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Hong Kong Establishes a Green Finance Taxonomy to Strengthen the City’s Position in Fundraising

With an average worldwide temperature that is about 1.5°C above pre-industrial levels, 2023 was officially the hottest year on record, according to the World Meteorological Organization. Additionally, data indicate that, since the 1980s, temperatures have increased with each passing decade,with the last nine years being the warmest on record. Severe weather serves as a stark reminder of the need for decarbonization and is proof positive that climate change is increasing. Every global citizen has a duty to address climate change, and the financial sector need to contribute as well. 

Three steps have been announced by the Hong Kong Monetary Authority (HKMA) to encourage the growth of green finance. These include the release of the Hong Kong Taxonomy for Sustainable Finance (Hong Kong Taxonomy), which offers an industry assessment tool; the impending beta launch of a physical risk assessment platform (assessment platform) to enhance data availability; and the disclosure of information about the extension of the Green and Sustainable Finance Grant Scheme’s scope to include transition bonds and loans. Although introducing the Hong Kong Taxonomy is my main goal today, I will also touch on the other two proposals in passing.

Hong Kong Taxonomy

Why was the Hong Kong Taxonomy developed?

Why is the Hong Kong Taxonomy being developed? This relates to the Agreement in Paris. The Paris Agreement, which was adopted in 2015 at the United Nations Climate Change Conference (COP 21) in Paris, committed nations to reducing emissions in order to keep the increase in the global average temperature well below 2°C over pre-industrial levels and to pursue efforts to limit it to 1.5°C.

A significant amount of funding will be needed to promote the transition of carbon-intensive activities and develop solutions to mitigate climate change in order to meet this target. Market projections state that in the next 30 years, investments in climate change alone in Asia will amount to US$66 trillion. As a result, the financial sector must assist efforts to mitigate climate change, which will create a wealth of opportunities.

How was the Hong Kong Taxonomy developed?

One of the main initiatives of the Green and Sustainable Finance Cross-Agency Steering Group (CASG) in Hong Kong has been to investigate the creation of a regional framework for green categorization that can be used to various financial industries. 

Hong Kong is an international financial center, so even while our physical footprint is less than that of other nations or cities, we may use our position as a “super-connector” to help the flow of green financing. There isn’t yet a widely accepted green taxonomy because of regional variations in economic structures, technological advancements, and climate change mitigation strategies.  

As a result, a valuable resource for our work may be the Common Ground Taxonomy (CGT), created by the International Platform on Sustainable Finance (IPSF). In order to shed light on the similarities between the taxonomies of China and the EU, the CGT compared both. In addition to facilitating sustainable capital flows in the global market, this lowers the transaction costs associated with cross-border investments. Still, the CGT cannot be immediately incorporated into the Hong Kong Taxonomy without modification, as it contains industry categories and criteria that are peculiar to each jurisdiction.

The Hong Kong Standard Industrial Classification (HSIC), the EU’s Taxonomy for Sustainable Activities, China’s Green Bond Endorsed Projects Catalogue, and the CGT are all linked onto activities to make the Hong Kong Taxonomy easier to use. Users are therefore able to determine if certain taxonomies apply to a given industry.

In light of Hong Kong’s unique conditions, including its primary sources of emissions, proportion of green investment, and CGT coverage, the Hong Kong Taxonomy currently classifies 12 economic activities into four sectors: power generation, transportation, construction, and water and waste management.

What are the applications of Hong Kong Taxonomy?

Hong Kong Taxonomy has the potential to increase public knowledge of green finance, foster consensus over green economic practices, and streamline the flow of green funding. We urge the financial industry to evaluate the greenness of projects and assets using the Hong Kong Taxonomy as a basis for product development and labeling, as well as disclosures. Market data indicates that when conducting cross-border financial transactions, making reference to the CGT can lower transaction costs.