The Hong Kong Monetary Authority (HKMA) is preparing a transition finance framework to classify whether activities can help carbon-intensive firms reach net-zero emissions, to support the development of the city as an international green and sustainable finance hub.
The HKMA has been developing a local “green taxonomy” framework for classifying economic activities considered environmentally friendly or sustainable, and the next step will be broadening that to include transition financing, said deputy CEO Darryl Chan Wai-man.
“We will start preparing for a transition taxonomy this year,” Chan said. “This will be the next phase in our work” to develop a local green classification framework.
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“A taxonomy is very important for transition financing, so that banks have a common standard to follow in terms of the issuance of bonds and loans.”
Transition finance refers to bonds and loans that help companies turn their carbon-intensive operations into climate-neutral outfits aligned with global green ambitions.
The development of transition finance has been identified as a key initiative for 2024 by the Green and Sustainable Finance Cross-Agency Steering Group, a body established in May 2020 by financial regulators in Hong Kong such as the Securities and Futures Commission and the HKMA, as well as other government bureaus to accelerate the growth of green and sustainable finance in Hong Kong.
Working on a transition taxonomy is not easy, says HKMA Deputy CEO Darryl Chan. Photo: Sun Yeung alt=Working on a transition taxonomy is not easy, says HKMA Deputy CEO Darryl Chan. Photo: Sun Yeung>
The HKMA will develop the taxonomy as part of the cross-agency steering group’s work on creating a market ecosystem to help financial institutions do more transition finance, Chan said.
“To start working on a transition taxonomy is not easy,” he added. “Around the world, there has been the development of transition taxonomies … to classify what [activities] count as a transition” to a net-zero economy.
“Different places are working on their own transition taxonomy, including Asean, the EU and [mainland China].”
In January, the Shanghai municipal government published a transition taxonomy, which includes water transport, ferrous metal smelting and processing, petroleum refineries, chemical raw material manufacturing, car manufacturing and aviation.
In December, the Monetary Authority of Singapore published the Singapore-Asia taxonomy, which defines green and transition activities that contribute to climate change mitigation across eight industries, including energy, real estate, transport and carbon capture and sequestration.
Last June, a sustainable finance package was added to the EU’s taxonomy, including criteria for economic activities that make a substantial contribution to the transition to a circular economy.
“We want to make reference to what others are doing in terms of transition [taxonomy] … so that there aren’t too many differences between banks in different jurisdictions,” Chan said.
Last May, the HKMA launched a consultation for developing a prototype of a green classification framework for adoption in the local market, “for classifying and labelling financial products and investments based on their environmental sustainability”.
The framework would use taxonomy common to China and the EU as a major reference for sustainable finance initiatives that would be acceptable across different jurisdictions, according to the consultation paper.
The framework identified four sectors applicable to Hong Kong, Chan said. They include electricity and power generation, transport, water supply and waste management and construction.
“The prototype will be rolled out for banks first as a reference, and also other financial sectors, as a starting point” when identifying green economic activities, he said.
As part of the government’s Green Week which starts on February 26, the HKMA has jointly organised “Climate Business Forum: Asia-Pacific with the International Finance Corporation” to promote the development of the city as an international green and sustainable finance centre, Chan said.
As of February 22, the government had issued green bonds amounting to US$25 billion, denominated in different currencies and tenors, funding various green projects in the city, according to Chan.
In the autumn, the HKMA will be launching a climate finance event with the Dubai Financial Services Authority in Hong Kong, with a focus on accelerating the flow of transition finance between the Middle East and Asia, Chan said, adding that there were plans to hold events with the Dubai government on a yearly basis.
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