Hong Kong to Expand Sustainable Finance Taxonomy with New Climate Mitigation, Adaptation, Transition Activities

The Hong Kong Monetary Authority (HKMA), Hong Kong’s central banking institution, announced the release of its draft “Phase 2A” of the Hong Kong Taxonomy, with proposals to expand its sustainable finance and investment classification system to include a series of new climate mitigation and adaptation categories, and additional activities targeting the low-carbon transition of hard-to-abate sectors.

The proposed update follows the publication in May 2024 by the HKMA of its initial Taxonomy, aimed at providing a framework to allow investors to identify and invest in activities that generate a positive impact on the environment, and to avoid those with a negative impact, as well as to align investments with climate goals, reduce the risk of investing in assets that are not aligned with a low-carbon future, and to unlock of investing in assets that are not aligned with a low-carbon future.

When initially published, the HKMA said that it aimed to use a phased approach to establishing the Taxonomy, adding more sectors and categories over time, including plans to introduce transition categories. The HKMA released “Phase 2A” earlier this year, with the most notable change being the expansion of the Taxonomy from its initial focus on only green categories to include categories focused on climate transition.

The new draft proposes expanding the Hong Kong Taxonomy with a series of new green and transition activities that contribute to climate change mitigation across the Transportation, Manufacturing, and Waste sectors, and further growing the taxonomy’s transition focus, with the introduction of transition pathways for hard-to-abate sectors including air transport, and iron and steel.

The draft also adds key enabling technologies that can support the development of other decarbonization applications, such as the manufacture and recycling of batteries, and the manufacture of low-carbon technologies.

Overall, through the addition of 10 new activities and recategorization of some prior activities, the draft would expand the number of economic activities in the taxonomy from 25 to 39.

In addition to climate mitigation, the draft also expands on climate adaptation-related measures, and also introduces a new process-based approach to support a more comprehensive assessment and classification of adaptation activities and measures, ensuring that they make a substantial contribution to climate change adaptation and appropriately manage maladaptation risks, with the HKMA citing a need to address the highly location- and context-specific nature of adaptation. The taxonomy’s initial adaptation focus is on shoreline protection and flood management, which are closely related to the key climate risks faced by Hong Kong.

While focusing on activities and measures related to the objectives of climate change mitigation and adaptation, the draft Phase 2B also defines four new environmental objectives for the taxonomy, including Biodiversity, nature and ecosystem protection; Sustainable use and conservation of water resources; Pollution prevention and control, and; Resource efficiency and circular economy. The draft indicated that future phases of the taxonomy will progressively address the remaining objectives, guided by market trends, policies, industry priorities, and technological advancements.

The HKMA said:

“Guided by market feedback, government policies, industry needs, and the latest developments in technology and climate science, the Phase 2B prototype introduces a number of enhancements that further support Hong Kong’s decarbonisation efforts, facilitate the region’s transition to a low-carbon economy, and reinforce Hong Kong’s position as an international financial centre and a leading hub for green and sustainable finance.”

With the release of the draft, the HKMA also initiated a consultation on the Phase 2B proposals, which will remain open until October 7, 2026.

Click here to access the consultation paper.