide green definitions of different degrees of precision, taking into account the complexity of the activities and applicability in the Hong Kong context.

• Layer 1 - the first layer would map activities to standardised industrial classification codes and categorise them according to whether they would be universally considered green, or just “potentially” green subject to meeting specific criteria.
• Layer 2 - the second layer identifies the key metrics that companies or projects would have to disclose to prove eligibility.
• Layer 3 - the third layer proposes technical screening criteria and related thresholds that can be applied to an activity in the Hong Kong context.

A decision tree is also set out in the Discussion Paper.

Activities and thresholds

The prototype focuses on 12 specific activities in the energy, land and water transportation, water and waste management and construction sectors to demonstrate different principles and ideas that could be further used for the building of a full-scale taxonomy. Other sectors, such as agriculture, industrial activities, technology development and R&D, and developing a transition criteria will be considered in a future iteration of the Green Classification Framework.

Prototype spreadsheet and sectoral activity cards

The prototype spreadsheet is set out in the Annex and provides a summary of the activities, three layers (as discussed above) and interoperability with other taxonomies.

A specific “activity card” has been developed for each of the twelve prototype activities. Structurally, the cards consist of several subsections including:

• a sector overview of how the sector operates in Hong Kong, its share of emissions, what technology is used, what kind of economic agents are involved in the sector (municipality or private companies), what the most pressing problems present in the sector are, and how the sector can be broken down for the purpose of its classification under the taxonomy;
• what kind of metrics are going to be used to define criteria and thresholds;
• the specific criteria and thresholds for each activity;
• consistency with other taxonomies; and
• any questions and outstanding issues.

Key reference taxonomies and alignment of the prototype

The major taxonomy referenced in developing the prototype is the Common Ground Taxonomy. The EU Taxonomy and the Chinese Green Bond Endorsed Projects Catalogue are also used as benchmarks and reference is made to the ASEAN taxonomy and the Climate Bonds Taxonomy. A table is included which sets out how these other taxonomies are adopted/adapted in the prototype Green Classification Framework.

What’s next?

The consultation is open for responses until 30 June 2023. The Discussion Paper explains that the HKMA plans to fine-tune the prototype and summarise the consultation with recommendations on future work around Q3 2023.