Hong Kong Monetary Authority publishes sustainable finance taxonomy

On 3 May 2024, the Hong Kong Monetary Authority (HKMA) published the Hong Kong Taxonomy for Sustainable Finance (the Hong Kong Taxonomy). The Hong Kong Taxonomy is to enable informed decision making on green and sustainable finance and facilitate relevant finance flows. Following its previous consultation in May 2023, the HKMA has polished and fine-tuned the taxonomy prototype based on the feedback received.

The use of the Hong Kong Taxonomy is voluntary, but the HKMA is encouraging banks to use it when labelling or assessing investments, as well as making disclosures, as it is intended to provide more clarity around what can be considered “green” and, therefore, reduce the risk of greenwashing. 

The Hong Kong Taxonomy has been developed with reference to other significant taxonomies, such as the Common Ground Taxonomy, China’s Green Bond Endorsed Projects Catalogue and the EU’s Taxonomy as the HKMA intends to support the interoperability between different taxonomies as far as possible. 

The current form of the Hong Kong Taxonomy covers 12 economic activities in four sectors and covers green activities. It does not cover transition activities, which are flagged to be considered in a later iteration of the taxonomy. 

The Hong Kong Taxonomy is focused on the environmental objective of climate change mitigation, although there is a reference to possibly expanding the scope to include the objective of climate change adaptation in future iterations. 

What did the HKMA publish?

The following three documents have been published:

• the “Consultation Report” which discusses the responses received from the stakeholders to the consultation and the HKMA’s findings and views on developing the framework;
• the “Hong Kong Taxonomy” which outlines the reasons for developing a taxonomy and the core principles and sectors involved; and
• the “Supplemental Guidance” which sets out more detailed guidance on the use and application of the Hong Kong Taxonomy.

Application of the Hong Kong Taxonomy

The Hong Kong Taxonomy essentially provides a framework for classifying green and sustainable activities for voluntary use by industry. The Hong Kong Taxonomy may, for example, be used for labelling of green bonds, classification of green loans as well as supporting specific reporting (e.g. it enables the determination of the proportion of assets that finance and are invested in green and sustainable activities).

What sectors does the Hong Kong Taxonomy cover?

The Hong Kong Taxonomy currently encompasses 12 economic activities under four sectors, namely: 

• power generation; 
• transportation; 
• construction; and 
• water and waste management. 

Power generation sector: 

This covers power generation, transmission and distribution of electricity, gas, steam and air conditioning supply. The objective is to provide clear guidance on certain technologies, assets and investments that will provide a substantial contribution to climate change mitigation in the context of Hong Kong’s decarbonisation goals.

Transportation sector:

This covers transportation and storage, such as land transport including railways, electric private cars and other public transport and water transport (including ships). The objective is to upgrade Hong Kong’s transport infrastructure and services for private mobility and achieve a goal of zero vehicular emissions in the future. 

Construction sector:

This covers the construction and renovation of buildings. The objective is to help building developers, owners, operators and investors to determine whether a building can be considered to be contributing to climate change mitigation, and to reduce the overall electricity consumption of buildings through promoting green buildings, improving buildings’ energy efficiency, and promoting a low-carbon lifestyle. 

Water and waste management sector: 

This covers water supply, sewage treatment, waste collection, treatment and recycling and any remediation activities. The objective is to reduce and monitor methane emissions and leakage and quantity and production of other types of waste.

How to use the Hong Kong Taxonomy?

The following steps set out how to assess whether an entity, asset or project aligns with the Hong Kong Taxonomy:

• Break down into activity level: An entity, asset, or project is broken down at the activity level, e.g. according to the industry codes provided in the Hong Kong Taxonomy. Expenditures such as capital expenditure and operating expense or revenue/turnover can then be tagged against each identified activity. 
• Check the coverage: An activity listed in the breakdown can be compared against the activity descriptions provided in the relevant “activity card” to verify if they are covered in the Hong Kong Taxonomy.
• Assess eligibility against the technical screening criteria (TSC): Information including granular data should then be collected and processed to determine the eligibility of the identified activities against the TSC. A combination of data provided by third-party together with in-house research may support the process.
• Conclude the evaluation: If an activity is eligible under the Hong Kong Taxonomy, the expenditure or revenue/turnover linked to the implementation of the activity can be considered green. The eligible expenditure could then form the basis of the underlying use of proceeds of a potential green financial instrument - for instance, a green bond or a loan. 

If 100% of the activities of a company align with the screening criteria of the Hong Kong Taxonomy, the company in its entirety may be considered green. However, if only a portion of the activities of the company align with the criteria, then only the relevant expenditure, turnover or revenue of the activities of the company could be considered eligible as green, depending on the referenced rules and frameworks.

What’s next?

The Hong Kong Taxonomy is described as a “living document” - for the second phase of development of the Hong Kong Taxonomy, the HKMA will focus on the below areas:

• expanding the coverage of the taxonomy to include more sectors and activities; and
• identifying transition activities.

There is also reference that the concepts of “Do No Significant Harm” and “Minimum Social Safeguards” will be explored in future iterations of the Hong Kong Taxonomy.

The HKMA has also developed a cloud-based platform to launch early next year which will assist the financial industry in assessing climate risk.