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

This document outlines the Hong Kong Taxonomy for Sustainable Finance (Phase 2A), a crucial update to the existing framework designed to classify environmentally sustainable economic activities. Its primary purpose is to facilitate and scale up green and sustainable finance flows, supporting Hong Kong's transition towards a low-carbon economy and bolstering its position as a global green finance hub. This phase extends the Taxonomy beyond its initial focus on climate change mitigation to explicitly include climate change adaptation.

The Hong Kong Taxonomy for Sustainable Finance (Phase 2A) is an official publication by the Hong Kong Monetary Authority (HKMA), building upon the foundation laid by Phase 1. This iteration significantly expands the Taxonomy's scope by introducing new sectors, incorporating transition activities and measures, and adding a comprehensive environmental objective for climate change adaptation. The document aims to provide clear, science-based guidance for market participants to identify and invest in sustainable economic activities, thereby addressing climate change risks and opportunities, and combating greenwashing. It is designed to be interoperable with international standards, particularly the Common Ground Taxonomy (CGT) and the Multi-Jurisdiction Common Ground Taxonomy (M-CGT), while also being tailored to Hong Kong's specific context.

The core of Phase 2A of the Hong Kong Taxonomy is structured around the principles of climate change mitigation and adaptation, detailing specific economic activities, their classification (Green, Transition, or Exclusion), and the associated criteria and thresholds for alignment.

This section builds upon Phase 1 by introducing a Transition category, which is crucial for driving decarbonisation in carbon-intensive sectors. The Taxonomy classifies activities into three categories based on their alignment with the Paris Agreement's 1.5°C climate goals:

• Green Category: Activities that substantially contribute to climate change mitigation and operate at near-zero emissions or are aligned with a 1.5°C pathway.
• Transition Category: Covers carbon-intensive activities on a time-bound decarbonisation journey towards net-zero by 2050, or activities enabling significant short-term emissions reductions. This category includes:
• Transition Activity: A standalone activity progressing towards 1.5°C alignment or facilitating significant short-term emissions reductions, typically with a corresponding Green Activity.
• Transition Measure: A component of an activity designed to materially reduce Scope 1 and 2 emissions.
• Exclusion Category: Activities incompatible with a 1.5°C pathway or those with low climate materiality.

Key principles for the Transition category:

• Applies only to activities with limited low-carbon alternatives.
• Requires demonstrable progress in emissions reduction and energy efficiency.
• Is time-bound with defined sunset dates.
• Primarily applies to existing infrastructure to prevent carbon lock-in.

Methods for developing Transition thresholds:

• Leveraging credible decarbonisation pathways.
• Benchmarking against high-performers.
• Applying consistent improvement parameters.

Phase 2A significantly expands the Taxonomy by introducing two new sectors:

• Manufacturing: This sector is critical due to its carbon intensity. The Taxonomy will define pathways for manufacturing activities to transition towards lower emissions.
• Information and Communications Technology (ICT): Recognising the role of ICT in enabling sustainability, this sector is included with specific activities like data processing, hosting, and data-driven solutions for GHG emission reductions.

Additionally, the scope of the Energy and Transportation sectors is broadened to include new green and transition activities, as well as transition criteria for existing Phase 1 green activities.

Specific Sector Updates:

• Energy:
• Expanded from three to seven activities.
• New activities include:
• Transmission and distribution of renewable and low-carbon gases (e.g., hydrogen, biogas).
• District heating and cooling.
• Electricity storage systems (mechanical, thermal, hydro, chemical).
• Transmission and distribution of electricity (to accommodate renewables and nuclear).
• Metrics: Primary metric is grams of CO2 equivalent per kilowatt-hour (gCO2e/kWh).
• Thresholds: Specific emissions intensity thresholds for electricity generation (e.g., A-001 to A-003) will be defined, with Green Activities requiring near-zero emissions and Transition Activities adhering to specific decarbonisation pathways with sunset dates (e.g., 2035 for Energy sector).
• Transportation:
• Introduces new activities such as the transportation of freight and passengers by sea.
• Low-carbon transport infrastructure is also covered.
• Sunset dates are defined for transition activities (e.g., 2030 for Maritime Transport).
• Manufacturing:
• New sector introduced.
• Activities include:
• Manufacture of hydrogen.
• Manufacture of equipment for hydrogen production (electrolysis).
• Manufacture of aluminium (alumina refining and smelting).
• Specific criteria will define Green and Transition activities within these manufacturing processes, focusing on emissions reduction and energy efficiency.
• Information and Communications Technology (ICT):
• New sector introduced.
• **Activity F-001: Data processing, hosting and related activities (Data Centres)**:
• Green Activity Criteria:
• Energy Usage: Achieves specific Power Usage Effectiveness (PUE) levels based on IT load (e.g., ≤1.35 at 100% IT load, ≤1.40 at 75% IT load, ≤1.45 at 50% IT load, ≤1.50 at 25% IT load) or is powered by 100% renewable/low-carbon energy with ≤100gCO2e/kWh lifecycle emissions. PUE thresholds are interpolated linearly.
• Water Usage: Implements advanced water treatment or achieves a Water Usage Effectiveness (WUE) of no more than 2.0 L/kWh (exempt if only air cooling is used).
• Global Warming Potential (GWP): Refrigerants used must have a GWP not exceeding 675, or meet lower applicable local standards.
• Construction of New Buildings: Must comply with the Taxonomy's green criteria for new commercial buildings.
• Transition Activity Criteria (Retrofitting and Operations of Existing Data Centres):
• Energy Usage: Meets specific PUE thresholds (e.g., ≤1.40 at 100% IT load, ≤1.45 at 75% IT load, ≤1.50 at 50% IT load, ≤1.55 at 25% IT load) and commits to achieving Green Activity PUE criteria by 2035.
• Water Usage: Achieves a WUE of no more than 2.3 L/kWh and meets Green Activity WUE criteria by 2035 (exempt if only air cooling is used).
• GWP: Refrigerant GWP must not exceed 675.
• Sunset Date: Transition Activity is eligible until 2035.
• Activity F-002: Data-driven solutions for greenhouse gas emissions reductions:
• Green Activity Criteria:
• Provides data/analytics for GHG emission reductions in other sectors, demonstrating life cycle GHG emissions reduction on par with best-in-class solutions, verified by a third party.
• OR, improves emissions profiles within the IT industry (energy efficiency, GHG reduction, maximised product use).
• Transition: Not applicable for this activity.

Phase 2A introduces a new environmental objective: Climate Change Adaptation. This addresses the growing need to adjust to actual and expected climate change impacts and build resilience.

• Core Principles of the Adaptation Framework:
• Adapting Measures-focused: Initially focuses on specific measures that enhance resilience.
• Localised for Hong Kong and adjacent regions: Tailored to local vulnerabilities and geographic/climatic factors.
• Building Block Approach for Phased Development: Designed for incremental expansion as understanding and data evolve.
• Graduated Assessment Approach: Currently uses a Whitelist approach for initial assessment, with potential to incorporate more sophisticated methods later.

• Whitelist Approach: A pre-defined list of adapting measures that are automatically deemed eligible, based on thorough research and minimal risk of maladaptation.

• Focus Sector: Water Sector:
• Prioritised due to Hong Kong's vulnerability to tropical cyclones, rainstorms, and reliance on external water supply.
• Key climate hazards identified:
• Flood Damage: Consequences of heavy precipitation, storm surge, sea-level rise.
• Water Stress: Consequences of water scarcity, reduced freshwater availability.
• Economic impacts include asset value loss and net revenue loss.

• Whitelisted Adapting Measures (Water Sector):
• **G-001: Implementation of stormwater separation** (Wastewater collection and treatment sub-sector).
• Associated ISIC Code(s): 3600, 4290.
• Impacts of Hazard: Asset value loss due to flood damage.
• Adaptation Outcome: Reduced physical vulnerability.
• **G-002: Installing water metering** (Water supplies sub-sector).
• Associated ISIC Code(s): 4322.
• Impacts of Hazard: Net revenue loss due to water stress.
• Adaptation Outcome: Improved adaptive capacity.

• Reporting for Adaptation: Only Capital Expenditures (CapEx) and Operational Expenditures (OpEx) can be classified as taxonomy-aligned for adapting measures; revenue is excluded.

• Introduction of Climate Change Adaptation Objective: The Taxonomy now explicitly covers activities aimed at adapting to climate change impacts.
• Introduction of Transition Category: A new classification for carbon-intensive activities on a decarbonisation journey, crucial for real-economy transition finance.
• Includes "Transition Activity" and "Transition Measure" classifications.
• Defined sunset dates for transition activities (e.g., 2035 for Energy, 2030 for Maritime Transport).
• Expansion of Sectors:
• New Sectors Introduced: Manufacturing and Information and Communications Technology (ICT).
• Expanded Existing Sectors: Energy and Transportation.
• New Activities within Energy Sector:
• Transmission and distribution of renewable and low-carbon gases.
• District heating and cooling.
• Electricity storage systems.
• Enhanced transmission and distribution of electricity.
• New Activities within Transportation Sector:
• Transportation of freight by sea.
• Transportation of passengers by sea.
• Detailed Criteria for ICT Sector:
• Specific PUE, Water Usage, and GWP thresholds for Data Centres (Green and Transition).
• Criteria for Data-driven solutions for GHG emission reductions.
• Adaptation Framework for Water Sector:
• Whitelist approach for identifying adapting measures.
• Focus on flood damage and water stress hazards.
• Specific whitelisted measures: stormwater separation and water metering.
• Interoperability and Alignment: Continued focus on alignment with international standards like CGT and M-CGT, while maintaining local relevance.
• Voluntary Adoption: The Taxonomy remains for voluntary adoption by market participants.

• Publication of Phase 1 Taxonomy: May 2024.
• Public Consultation on Phase 2A: September 2025.
• Effective Date of Phase 2A Taxonomy: January 2026.
• Sunset Date for Transition Activities in Energy Sector: 2035.
• Sunset Date for Transition Activities in Maritime Transport Sector: 2030.
• Commitment Deadline for Data Centres to meet Green Activity PUE criteria: 2035.
• Commitment Deadline for Data Centres to meet Green Activity WUE criteria: 2035.

The Hong Kong Taxonomy for Sustainable Finance (Phase 2A) is designed for voluntary adoption by a wide range of market participants, including:

• Financial Institutions: Banks, asset managers, insurers, and other lenders/investors looking to develop and offer green/sustainable finance products and manage portfolios aligned with sustainability goals.
• Corporates: Companies seeking to raise green finance or demonstrate their commitment to sustainability and transition to lower-carbon operations.
• Investors: Institutional and retail investors looking for clear guidance on identifying sustainable investments.
• Government Agencies and Regulators: To inform policy development and supervisory frameworks.

The degree of impact will vary. For entities already actively engaged in sustainable finance, adoption can enhance credibility and streamline reporting. For others, it will require significant effort in understanding the criteria, assessing their activities, and potentially modifying operations or investment strategies. The Taxonomy's phased approach and focus on building capacity aim to manage this impact.

As the Taxonomy is for voluntary adoption, there are no direct regulatory compliance requirements at this stage. However, market participants are encouraged to:

• Understand and Utilise the Taxonomy: Familiarise themselves with the definitions, criteria, and thresholds for Green, Transition, and Exclusion activities.
• Integrate into Decision-Making: Use the Taxonomy to inform investment decisions, product development, risk assessment, and reporting frameworks.
• Reporting: If adopted, entities will need to report on their taxonomy-aligned CapEx, OpEx, and revenue according to the specified categories. For Transition Activities, reporting on progress towards sunset dates and commitment to future Green criteria will be necessary.
• Verification: While not mandated, independent verification of sustainability claims aligned with the Taxonomy will enhance credibility.
• Stakeholder Engagement: Continuously engage with evolving market practices, technological advancements, and policy updates related to sustainable finance.
• Future Incorporation: The HKMA intends to explore the incorporation of the Taxonomy into banking supervisory policies in the long run, which would then introduce mandatory compliance aspects.

• ISIC Codes: Associated International Standard Industrial Classification (ISIC) codes are provided for various activities to aid in classification (e.g., 6311 for Data Processing, Hosting and Related Activities; 3600 and 4290 for Wastewater Collection and Treatment).
• Metrics:
• gCO2e/kWh: Grams of carbon dioxide equivalent per kilowatt-hour (for energy sector emissions intensity).
• PUE (Power Usage Effectiveness): Ratio of total facility energy to IT equipment energy. Specific thresholds are defined for different IT loads in the ICT sector.
• WUE (Water Usage Effectiveness): Litres of water consumed per kilowatt-hour of IT energy. Specific thresholds are defined.
• GWP (Global Warming Potential): A measure of a greenhouse gas's warming impact relative to carbon dioxide. A cap of 675 is set for refrigerants.
• Key Definitions:
• Paris Agreement 1.5°C goals: The scientific benchmark for climate mitigation.
• Net Zero by 2050: The target year for achieving carbon neutrality.
• Transition Activity: Carbon-intensive activities on a decarbonisation pathway.
• Transition Measure: Components that reduce emissions within an activity.
• Sunset Date: A defined end date for the eligibility of Transition Activities and Measures.
• Adapting Measures: Technologies, processes, materials, practices, or services that enhance resilience to climate change.
• Maladaptation Risk: Unintended increase in vulnerability or exposure to climate hazards due to an adaptation investment.
• Common Ground Taxonomy (CGT) & Multi-Jurisdiction Common Ground Taxonomy (M-CGT): International frameworks for ensuring interoperability.
• Data Centre Criteria (ICT):
• Energy Usage: PUE thresholds provided for different IT loads at 100%, 75%, 50%, and 25% loads, with linear interpolation for intermediate loads. Example: Green PUE for 75% IT load is ≤1.40.
• Water Usage: WUE threshold of no more than 2.0 L/kWh for Green Activity, and 2.3 L/kWh for Transition Activity, with commitments for improvement by 2035.
• GWP: Cap of 675 for refrigerants.
• Data-driven Solutions (ICT): Criteria include demonstrating GHG emission reduction on par with best-performing solutions, and using methodologies like GHG Protocol or ISO standards for verification.

• Appendix: Associated ISIC Codes: This appendix provides a comprehensive list of ISIC codes associated with the economic activities defined in the Taxonomy, facilitating clear identification and classification for reporting and analysis. It ensures that market participants can accurately map their operations to the Taxonomy's framework.