Hong Kong’s de facto central bank is considering introducing mandatory green rules for the banking sector

The Hong Kong Monetary Authority (HKMA) wants to make a green taxonomy framework mandatory for the banking sector to support the development of sustainable finance in the city.

The actual Central Bank of Hong Kong issued ecological taxonomy last month to help banks and investors determine the sustainability of businesses. The taxonomy covers 12 types of economic activities in four sectors: energy, transport, construction and water and sewage management.

“We will consider whether to make it mandatory, at least for the banking sector, so that we have a solid investor base,” said Kenneth Hui, executive director (external) of the HKMA, at the launch of Project Jockey at the University of Hong Kong Club Enterprise Sustainability Global Research Institute on Thursday.

“It is voluntary at the moment, so the capital market and banking (participants) can choose to adopt it. We believe this provides a good benchmark for both investors and issuers, allowing for a broadly clear definition of what is green and what is not.

The HKMA’s green taxonomy covers 12 economic activities in four sectors: energy, transport, construction, and water and waste management. Photo: Yik Yeung-man — The HKMA green taxonomy covers 12 types of economic activities in four sectors: energy, transport, construction and water and waste management. Photo: Yik Yeung-man

The taxonomy is important to prevent “eco-framing” – making unsubstantiated claims about the environmental benefits of a product or service.

The HKMA is currently working to expand the scope of the taxonomy to include other environmental activities beyond the four sectors, Hui said. “Hydrogen and hydropower are things we are thinking about now.”

The HKMA also plans to expand the taxonomy to include transition financingand explores the possibility of providing guidance to the industry.

Consolidating different taxonomies and sustainability disclosures is important to reduce the risk of eco-shadowing and transaction costs, said Ma Jun, chairman and president of the Hong Kong Green Finance Association, adding that Hong Kong can play a key role as a testing ground for interoperability standards .

The inconsistency and inconsistency of different taxonomy and disclosure standards, rules and regulations can result in market fragmentation, increase transaction costs and even encourage “eco-shaming,” Ma said.

“As a testing ground for interoperability standards, both in terms of taxonomy and information disclosure, Hong Kong can demonstrate to the rest of the world how interoperability can actually work.”

The new requirements have been introduced in line with the climate standards of the International Sustainability Standards Board (ISSB), which was established at the COP26 global climate summit in Glasgow in 2021 to consolidate various reporting standards. The ISSB published its final standards in June last year.

According to Michael Duignan, executive director of corporate finance in Hong Kong, applying ISSB standards to the Hong Kong market has been a challenge because only about 7 percent of listed companies are based in the city, while most of them are based in mainland China. Securities and Futures Commission.

“One of the biggest challenges for us was introducing legislation that would cover (the two jurisdictions) because China is at a different stage of development compared to Hong Kong,” he said.

“This meant we had to base the standards on the ISSB, but at the same time introduce all the flexibility built into the ISSB.”