The green taxonomy, which was released last month, is intended to assist banks and investors in determining the sustainability of economic activity, according to South China Morning Post. The framework, which encompasses 12 economic activities in four sectors—energy, transportation, building, and water and waste management—aims to provide a clear guide for defining what is considered green.

The HKMA's executive director (external), Kenneth Hui, emphasized the possible transition from optional adoption to required adherence during the opening of the Jockey Club Enterprise Sustainability Global Research Institute at the University of Hong Kong. "To ensure that we have a strong investor base, we will investigate whether to make it mandatory, at least for the banking sector," Hui stated. As of right now, adoption by capital market and banking participants is entirely optional. It, in our opinion, gives issuers and investors a solid point of reference to essentially define what is and isn't green.

Hydrogen and hydropower are two more green activities that HKMA is exploring to include in the taxonomy's scope beyond the original four sectors. To guarantee thorough and useful implementation, there are also plans to provide transition funds and offer industry-specific coaching.

In order to lower transaction costs and lessen the possibility of greenwashing, Ma Jun, the chairman and president of the Hong Kong Green Finance Association, stressed the need of combining various sustainability taxonomies and disclosures. Ma stated, "Hong Kong can be an important testing ground for interoperable standards." The market might become fragmented, transaction costs could rise, and even greenwashing could be encouraged by the inconsistent and incompatible application of different taxonomy and disclosure standards, principles, and legislation.

The Hong Kong Exchanges and Clearing (HKEX) recently wrapped up its consultation on improving climate-related disclosures under its ESG framework, as part of its larger sustainability goal. The International Sustainability Standards Board (ISSB), which was founded during the COP26 global climate conference in Glasgow in 2021 to combine disparate reporting standards, has produced climate standards that are in line with the new criteria. In June of last year, the ISSB published its final criteria.

The Securities and Futures Commission's executive director of corporate finance, Michael Duignan, remarked on the difficulties in implementing ISSB requirements in the Hong Kong market. "Introducing rules that straddle the [two jurisdictions] was one of our biggest challenges because China is at a different stage of development than Hong Kong," Duignan stated. "This meant that while introducing all the flexibility built into ISSB, we still had to base the standards on it."

Hong Kong's attempts to create a comprehensive, globally-recognized green taxonomy might serve as a model for sustainable financing systems as it works through these obstacles.