The World Meteorological Organization has confirmed that 2023 is the warmest year ever recorded, with the average global temperature approaching 1.5°C above pre-industrial levels. Data also shows that each decade since the 1980s has been warmer than the previous one, and the last nine years have been the warmest on record. Severe weather is clear evidence of accelerating climate change and reminds us of the urgent need to reduce carbon emissions. In response to climate change, every global citizen has a responsibility, and the financial industry should also play a part. The Hong Kong Monetary Authority (HKMA) has announced three measures to promote the development of green finance, including the release of the Hong Kong Taxonomy for Sustainable Finance, which provides the industry with an assessment tool for green finance. They will also launch a beta version of a platform to assess physical risks and expand the Green and Sustainable Finance Grant Scheme to include transition bonds and loans. While the main focus is on introducing the Hong Kong Taxonomy, the other two measures will also be briefly mentioned.
Hong Kong Taxonomy
Why was the Hong Kong Taxonomy created?
Why do we develop the Hong Kong Taxonomy? This relates to the Paris Agreement. In 2015, the United Nations Climate Change Conference (COP 21) in Paris adopted the Paris Agreement, in which countries pledged to take steps to reduce emissions, with the aim of keeping the global average temperature increase well below 2°C relative to pre-industrial levels and making efforts to limit it to 1.5°C. Achieving this goal will require a significant amount of capital to develop solutions to combat climate change and support the transition of carbon-intensive activities. Market estimates suggest that Asia alone will need US$66 trillion in climate investments in the next 30 years. Therefore, tackling climate change requires the support of the financial industry, which will in turn bring about enormous opportunities.
As more capital is directed towards addressing 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 benefits, and whether the level of emissions reduced can meet the climate goals of the Paris Agreement, etc. A taxonomy provides the industry with an assessment tool for green finance and helps to identify green economic activities, thereby preventing misleading behavior related to green initiatives.
In recent years, the market has started to consider the application of a green taxonomy. Examples of application include labeling and disclosing financial instruments (such as bonds), where the financed projects are assessed to ensure that they align with the green definitions under the taxonomy. Therefore, a green taxonomy is a vital part of the green finance ecosystem. It enables investors to seek green investment opportunities and make informed decisions, thereby facilitating the mainstreaming of sustainable finance flows.
How did the Hong Kong Taxonomy come about?
In Hong Kong, the Green and Sustainable Finance Cross-Agency Steering Group (CASG) has been working on creating a local green classification framework for the financial sectors. Hong Kong, as an international financial center, aims to facilitate the flow of green finance due to its role as a 'super-connector.' As of now, there is no globally recognized green taxonomy due to differences in economic structures and approaches to climate change among regions. The hope is that the Hong Kong Taxonomy can align with mainstream taxonomies in the market so that the industry can use it while considering the standards of other mainstream taxonomies.
The Common Ground Taxonomy (CGT) developed by the International Platform on Sustainable Finance (IPSF) is considered an important reference for the work in Hong Kong. The CGT compared the taxonomies of China and the European Union (EU), revealing commonalities between them, which helps reduce transaction costs of cross-border investments and facilitates sustainable capital flows in the global market. However, as the CGT includes jurisdiction-specific industry classifications and criteria, it cannot be directly incorporated into the Hong Kong Taxonomy without modification.
Therefore, with the support of an international not-for-profit organization focused on mobilizing global capital for climate action, Hong Kong has been developing a taxonomy that is interoperable with the CGT, and seeking feedback from the market and relevant stakeholders. The Hong Kong Taxonomy maps activities 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 helps users identify whether an industry is covered by these taxonomies. When formulating the green criteria for each activity, they 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 from the CGT. On the other hand, to consider local circumstances, technical screening criteria of the construction sector include standards that are 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 uses of Hong Kong Taxonomy?
We think that the Hong Kong Taxonomy could help people understand green finance, promote common understanding on green economic activities, and assist green finance flow. We encourage the financial sector to use the Hong Kong Taxonomy as a basis to evaluate the greenness of projects and assets when creating and labeling products, as well as making disclosures. According to market analysis, using the CGT can lower transaction costs when engaging in cross-border financial transactions. Since the Hong Kong Taxonomy aligns with the CGT, we believe that it can provide similar advantage to help the industry to assess how their projects meet the requirements of other mainstream taxonomies and evaluate their level of “greenness”, thereby effectively promoting cross-regional green finance flows. In the long term, we will consider how the Hong Kong Taxonomy can be integrated into banking supervisory policies. We will maintain communication with the banking sector in this regard.
What comes after this?
The Hong Kong Taxonomy will be improved in stages. After releasing the first phase, we will start the second phase of development, mainly in the following two areas:
Broaden the coverage of the taxonomy to include more sectors and activities. For instance, by expanding 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.
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.
Even though Hong Kong does not have much carbon footprint in transition activities, we can use our role as an international financial centre to support the need for transition financing, which is particularly critical 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 industry. The Financial Secretary proposed in the 2024-25 Budget to extend the scheme by three years to continue to promote the adoption of sustainable finance and good market practice. In developing the relevant details, which we will announce later today, we have taken into account 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.
Tool for Assessing Physical Risks
In addition to funding environmentally friendly projects, the financial industry also needs to effectively handle climate risks. The HKMA, as a banking supervisor, has been working to improve banks’ abilities in managing climate risks. While some banks have started to strengthen their frameworks for managing climate risks, they still encounter various challenges overall, especially due to a lack of data and tools for assessing physical risks and conducting stress tests. To make it easier for the industry to access detailed data for assessing physical risks and to enhance the industry’s capability in understanding and evaluating such risks, we have created a cloud-based platform. This platform includes a database of over 40 public data or data sources related to physical risks, to help the industry assess the potential impact of physical risks on residential and commercial buildings in Hong Kong across different climate scenarios. We will soon launch the beta version of the assessment platform and plan to release the final version early next year, after considering industry feedback and integrating local climate data.
We will continue working with relevant parties to strengthen the financial industry’s ability to withstand climate risks and utilize Hong Kong’s position as a global financial center to support sustainable development in Hong Kong and globally.
