Enclosure - Consultation Report: Prototype of Hong Kong Taxonomy for Sustainable Finance (Phase 2A)

This document is a Consultation Report by the Hong Kong Monetary Authority (HKMA) on the Prototype of Hong Kong Taxonomy for Sustainable Finance (Phase 2A). It summarizes feedback received from stakeholders on the proposed enhancements to the Taxonomy, which builds upon Phase 1 released in May 2024. The primary purpose of the Taxonomy is to serve as an enabling tool for market participants to make informed decisions regarding green and sustainable finance, ultimately aiming to scale up relevant capital flows. Phase 2A introduces new green activities, transition elements, and a new environmental objective focused on climate change adaptation, with a specific initial focus on water-related measures.

The report details the findings of a public consultation conducted by the HKMA on the Phase 2A prototype of the Hong Kong Taxonomy for Sustainable Finance. This prototype represents a significant enhancement, incorporating new green activities, transition elements for financing activities that are not yet fully green but are on a credible path to decarbonization, and a new environmental objective focused on climate change adaptation. The consultation sought to gather diverse perspectives from financial institutions, corporations, industry bodies, NGOs, and other stakeholders to ensure the Taxonomy remains robust, internationally aligned, and practical for the Hong Kong market. The report outlines the feedback received, areas of support and concern, and the HKMA's responses and resulting adjustments to the Phase 2A Taxonomy.

The core of the report revolves around the feedback received and the HKMA's responses to various aspects of the Phase 2A prototype. This includes:

• Taxonomy Design and Structure: The overall design and structure of the Taxonomy were generally well-received, praised for their logical organization, clear hierarchical structure, and user-friendly activity cards. The classification of activities into "Green Activity," "Transition Activity," and "Exclusion" categories, likened to a "traffic-light approach," was seen as credible and practical. The inclusion of International Standard Industrial Classification of All Economic Activities (ISIC) codes has been added to facilitate cross-referencing. Phase 2A is considered to supersede Phase 1, with all future references to activities and measures needing to align with the latest technical criteria under Phase 2A.
• Harmonisation and Interoperability: While respondents acknowledged the Taxonomy's alignment with regional and international frameworks (e.g., EU Taxonomy, China's Green Bond Endorsed Project Catalogue, Multi-Jurisdiction Common Ground Taxonomy), they requested clearer explanations and visual mappings to facilitate easier comparison. The HKMA affirmed that the principle of interoperability has guided development and documented references in methodological sections.
• Mitigation Framework – Transition Elements: The introduction of "Transition Activities" and "Transition Measures" was strongly supported, recognizing the critical role of transition financing, especially in Asia.
• Transition Activities: Defined as economic activities that are not yet aligned with a 1.5°C pathway but are progressing towards it or enable significant short-term emissions reductions by a designated sunset date. These allow the entire activity to access sustainable financing.
• Transition Measures: Defined as specific components and interventions within an activity that can partially improve its emission performance. This category facilitates financing for granular processes and technologies when the entire activity doesn't meet "Green" or "Transition Activity" criteria.
• Activity-level and Entity-level Transition Plans: The Taxonomy adopts an activity-level and asset-level approach. Transition plans are required in specific cases for Transition Activities (e.g., maritime vessels, data centers) and Transition Measures (e.g., forward-looking decarbonisation technologies).
• Mitigation Framework – Sunset Dates: Sunset dates were generally supported as a time-bound, science-based approach to transition. Suggestions for extensions (e.g., to 2040) were noted. These dates are determined by factors such as technology maturity, sectoral emissions, market readiness, Hong Kong's climate commitments, and international alignment.
• Adaptation Framework: The inclusion of climate change adaptation as an environmental objective was welcomed. The initial "whitelist" approach for adaptation measures was deemed pragmatic. Respondents suggested expanding the whitelist, incorporating technical criteria, and implementing maladaptation checks. The HKMA will explore more sophisticated assessment approaches in subsequent phases.
• Taxonomy Alignment Metrics (CapEx, OpEx, Revenue): Clarifications were sought on Capital Expenditure (CapEx), Operational Expenses (OpEx), and Revenue definitions and their significance for claiming Taxonomy alignment. The report provides definitions for these terms, emphasizing that Taxonomy alignment for CapEx and OpEx makes activities/measures eligible for Green/Transition-labeled debt, while Taxonomy-aligned revenue reports alignment of net turnover. Transition Measures are only eligible for transition capital expenditure (CapEx) and operational expenses (OpEx) financing and cannot claim revenue alignment.
• Sector Chapters: Detailed feedback and HKMA responses were provided for specific sectors, including:
• Energy: Transmission and distribution of electricity (A-004) and renewable/low-carbon gases (A-005). The HKMA clarified emissions thresholds for electricity transmission/distribution and defined renewable/low-carbon gases. Storage of electricity (A-006) and district heating/cooling (A-007) were also addressed, with the HKMA clarifying eligibility of batteries and refining the scope of district heating/cooling. Fossil gas power generation is under consideration for future inclusion, with criteria to be science-based and locally relevant.
• Transportation: Clarifications were provided on the scope of light commercial vehicles (B-003) and the distinction between personal mobility devices (B-002) and other vehicle categories.
• Buildings: Feedback on energy efficiency in existing buildings (C-001) and construction of new buildings (C-002) led to clarifications on BEAM Plus baselines and zero-carbon-ready building certification. For installation/maintenance/repair of building equipment (C-003), the HKMA noted requests for quantitative thresholds and a lifecycle approach, but stated the focus remains on operational emissions due to data limitations.
• Waste: Quantitative definitions for "majority of produced biogas" and clarifications on bio-waste thresholds and chemicals for sewage sludge/domestic waste treatment (D-001, D-003) were provided.
• Manufacturing: The manufacture of hydrogen (E-001) saw requests for activity scope clarification (geological hydrogen, derivatives) and lifecycle emissions accounting. The HKMA clarified a "cradle-to-site" methodology and provided guidance on renewable electricity usage. For aluminium manufacturing (E-003, E-004), the HKMA outlined the basis for emission thresholds and will explore Hong Kong-specific thresholds and flexibility in future updates. A suggestion to include "percentage increase in the utilisation of secondary aluminium or recycled/scrap aluminium" as a Transition Measure was noted, with the HKMA stating that secondary aluminium production is automatically eligible under Green Activity.
• Information and Communications Technology (ICT): For data processing/hosting (F-001), the HKMA addressed water usage, refrigerant GWP, and construction of new data centre buildings, clarifying the interplay with BEAM Plus and the complementary nature of F-001 and C-002. For data-driven solutions (F-002), the HKMA explained how GHG reductions can be demonstrated and noted that while minimum thresholds aren't set, solutions are expected to contribute positively to efficiency and emissions reduction.
• Further Development and Implementation:
• Expansion of the Taxonomy: Suggestions for new activities include waste-to-energy, landfill gas collection, methane recovery, water/wastewater treatment, desalination, critical mineral mining, and professional services. For adaptation, additional hazards like heat stress and storm damage were proposed, along with measures like sea walls and resilient building designs. Other environmental objectives proposed for consideration include pollution prevention, biodiversity, sustainable water use, and circular economy. The HKMA will prioritize recommendations relevant to Hong Kong, the Greater Bay Area, and ASEAN.
• Taxonomy Implementation: Priority use cases identified include channeling and scaling up sustainable capital flows for sovereign issuances, sustainable debt, ESG fund products, and innovative financing for adaptation. The Taxonomy is also seen as a tool for shaping policies and corporate/investment strategies, including transition planning.
• Do No Significant Harm (DNSH) and Minimum Social Safeguards (MSS): Respondents highlighted the need for guidance on DNSH and MSS, including considerations of a just transition, and requested a clear stance on their inclusion and alignment with global standards.

The Phase 2A prototype introduces several significant changes and new requirements:

• Introduction of Transition Elements:
• Transition Activities: A new category allowing activities not currently aligned with 1.5°C pathways but with credible plans for significant short-term emissions reductions or progression towards alignment to access sustainable finance.
• Transition Measures: A category for specific components or interventions that improve the emission performance of an activity, facilitating financing for granular processes and technologies.
• New Environmental Objective: Climate Change Adaptation: This adds a focus on resilience to climate-related physical risks, initially with water-related measures.
• Expansion of Scope: The Taxonomy's coverage is expanded to include new sectors:
• Manufacturing (e.g., hydrogen, aluminium).
• Information and Communications Technology (ICT).
• Enhanced Detail in Sector Criteria:
• More specific technical criteria, metrics, and thresholds for activities within existing and new sectors.
• Clarification of methodologies for emissions calculations (e.g., lifecycle assessments for hydrogen).
• Introduction of specific requirements for transition plans at activity or entity levels for certain activities.
• Superseding Phase 1: Phase 2A integrates and updates Phase 1 content, meaning all future references should align with Phase 2A.
• Interoperability Enhancements: Inclusion of ISIC codes to facilitate cross-referencing with global taxonomies.
• Clarification of Metrics: Detailed definitions and roles of CapEx, OpEx, and Revenue in Taxonomy alignment.
• Refinement of Existing Criteria: Adjustments based on stakeholder feedback, such as clarification of thresholds for electricity transmission/distribution, and refinements in building sector criteria.

The document is a Consultation Report, with the original consultation for the Phase 2A prototype having occurred following its publication on 8 September 2025. The report itself is dated January 2026. There are no explicit future effective dates or deadlines mentioned within this consultation report. The implementation and adoption of the finalized Phase 2A Taxonomy will likely be subject to subsequent announcements by the HKMA.

The impact of the Hong Kong Taxonomy for Sustainable Finance (Phase 2A) is broad, primarily affecting:

• Financial Institutions: Banks, asset managers, and insurance companies will use the Taxonomy as a framework to identify, assess, and finance green and sustainable activities. This will influence their lending, investment, and product development strategies.
• Corporates and Issuers: Companies seeking to raise capital for green and sustainable projects will need to align their activities and projects with the Taxonomy's criteria to access favorable financing. This includes those issuing green bonds, sustainability-linked bonds, and other sustainable debt instruments.
• Industry and Professional Associations: These bodies will play a role in disseminating information, providing guidance, and advocating for the adoption of the Taxonomy among their members.
• Non-Governmental Organisations (NGOs): NGOs will likely use the Taxonomy as a benchmark to assess the sustainability of financial products and corporate activities, and to advocate for higher environmental standards.
• Regulators: While the Taxonomy is voluntary at this stage, it can inform regulatory approaches and policy development related to sustainable finance in Hong Kong.

The degree of impact is significant for entities aiming to engage in sustainable finance, requiring them to understand and potentially reorient their operations, investments, and reporting to align with the Taxonomy's criteria. For those not actively pursuing sustainable finance, the impact will be indirect, through evolving market expectations and potential competitive pressures.

As the Taxonomy is described as a voluntary tool at this stage, there are no immediate mandatory compliance requirements. However, the HKMA seeks to increase its adoption through various means, suggesting that future policy or regulatory developments might introduce compliance obligations.

Key aspects related to compliance and implementation guidance include:

• Use of the Taxonomy: The Taxonomy can be used for:
• Channelling and scaling up sustainable capital flows (sovereign issuances, sustainable debt, ESG funds).
• Creating innovative financing products.
• Shaping local policies and corporate/investment strategies.
• Guiding transition planning and demonstrating alignment with transition opportunities.
• Reporting Requirements: While not explicitly mandated yet, the Taxonomy implies that entities aligning with it will need to be able to demonstrate and report on their alignment, particularly concerning metrics like CapEx, OpEx, and revenue.
• Implementation Support: Respondents suggested that regulatory agencies can provide actions and support to increase adoption. The HKMA is considering these suggestions for future phases.
• Transition Plans: For specific "Transition Activities" and "Transition Measures," the development and adherence to credible activity-level or entity-level transition plans are a de facto requirement for alignment with these categories.
• Data and Documentation: Entities will need robust data collection and documentation processes to substantiate their alignment with the Taxonomy's technical criteria and metrics.

This section highlights key technical terms, definitions, standards, and metrics mentioned in the report:

• Key Concepts:
• Green Activity: Economic activities that substantially contribute to environmental objectives and do no significant harm to other environmental objectives, adhering to specific technical screening criteria.
• Transition Activity: Economic activities that do not yet meet "Green Activity" criteria but are on a credible pathway to alignment with a 1.5°C pathway or enable significant short-term emissions reductions by a designated sunset date.
• Transition Measure: Specific components or interventions within an activity that partially improve emission performance, enabling financing for granular processes and technologies.
• Do No Significant Harm (DNSH): A principle ensuring that an activity does not cause significant harm to other environmental objectives.
• Minimum Social Safeguards (MSS): Principles related to social protection, including fair labor practices and human rights.
• Just Transition: Ensuring that the shift to a sustainable economy is fair and inclusive, minimizing negative impacts on workers and communities.
• Environmental Objectives:
• Climate Change Mitigation (Phase 1 and enhanced in Phase 2A).
• Climate Change Adaptation (New in Phase 2A, initially focusing on water-related measures).
• Pollution Prevention, Biodiversity and Nature, Sustainable Use of Water Resources, Circular Economy (proposed for future consideration).
• Metrics and Methodologies:
• Capital Expenditure (CapEx): Payments for assets intended to maintain or grow a company's property and equipment or invest in new technology; recorded on the balance sheet.
• Operational Expenses (OpEx): Shorter-term costs for day-to-day business operations, such as maintenance or R&D.
• Revenue (Net Turnover): Money derived from the sale of products and services.
• Lifecycle Assessment (LCA): A methodology to assess the environmental impacts associated with all stages of a product's life, from raw material extraction to end-of-life treatment. A "cradle-to-site" methodology is applied for hydrogen manufacture (E-001).
• Power Usage Effectiveness (PUE): A metric for data center energy efficiency.
• Water Usage Effectiveness (WUE): A metric for data center water efficiency.
• Global Warming Potential (GWP): A measure of how much heat a greenhouse gas traps in the atmosphere relative to carbon dioxide.
• Grid Emissions Factor: A measure of the carbon intensity of electricity generated for the grid.
• Standards and Frameworks Referenced:
• EU Taxonomy: European Union's classification system for sustainable economic activities.
• China’s Green Bond Endorsed Project Catalogue.
• Multi-Jurisdiction Common Ground Taxonomy.
• International Standard Industrial Classification of All Economic Activities (ISIC).
• IEA Net Zero by 2050 Roadmap.
• Transition Pathway Initiative (TPI).
• International Aluminium Institute (IAI).
• BEAM Plus: Hong Kong's green building assessment tool.
• BEC (Building Environmental Standards).
• Mandatory Energy Efficiency Labelling Scheme (MEELS).
• Voluntary Energy Efficiency Scheme (VEELS).
• ISO Standards: ISO 14040, ISO 14044, ISO 14067, ISO 19870 (for LCA calculations).
• Kunming-Montreal Global Biodiversity Framework.
• Leadership in Energy and Environmental Design (LEED) v5.
• BREEAM v7.
• Intergovernmental Panel on Climate Change (IPCC).
• United Nations Environment Programme (UNEP).
• Science Based Targets initiative (SBTi).
• Green Product Certification Scheme (Construction Industry Council, Hong Kong).
• China Building Material Federation standards.
• NABERS (National Australian Built Environment Rating System).
• Specific Thresholds and Criteria:
• Transmission and Distribution of Electricity (A-004): 67% threshold for newly enabled generation capacity under Green Activity, 50% for Transition Activity.
• Data Centres (F-001): GWP threshold of 675 for refrigerants.
• Attachments/Tables:
• Figure 1: Type of respondents to Phase 2A taxonomy prototype: A pie chart and table showing the breakdown of the 25 responses by respondent type (Banks, Asset managers, Insurance companies, Corporates, Industry and professional associations, Non-government organisations).
• Table 1: Consultation questions of Phase 2A taxonomy prototype: A table listing the four main categories of consultation questions and their sub-questions, covering taxonomy design, methodology, sector chapters, and implementation.

This summary provides a comprehensive overview suitable for executive decision-making, detailing the purpose, content, changes, implications, and technical specifics of the HKMA's Consultation Report on the Hong Kong Taxonomy for Sustainable Finance (Phase 2A).