Scott Gardiner and Tiffany Kwong share their latest insight from Hong Kong: there’s no escaping the heat of summer, but there is cool relief coming for investors and issuers in the climate finance space. A prototype that will classify financial products and investments based on environmental sustainability is in its consultation stage.
If you are in Hong Kong then you would have first-hand experience, and if you are not, let us tell you: Hong Kong’s summer is getting hotter. A lot hotter! In turn, Hong Kong’s efforts in combating climate change and carbon neutrality are heating up. For example, the introduction of the Hong Kong Climate Action Plan 2050 and the Steering Committee on Climate Change and Carbon Neutrality.
And now, it is set to get its own green taxonomy. As an international financial hub, green and sustainable finance is one of Hong Kong’s focus areas. The Hong Kong Monetary Authority (HKMA) released a discussion paper, “Prototype of a Green Classification Framework for Hong Kong”, on 30 May 2023. It is seeking feedback before 30 June 2023. The Climate Bonds Initiative (a global not-for-profit) will develop a prototype taxonomy for the HKMA, focusing on limited sectors and expanding in the future. We’ll call it the Hong Kong Taxonomy to keep it simple (time will tell whether it is simple in practice).
What is a green taxonomy? It is unrelated to tax…
A green taxonomy is a tool that provides a standardised framework for classifying and labelling financial products and investments based on environmental sustainability.
By introducing the Hong Kong Taxonomy, the HKMA intends to provide consistent and internationally recognised definitions of “green” and “environmentally sustainable” economic activities. The initial prototype will focus centrally on climate change mitigation.
Why do we need a taxonomy? Benefits…
A green taxonomy provides guidance, framework and standards for all stakeholders. To name a few upsides, a taxonomy could avoid greenwashing, attract capital and harmonise disclosure.
Everyone can benefit from a taxonomy.
- If you are an investor trying to make better decisions, it gives you clean and standardised information.
- If you are an issuer, your green products can gain credibility and legitimacy with the standards.
- For regulators, it helps to ensure compliance and provides a basis for measuring progress towards sustainability goals.
- None of the above? You can still gain some – a taxonomy supports the transition towards a low-carbon and sustainable economy for the greater society.
Taxonomy allows stakeholders to identify “green” activities that make a positive impact on the environment. It can also increase transparency and accountability and help unlock new investment opportunities for green and sustainable projects.
Making history – one giant leap towards a universal taxonomy?
Over 20 jurisdictions have established or are establishing a taxonomy or similar classification scheme. The idea of having a taxonomy is to establish a common standard, and ideally, there should be one universally recognised taxonomy. While we are slightly far from that goal, Hong Kong intends to be the first market to operationalise the Common Ground Taxonomy, which compares the commonalities between Mainland China and EU taxonomies.
The Hong Kong Taxonomy is a significant step towards harmonising taxonomies. That’s because its aim is to achieve interoperability with other existing taxonomies. Beyond the taxonomies of the EU and Mainland China (and their Common Ground Taxonomy), it also explicitly considers the ASEAN Taxonomy and Climate Bonds Taxonomy.
Could it be one giant leap? We are just as excited to find out as you are.
Which sectors will the Hong Kong Taxonomy cover?
The initial prototype will focus on the following sectors with 12 selected activities:
| Sectors | Activity category | Prototype activities |
| Electricity, Gas, Steam and Air Conditioning Supply
|
Electric Power Generation, Transmission and Distribution | 1. Electricity generation using concentrated solar power technology
2. Electricity generation using solar photovoltaic technology 3. Electricity generation using wind power |
| Transportation and Storage
|
Land Transport Including Railways | 4. Construction and operation of public transportation systems in urban and rural areas
5. Construction and operation of personal mobility devices, cycle logistics |
| Water Transport | 6. Transportation of freight by sea
7. Transportation of passengers by sea |
|
| Water supply; sewerage, waste management and remediation activities
|
Sewage Sludge Treatment | 8. Sewage sludge treatment – anaerobic digestion |
| Waste Collection, Treatment and Recycling | 9. Collection and transport of non-hazardous waste in source segregated fractions
10.Utilisation/ treatment of domestic waste – anaerobic digestion |
|
| Construction
|
Construction and Renovation of Buildings | 11.Construction of new buildings
12.Renovation of existing buildings |
For easy navigation, the prototype developed specific activity cards for each of the above 12 prototype activities. They consist of sector overview, metrics, criteria and thresholds, questions and outstanding issues.
What’s next?
The prototype will be modified appropriately following the consultation period in Q3 2023. Other sectors like heavy industries and carbon-intensive manufacturing sectors (for example aluminium, cement and steel) and additional environmental objectives will be considered in the next phase as the Hong Kong Taxonomy expands.
Let’s embark on the ESG journey together as we bring you more ESG news. Stay tuned!
Want to know more? Read about ASEAN’s Taxonomy here.
