Enclosure - Hong Kong Taxonomy for Sustainable Finance (Phase 2A)

This document outlines the Hong Kong Taxonomy for Sustainable Finance (Phase 2A), published in January 2026. It serves as a detailed framework for defining and classifying environmentally sustainable economic activities, aiming to systematically scale up green and sustainable finance flows to address climate change mitigation and adaptation needs.

The Hong Kong Taxonomy is a home-grown classification system developed by the Hong Kong Monetary Authority (HKMA) to establish a common standard for identifying and channeling capital towards environmentally responsible projects. Its primary goal is to facilitate the transition to a low-carbon economy by providing clear guidance to market participants, enhancing transparency, and combating greenwashing.

Phase 1 of the Taxonomy, launched in May 2024, focused on 12 green economic activities across Energy, Transportation, Waste, and Construction, aligning with the Common Ground Taxonomy (CGT) for interoperability. Phase 2A builds upon this foundation by expanding the scope to include Climate Change Adaptation, introducing new sectors (Manufacturing and ICT), and incorporating "transition" elements to support carbon-intensive industries in their decarbonisation journeys.

The Taxonomy is designed for voluntary adoption and is intended to build market confidence, support product development, and inform investment decisions. The HKMA plans to explore its incorporation into supervisory policies in the long term.

The core of Phase 2A of the Hong Kong Taxonomy is structured around two key environmental objectives: Climate Change Mitigation and Climate Change Adaptation.

1. Climate Change Mitigation:

• Classification Framework: Activities are classified as Green, Transition, or Exclusion based on their alignment with the Paris Agreement's 1.5°C climate goals.
• Green Activities: Substantially contribute to climate change mitigation and operate at near-zero emissions or are aligned with a 1.5°C pathway without yet being at near-zero emissions.
• Transition Activities: Carbon-intensive activities on a time-bound decarbonisation journey to align with a 1.5°C trajectory, aiming for net-zero by 2050. They can also be activities enabling substantial short-term emissions reductions. These are generally for existing infrastructure and are time-bound with sunset dates.
• Transition Measures: Components of an activity designed to materially reduce Scope 1 and 2 emissions, such as installing a dual-fuel engine. These are also time-bound.
• Exclusion Activities: Incompatible with a 1.5°C future or not progressing rapidly enough, or activities with minimal climate materiality.

• Key Principles for Transition:

1. Limited or no low-carbon alternatives: Applies to highly-emitting but necessary activities (e.g., hard-to-abate steel/cement). Fossil-based land transport is excluded due to available low-carbon alternatives.
2. Demonstrable progress: Requires measurable reduction in emissions intensity and/or increase in energy efficiency.
3. Time-bound: Activities must meet Green criteria by a defined sunset date.
4. Existing infrastructure: Primarily applies to existing assets to prevent carbon lock-in.

• Developing Transition Thresholds: Utilizes methods like leveraging credible decarbonisation pathways (e.g., Transition Pathway Initiative - TPI), benchmarking against best-in-class performers, and applying consistent improvement parameters.

• Sectoral Expansion: Phase 2A introduces two new sectors and expands existing ones:
• Energy: Expanded to seven activities, including:
• Electricity generation using concentrated solar power technology (Green)
• Electricity generation using solar photovoltaic technology (Green)
• Electricity generation from wind power (Green)
• Transmission and distribution of electricity (Green)
• Transmission and distribution of renewable and low-carbon gases (Green)
• Storage of electricity (Green)
• District heating and cooling (Green)
• Metrics: Emissions intensity measured in gCO2e/kWh.
• Transportation: Updates to include activities like transport by motorbikes, passenger cars, and light commercial vehicles, and low-carbon transport infrastructure.
• Construction: Includes construction of new buildings and renovation of existing buildings.
• Waste: Focuses on sewage sludge treatment (anaerobic digestion/co-digestion) and collection/transport of non-hazardous waste in source-segregated fractions.
• Manufacturing (New Sector):
• Manufacture of hydrogen.
• Manufacture of equipment for hydrogen production through electrolysis.
• Manufacture of aluminium (alumina refining, aluminium smelting).
• Information and Communications Technology (ICT) (New Sector):
• Data processing, hosting and related activities (Data Centres):
• Green Activity Criteria:
• Energy Usage: High energy efficiency (PUE aligned with BEAM Plus New Data Centres v1.0) at different IT loads (e.g., PUE ≤1.35 at 100% IT load) or powered by 100% renewable/low-carbon energy (≤100gCO2e/kWh lifecycle emissions).
• Water Usage: Effective water management (e.g., advanced water treatment) or WUE ≤ 2.0 L/kWh.
• GWP: Refrigerants with GWP ≤ 675 or lower applicable local standards.
• New Construction: Must also meet Taxonomy's green criteria for new commercial buildings.
• Transition Activity Criteria (Retrofits/Existing):
• Energy Usage: PUE thresholds (e.g., PUE ≤1.40 at 100% IT load) with a commitment to meet Green criteria by 2035.
• Water Usage: WUE ≤ 2.3 L/kWh, meeting Green criteria by 2035.
• GWP: Refrigerants with GWP ≤ 675 or lower applicable local standards.
• Sunset Date: 2035.
• Data-driven solutions for greenhouse gas emissions reductions:
• Green Activity Criteria:
• Provides data/analytics for GHG emission reductions.
• Demonstrates GHG emission reductions on par with best-performing solutions.
• Calculations verified by independent third party using GHG Protocol, ISO 14067: 2018, etc.
• Alternative Green Activity: Increases energy efficiency, reduces GHG emissions, or maximizes product use in IT products and processes.
• Transition: Not applicable.

2. Climate Change Adaptation:

• Background: Recognizes the increasing urgency to adapt to actual and expected climate change impacts and physical risks, with a significant financing gap.
• Hong Kong's Adaptation Framework: Core Principles:
• Adapting measures-focused: Initially focuses on specific measures rather than standalone activities.
• Localised for Hong Kong and adjacent regions: Considers local geographical and climatic factors, and vulnerabilities in the Greater Bay Area.
• Building block approach for phased development: Allows for incremental expansion to include more sectors and activities.
• Graduated assessment approach: Begins with a Whitelist approach for automatically eligible adapting measures, with potential to incorporate more sophisticated methods (technical checks, threshold-based criteria) later. Maladaptation risk is a key consideration.
• Initial Focus Sector: Water Sector:
• Prioritized due to Hong Kong's vulnerability to tropical cyclones, rainstorms, and reliance on external water supply.
• Climate Hazards: Flood Damage and Water Stress.
• Whitelisted Adapting Measures (Water Sector):
• G-001: Implementation of stormwater separation: (Wastewater collection and treatment) - Associated ISIC Code: 3600, 4290. Addresses flood damage by reducing physical vulnerability.
• G-002: Installing water metering: (Water supplies) - Associated ISIC Code: 4322. Addresses flood damage and water stress by improving adaptive capacity through optimized water usage and loss prevention.
• *(Note: The provided document snippet is incomplete regarding the full list of whitelisted measures in the Water Sector, but it mentions "Water [sub-sector]" and indicates G-002 relates to water stress. More measures related to water stress are expected in subsequent iterations.)*
• CapEx and OpEx Alignment: For adapting measures, only Capital Expenditures (CapEx) and Operational Expenditures (OpEx) can be classified as taxonomy-aligned. Revenue is excluded.

The publication of the Hong Kong Taxonomy for Sustainable Finance (Phase 2A) represents a significant expansion and refinement of the framework introduced in Phase 1. Key changes include:

• Introduction of Climate Change Adaptation: A new environmental objective has been added to address the critical need for adaptation to climate impacts and physical risks.
• Inclusion of Transition Activities and Measures: A new category is introduced to facilitate the decarbonisation of carbon-intensive sectors by defining credible pathways for their transition towards net-zero goals.
• Expansion of Sectors:
• New Sectors: Manufacturing and Information and Communications Technology (ICT) have been incorporated.
• Expanded Sectors: Energy and Transportation have had their scope broadened with new green and transition activities.
• Specific New Activities under Climate Change Mitigation:
• Energy: District heating and cooling, Transmission and distribution of renewable and low-carbon gases, Electricity storage systems.
• ICT: Data processing, hosting and related activities (Data Centres) and Data-driven solutions for greenhouse gas emissions reductions.
• Enhanced Detail in Existing Sectors: Criteria and thresholds have been further defined for activities previously included in Phase 1, particularly for energy and transportation.
• Shift from solely Green to Green & Transition: The Taxonomy now embraces a dual focus on achieving green standards and facilitating the transition for hard-to-abate sectors.
• Whitelisting Approach for Adaptation: The initial phase of the adaptation framework uses a Whitelist of approved measures for streamlined implementation.
• Alignment with Global Standards: Continued emphasis on interoperability with international frameworks like the Common Ground Taxonomy (CGT) and Multi-Jurisdiction Common Ground Taxonomy (M-CGT), while incorporating local context.

While specific effective dates for the voluntary adoption of Phase 2A are not explicitly stated as a single launch date, the document is dated January 2026, indicating its publication and intended implementation period.

• January 2026: Publication of Hong Kong Taxonomy for Sustainable Finance (Phase 2A).
• May 2024: Publication of Phase 1 of the Hong Kong Taxonomy.
• September 2025: Public consultation on Phase 2A was conducted.
• By 2035:
• Phasing out of coal for daily electricity generation in Hong Kong.
• Sunset date for transition activities and measures in the Energy sector.
• Commitment for data centres to align with Green Activity criteria for PUE and WUE.
• By 2050: Hong Kong's target for achieving carbon neutrality.
• By 2030: Sunset date for transition activities and measures in the Maritime Transport sector (mentioned as an example for sunset dates).

The Hong Kong Taxonomy is designed for voluntary adoption by market participants, indicating a broad scope of potential impact across the financial ecosystem and related industries.

• Applicable Parties:
• Financial Institutions: Banks, asset managers, insurers, and other financial service providers using the Taxonomy for investment decisions, product development, and reporting.
• Corporates: Companies seeking to issue green or transition finance, improve their sustainability credentials, and attract investment.
• Investors: Institutional and retail investors looking for credible sustainable investment opportunities.
• Government Agencies: For policy development, green bond issuance, and public sector financing.
• Other Stakeholders: Including regulators, industry bodies, and researchers.

• Affected Institutions: All entities involved in sustainable finance and those operating in or seeking investment for activities covered by the Taxonomy, particularly in the Energy, Transportation, Waste, Construction, Manufacturing, and ICT sectors.

• Degree of Impact:
• Low to Moderate: For those adopting the Taxonomy voluntarily for transparency and market access.
• Potentially High: For institutions seeking to access sustainable finance markets, develop green products, or align with evolving international standards. The long-term prospect of incorporating the Taxonomy into supervisory policies could significantly increase its impact.

As the Taxonomy is for voluntary adoption, formal compliance is not mandated at this stage. However, entities choosing to align with the Taxonomy will need to adhere to its criteria and reporting guidelines.

• Specific Compliance Steps (Voluntary):
• Understand Taxonomy Criteria: Thoroughly review and understand the detailed eligibility criteria for Green, Transition, and Adaptation activities and measures relevant to their operations or investments.
• Data Collection and Assessment: Gather necessary data to assess alignment with specific thresholds (e.g., emissions intensity, PUE, WUE, GWP).
• Internal Policies and Procedures: Develop or update internal policies to integrate Taxonomy alignment into investment screening, product development, and reporting processes.
• Due Diligence: Conduct due diligence on projects and assets to ensure they meet Taxonomy requirements.
• Third-Party Verification: Consider obtaining independent verification for Taxonomy alignment claims to enhance credibility, particularly for green or transition bonds.

• Reporting Requirements:
• Taxonomy Alignment: Report on the percentage of CapEx, OpEx, and Revenue (for Green Activities) or CapEx and OpEx (for Transition Activities/Measures and Adaptation Measures) that are taxonomy-aligned.
• Transition Activity/Measure Specifics: For transition activities, reporting may include details on the decarbonisation pathway, progress made, and adherence to sunset dates.
• Data Centre Metrics: Reporting on PUE, WUE, and GWP for data centres.
• Data-Driven Solutions: Reporting on demonstrated GHG emission reductions and verification methodologies.
• Adaptation Measures: Reporting on the whitelisted adapting measures implemented.
• Implementation Guidance:
• Stakeholder Engagement: The HKMA emphasizes ongoing stakeholder engagement for continuous improvement.
• Phased Approach: The Taxonomy is being rolled out in phases, allowing for gradual adoption and adaptation.
• Market Capacity Building: The HKMA aims to support market capacity building for understanding and applying the framework.

The Taxonomy is rich in technical terms, definitions, standards, and metrics.

• Key Technical Terms and Definitions:
• Carbon Neutrality: Achieving a balance between emitting carbon and absorbing carbon from the atmosphere.
• Paris Agreement 1.5°C Climate Goals: The target to limit global warming to 1.5°C above pre-industrial levels.
• Scope 1, 2, 3 Emissions: Direct emissions (Scope 1), indirect emissions from purchased energy (Scope 2), and other indirect emissions (Scope 3).
• GHG Protocol: A widely used accounting standard for measuring and managing greenhouse gas emissions.
• PUE (Power Usage Effectiveness): A metric for data centre energy efficiency, calculated as Total Facility Energy divided by IT Equipment Energy.
• WUE (Water Usage Effectiveness): A metric for data centre water efficiency, often measured in Liters per Kilowatt-hour (L/kWh).
• GWP (Global Warming Potential): A measure of how much heat a greenhouse gas traps in the atmosphere over a specified time.
• Sunset Date: A defined endpoint by which transition activities/measures must meet Green criteria or cease to be taxonomy-aligned.
• Maladaptation: An unintended increase in vulnerability or exposure to climate hazards.
• Adapting Measures: Sub-components of activities (technologies, processes, etc.) that contribute to resilience and adaptation.

• Standards and Metrics:
• gCO2e/kWh (grams of carbon dioxide equivalent per kilowatt-hour): Primary metric for electricity generation emissions intensity.
• PUE Thresholds: Specific values defined for different IT loads (e.g., ≤1.35 at 100% IT load for Green Data Centres).
• WUE Thresholds: Specific values defined (e.g., ≤2.0 L/kWh for Green Data Centres).
• GWP Cap: A limit for refrigerant GWP (e.g., 675).
• ISIC Codes (International Standard Industrial Classification of All Economic Activities): Used to associate Taxonomy activities with specific economic sectors.
• BEAM Plus New Data Centres Version 1.0 (NDC V1.0) and BEAM Plus EDC v1.0: Local green building assessment tools referenced for PUE and Water Usage criteria.
• GHG Protocol, ISO 14067:2018, ISO 14064-2:2019: Methodologies for calculating GHG emissions reductions for ICT solutions.
• Climate Bonds Resilience Taxonomy (CBRT): Referenced for adaptation framework principles and assessment approaches.
• Intergovernmental Panel on Climate Change (IPCC): Referenced for adaptation guidance.
• International Maritime Organisation (IMO): Referenced for emissions reduction targets in maritime transport.
• Transition Pathway Initiative (TPI): Referenced for sector-specific decarbonisation pathways.

• Specific Numbers, Percentages, Amounts, Ratios:
• HK$240 billion: Allocated over 15-20 years for climate change mitigation and adaptation measures in Hong Kong.
• US$66 trillion: Estimated climate investment required in Asia (2020-2050).
• US$22 trillion: Projected climate investment needed in China (2020-2060).
• 61%: Hong Kong's energy sector's contribution to total carbon emissions in 2023.
• 2015 to 2024: Period of significant reduction in coal's share in Hong Kong's electricity generation fuel mix from ~50% to ~20%.
• By 2035: Target for phasing out coal for daily electricity generation; sunset date for Energy sector transition activities.
• 60% to 70%: Expected share of zero-carbon energy in Hong Kong's fuel mix before 2035.
• 7.5% to 10%: Target renewable energy mix by 2035.
• 15%: Further increased renewable energy mix target (subsequently).
• By 2050: Hong Kong's carbon neutrality target.
• 2030: Sunset date example for Maritime Transport transition activities.
• PUE Thresholds for Data Centres: e.g., ≤1.35 at 100% IT load (Green), ≤1.40 at 100% IT load (Transition).
• Water Usage Effectiveness (WUE) for Data Centres: ≤2.0 L/kWh (Green), ≤2.3 L/kWh (Transition).
• GWP Cap for Refrigerants: 675.
• US$2 trillion: Economic losses from extreme weather (2014-2023).
• US$187–359 billion annually: Estimated financing gap for climate change adaptation.
• 4.1%: Proportion of Government Sustainable Bond Programme proceeds allocated to adaptation projects as of 30 September 2024 (16 out of 116 projects).
• HK$194 billion: Proceeds from adaptation-focused projects under the GSBP as of 30 September 2024.
• ~2,400 mm: Hong Kong's average annual rainfall.

The document includes an **Appendix: Associated ISIC Codes**. This appendix serves to map the specific economic activities defined within the Taxonomy to their corresponding International Standard Industrial Classification of All Economic Activities (ISIC) codes. This mapping is crucial for market participants to identify which ISIC codes are covered by each Taxonomy activity, facilitating classification and reporting efforts. For example, "Data processing, hosting and related activities" is linked to ISIC code 6311, and "Manufacture of hydrogen" would have a corresponding ISIC code within the manufacturing division. This ensures consistency and alignment with broader industrial classifications.