Hong Kong issues green taxonomy targeting EU-China interoperability

The Hong Kong Monetary Authority (HKMA) has finalised and published a taxonomy for sustainable finance adapted to local needs.

It will be the first taxonomy to seek alignment with the so-called common ground taxonomy (CGT), which was developed by a multilateral EU working group to map areas of alignment between the EU and Chinese green taxonomies.

The taxonomy was previously known as a “green classification framework” based on an early prototype released a year ago.

It was renamed after stakeholders argued that a “sustainable” badge would provide more room for “activities such as nuclear, gas, and other transitional practices that are considered sustainable but may not necessarily align with the specific criteria of being ‘green’,” the HKMA said.

Nuclear and gas-fired energy are not admissible under the taxonomy’s current iteration, which favours conventional renewable energy sources such as solar and wind. Both the construction and operation of solar and wind plants have been made taxonomy-eligible by the HKMA.

The Hong Kong taxonomy has been developed solely for climate change mitigation and does not cover broader objectives such as biodiversity and the circular economy.

While it shares many similarities with the pioneering EU green taxonomy – both apply a strict threshold of 100gCo2e/kWh for lifecycle emissions and have explicit screening criteria – Hong Kong authorities have not yet developed a policy around Do No Significant Harm (DNSH).

The EU taxonomy and others which have applied DNSH require eligible green or sustainable activities to be tested to ensure that they do not negatively impact other environmental objectives.

Compliance with DNSH hurdles has been challenging due to the broad scope of potential environmental harms. A study by the EU’s external taxonomy advisory group found that around half of the DNSH criteria associated with the bloc’s green taxonomy, which total nearly 300 unique tests, are not usable.

The HKMA has described the first release of its taxonomy as a “living document”, and said that it aims to explore elements like DNSH and minimum social safeguards in “future development”.

The regulator has not indicated that it will develop any disclosure or conduct-based requirements aligned to the taxonomy.

Local adaptations

The Hong Kong taxonomy for sustainable finance encompasses 12 economic activities across four sectors: power generation, transportation, construction, and water and waste management.

According to the HKMA, it is the first taxonomy to incorporate local industry standards such as Hong Kong’s Building Environmental Assessment Method (BEAM), which rates the sustainability performance of projects for activities relating to construction of new buildings.

All the taxonomy’s criteria are aligned with the EU, Chinese, ASEAN and common ground taxonomies.

However, the criteria for activities related to domestic waste treatment, collection and transport of non-hazardous waste, sewage sludge treatment, new building construction and building renovations fall short of a reference green taxonomy developed by the Climate Bonds Initiative (CBI).

CBI is a co-developer…