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

This document outlines the Hong Kong Taxonomy for Sustainable Finance (Phase 2A), developed by the Hong Kong Monetary Authority (HKMA). It serves as a comprehensive 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. This phase builds upon Phase 1, expanding its scope to include new sectors, transition elements, and the critical area of climate change adaptation.

The Hong Kong Taxonomy is a classification system designed to provide clear guidelines for identifying environmentally sustainable activities. Its primary purpose is to:

• Guide market participants: Offer clarity for informed investment decisions in green and sustainable finance products.
• Scale up capital flows: Facilitate increased investment in credible green and sustainable assets, projects, and investments.
• Address greenwashing: Enhance confidence in sustainability claims and mitigate concerns about misleading environmental marketing.
• Improve comparability: Enable consistent assessment across portfolios and investments.

This Phase 2A document introduces significant expansions, incorporating climate change adaptation as a new environmental objective alongside climate change mitigation. It also introduces a "Transition" category to support the decarbonisation of carbon-intensive sectors. The Taxonomy aims to be interoperable with international standards while catering to Hong Kong's specific economic context and sustainability priorities.

The Taxonomy is structured around environmental objectives, with detailed criteria and thresholds for specific economic activities within various sectors.

**Chapter I: Introduction** sets the context for the Taxonomy, highlighting Hong Kong's commitment to carbon neutrality before 2050 and the financial sector's pivotal role in achieving this goal. It details the evolution from Phase 1 (focusing on 12 green activities in Energy, Transportation, Waste, and Construction) to Phase 2, which includes new sectors like Manufacturing and ICT, and introduces "transition elements."

**Chapter II: Climate Change Mitigation** details the classification framework for activities contributing to mitigation. This chapter introduces a three-tiered classification system:

• Green Category: Activities that contribute substantially 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 Category: Carbon-intensive activities that are on a time-bound decarbonisation journey towards net-zero by 2050, or activities/measures enabling significant short-term emissions reductions. This category includes:
• Transition Activity: A standalone activity progressing towards a 1.5°C pathway or facilitating significant short-term emissions reductions. These have defined sunset dates.
• Transition Measure: A component of an activity designed to materially reduce Scope 1 and 2 emissions, such as installing a new technology. These are also time-bound.
• Exclusion Category: Activities incompatible with a 1.5°C pathway, not progressing rapidly enough, or having low climate materiality.

Key sectors covered under Climate Change Mitigation in Phase 2A include:

• Energy: Expanded to include new activities like Transmission and Distribution of Renewable and Low-Carbon Gases, and District Heating and Cooling. Electricity generation activities remain central, with specific thresholds for emissions intensity (gCO2e/kWh) for solar, wind, and concentrated solar power technologies. Transmission and distribution of electricity also have specific criteria. Electricity storage systems and district heating/cooling are newly defined activities.
• Transportation: Includes updates and expansions, covering public transportation, personal mobility devices, and freight/passenger sea transport. Criteria focus on emission reduction for various modes of transport.
• Construction: Focuses on new buildings and renovation of existing buildings, with criteria related to energy performance and operational carbon emissions.
• Waste: Encompasses sewage sludge treatment and collection/transport of non-hazardous waste, with criteria for anaerobic digestion or co-digestion.
• Manufacturing: A new sector introduced in Phase 2A, covering the manufacture of hydrogen, equipment for hydrogen production via electrolysis, and specific aluminium manufacturing processes (alumina refining and smelting). Criteria focus on emissions reduction and energy efficiency.
• Information and Communications Technology (ICT): Another new sector, covering data centres and data-driven solutions for GHG emissions reductions.
• Data Centres: Green criteria focus on high energy efficiency (measured by PUE), water usage effectiveness (WUE), and low Global Warming Potential (GWP) of refrigerants. Transition activities for existing data centres have slightly relaxed PUE thresholds and a commitment to align with Green criteria by 2035.
• Data-driven solutions: Green criteria require demonstrating GHG emissions reductions, life cycle emissions reduction on par with best-in-class solutions, and verification by third parties.

**Chapter III: Climate Change Adaptation** introduces a new environmental objective for climate change adaptation. It defines adaptation as the process of adjustment to actual and expected climate change impacts. This chapter introduces:

• Adaptation Framework: Guided by four core principles: building block approach for phased development, localised for Hong Kong and adjacent regions, Whitelist approach for initial assessment, and focus on adapting measures.
• Adapting Measures: Sub-components of activities (technologies, processes, materials, practices) that enhance resilience. Only Capital Expenditures (CapEx) and Operational Expenditures (OpEx) for adapting measures can be taxonomy-aligned.
• Whitelist Approach: Initially, a curated list of adapting measures are automatically deemed eligible without specific criteria, provided they don't pose significant maladaptation risks.
• Initial Focus Sector: Water Sector: Due to Hong Kong's vulnerabilities to tropical cyclones and rainstorms, the Water Sector is prioritised for adaptation. Key hazards identified are flood damage and water stress.
• Whitelisted Adapting Measures (Water Sector):
• G-001: Implementation of stormwater separation: For wastewater collection and treatment, mitigating asset value loss due to flood damage.
• G-002: Installing water metering: For water supplies, mitigating net revenue loss due to flood damage and improving adaptive capacity.
• Other measures within the Water Sector addressing water stress will be detailed in the full document.
• Future iterations will explore other climate hazards like storm damage, mass movement damage, and heat stress across sectors like buildings, transportation, and energy infrastructure.

The key changes introduced in Phase 2A of the Hong Kong Taxonomy are:

• Inclusion of Climate Change Adaptation: A new environmental objective dedicated to adaptation measures and investments.
• Introduction of the Transition Category: A new classification alongside "Green" and "Exclusion" to support decarbonisation in carbon-intensive sectors. This includes "Transition Activity" and "Transition Measure."
• Expansion of Covered Sectors:
• Manufacturing: Added as a new sector under Climate Change Mitigation.
• Information and Communications Technology (ICT): Added as a new sector under Climate Change Mitigation, with specific criteria for data centres and data-driven solutions.
• Expansion of Activities within Existing Sectors:
• Energy: Increased from three to seven activities, including new categories for Transmission and Distribution of Renewable and Low-Carbon Gases, and District Heating and Cooling. Electricity storage systems are also explicitly covered.
• Transportation: Scope broadened to include new green and transition activities.
• Refined Criteria for Phase 1 Activities: Transition criteria are defined for green activities identified in Phase 1, allowing for their gradual decarbonisation.
• Shift to "Adapting Measures" for Adaptation: The initial focus for adaptation is on specific measures, not full activities, to facilitate capacity building and phased development.
• Whitelist Approach for Adaptation: Utilisation of a pre-defined list of eligible adapting measures for initial assessment to manage the nascent nature of adaptation research.
• Interoperability and Localisation: Continued emphasis on alignment with international frameworks (e.g., Common Ground Taxonomy - CGT, Multi-Jurisdiction Common Ground Taxonomy - M-CGT) while incorporating Hong Kong's local context and priorities.

• January 2026: Expected publication date of the "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.
• Before 2050: Hong Kong's target for achieving carbon neutrality.
• By 2035: Hong Kong's commitment to phasing out coal for daily electricity generation.
• By 2035: Target date for energy utilities to build capacity and adapt to evolving sustainability requirements, as indicated by a sunset date for the Energy sector's transition activities.
• By 2030: Sunset date for transition activities and measures in the Maritime Transport sector.
• By 2035: Commitment for data centres to align with Green Activity PUE criteria.

The Hong Kong Taxonomy is designed for voluntary adoption by market participants. This includes, but is not limited to:

• Financial Institutions: Banks, asset managers, insurers, and other financial service providers.
• Corporates: Companies across various sectors seeking to finance or issue green and sustainable instruments, or to align their operations with sustainability principles.
• Investors: Institutional and retail investors looking for credible sustainable investment opportunities.
• Government Agencies: To guide policy development and sustainable finance initiatives.

The degree of impact will vary:

• High Impact: For institutions actively engaged in sustainable finance, product development, and investment assessment. It provides a clear framework for classification and reporting.
• Medium Impact: For corporates looking to access sustainable finance or improve their ESG disclosures. It offers guidance on what activities qualify as sustainable.
• Low Impact (initially): For entities not directly involved in sustainable finance, though its increasing influence may necessitate future consideration.

The Taxonomy is intended to foster a more robust and transparent sustainable finance market in Hong Kong, the Chinese Mainland, and the wider Asia region, influencing regional and global sustainable finance flows.

• Voluntary Adoption: The Taxonomy is currently voluntary. However, the HKMA intends to explore its incorporation into banking supervisory policies in the long run.
• Market Capacity Building: The immediate focus is on promoting understanding and application of the framework.
• Reporting for Alignment:
• Green Activities: Revenue, CapEx, and OpEx can be reported as taxonomy-aligned.
• Transition Activities: Revenue, CapEx, and OpEx can be reported as taxonomy-aligned.
• Transition Measures: CapEx and OpEx can be reported as taxonomy-aligned, while revenue cannot.
• Adapting Measures (Climate Adaptation): CapEx and OpEx can be reported as taxonomy-aligned, while revenue is excluded.
• Demonstrable Progress: For Transition Activities, demonstrable progress in emissions intensity reduction and/or energy efficiency improvement is required, with forward-looking thresholds subject to review.
• Verification: For data-driven ICT solutions, GHG emissions reductions must be calculated using recognised methodologies (e.g., GHG Protocol) and verified by an independent third party.
• Sunset Dates: Activities classified under the Transition category are time-bound and must meet Green criteria or cease to be taxonomy-aligned by their respective sunset dates (e.g., 2030 for Maritime Transport, 2035 for Energy).
• Stakeholder Engagement: Ongoing engagement is crucial for the Taxonomy's iterative development and relevance.

• ISIC Codes: Associated International Standard Industrial Classification of All Economic Activities codes are provided for specific activities (e.g., 6311 for data processing, hosting and related activities).
• Metrics:
• gCO2e/kWh: Grams of carbon dioxide equivalent per kilowatt-hour, used for measuring emissions intensity in the Energy sector.
• PUE (Power Usage Effectiveness): Ratio of total facility energy to IT equipment energy, a key metric for data centre energy efficiency. Specific thresholds are defined for different IT loads (e.g., ≤1.35 at 100% IT load for Green Activity).
• WUE (Water Usage Effectiveness): Litres of water used per kilowatt-hour of IT energy, a metric for data centre water efficiency (e.g., ≤2.0 L/kWh for Green Activity).
• GWP (Global Warming Potential): Measures the heat a greenhouse gas traps in the atmosphere relative to CO2. A cap of 675 is set for refrigerants, aligning with EU Taxonomy standards.
• GHG Protocol, ISO 14067:2018, ISO 14064-2:2019: Methodologies referenced for calculating GHG emissions reductions in ICT solutions.
• BEAM Plus New Data Centres Version 1.0 (NDC V1.0): Reference for PUE and water usage thresholds for data centres.
• Climate Bonds Resilience Taxonomy (CBRT): Reference for the adaptation framework and assessment approaches.
• Intergovernmental Panel on Climate Change (IPCC): Referenced for understanding climate change impacts.
• Paris Agreement 1.5°C Climate Goals: The foundational benchmark for classifying activities under the mitigation objective.
• Transition Pathway Initiative (TPI): Provides sector-specific guidance for aligning with Below 2°C targets, used in developing transition thresholds.
• International Maritime Organisation (IMO): Target of a 40% reduction in GHG emissions by 2030 serves as a benchmark for maritime activities.
• Maladaptation Risk: Defined as unintended measurable increase in vulnerability or exposure to climate hazards posed by an adaptation investment.
• Climate Hazards (Adaptation):
• Flood Damage: Consequences of flooding from heavy precipitation, coastal events, etc.
• Water Stress: Consequences of water scarcity due to precipitation changes, aridity, etc.
• Storm Damage: Consequences of severe windstorms, tropical cyclones, etc.
• Mass Movement Damage: Consequences of landslides, coastal erosion, etc.
• Heat Stress: Consequences of high temperatures and extreme heat events.
• Associated ISIC Codes: Used to link specific activities to industry classifications, aiding in data collection and reporting.

Appendix: The Appendix includes a list of associated ISIC Codes relevant to the activities defined in the Taxonomy. This is crucial for practical application and aligning with existing industry classifications.

In summary, Phase 2A of the Hong Kong Taxonomy represents a significant advancement, broadening its scope to include new carbon-intensive sectors like Manufacturing and ICT, introducing a crucial "Transition" category to facilitate decarbonisation pathways, and critically, incorporating climate change adaptation as a core environmental objective. This makes the Taxonomy a more comprehensive and forward-looking tool for directing capital towards a sustainable future, aligning Hong Kong with global efforts to combat climate change.