Hong Kong Sustainable Finance Taxonomy: Defining Criteria for Green and Sustainable Financial Products

Hong Kong has moved decisively to define what counts as “green” for financial products. In May 2024, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) jointly published the Hong Kong Sustainable Finance Taxonomy (the Taxonomy), a classification system that sets out specific technical screening criteria for economic activities considered environmentally sustainable. This matters now because the Taxonomy is not merely a voluntary guideline — it is the foundational reference point for all SFC-authorised green and ESG funds, HKMA’s Green and Sustainable Finance Grant Scheme, and any future mandatory disclosure requirements under the Green and Sustainable Finance Cross-Agency Steering Group’s roadmap. For any institution that plans to launch a green bond, an ESG-labelled fund, or a sustainability-linked loan in Hong Kong, the Taxonomy defines the boundary between a genuine green product and one that risks being labelled as greenwashing. The Taxonomy covers 12 economic activities across four sectors — energy, transport, construction, and water/waste management — and adopts a “do no significant harm” principle alongside minimum social safeguards. This article explains the Taxonomy’s core criteria, its interaction with existing SFC and HKMA regulatory frameworks, and the practical steps firms must take to align their products with Hong Kong’s new green standard.

The Taxonomy’s Structure and Classification Framework

The Taxonomy adopts a three-tier classification system. Tier 1 activities are those that contribute substantially to climate change mitigation. Tier 2 activities are transitional — they do not yet meet the green threshold but represent a credible pathway toward decarbonisation. Tier 3 covers enabling activities that support other sectors in achieving environmental objectives. The HKMA circular of 3 May 2024 (Ref: B10/01C/54) states that the Taxonomy applies to both debt and equity instruments, and that the technical screening criteria will be updated annually.

Technical screening criteria are sector-specific and quantitative. For electricity generation, the Taxonomy requires that renewable energy facilities achieve a lifecycle greenhouse gas emission intensity of less than 100g CO2e/kWh. For new buildings, the criteria mandate a 20% improvement over the Building Energy Code’s baseline, as measured by the Energy Performance Certificate. For existing building retrofits, the Taxonomy requires a 30% reduction in primary energy demand compared to the pre-retrofit baseline. These thresholds are not aspirational — they are the pass/fail line for any financial product that claims alignment with the Taxonomy.

The “do no significant harm” principle applies across all four environmental objectives. An activity that meets the climate change mitigation criteria must also not cause significant harm to climate change adaptation, water and marine resources, circular economy, pollution prevention, or biodiversity. The HKMA’s guidance explicitly states that an activity that violates Hong Kong’s environmental laws — for example, the Air Pollution Control Ordinance (Cap. 311) or the Water Pollution Control Ordinance (Cap. 358) — automatically fails the “do no significant harm” test, regardless of its carbon performance.

Minimum social safeguards are mandatory. Any economic activity classified under the Taxonomy must comply with the International Labour Organization’s core labour standards, the United Nations Guiding Principles on Business and Human Rights, and Hong Kong’s own employment legislation. The SFC’s circular of 15 May 2024 on ESG fund disclosure confirms that fund managers must include a statement in their offering documents confirming that the fund’s investments adhere to these minimum safeguards.

Alignment with SFC and HKMA Regulatory Frameworks

The SFC has integrated the Taxonomy into its fund authorisation process. For any fund that uses “green,” “ESG,” “sustainable,” or similar terms in its name or investment objective, the SFC now requires an assessment of whether at least 70% of the fund’s assets meet the Taxonomy’s criteria. This requirement is set out in the SFC’s Guidelines for ESG Funds (updated June 2024). The remaining 30% of assets must not be in activities that contradict the Taxonomy’s environmental objectives.

HKMA’s Green and Sustainable Finance Grant Scheme links directly to the Taxonomy. The grant scheme, which covers both bond issuance costs and external review expenses, now requires that the underlying project or activity be classified under the Taxonomy’s Tier 1 or Tier 2 categories. The HKMA’s circular of 3 May 2024 specifies that grants for bond issuance are capped at HKD 2.5 million per issuance, and for external reviews at HKD 800,000 per review. These caps apply only when the Taxonomy criteria are met.

The Taxonomy interacts with the HKEX’s ESG reporting framework. The Stock Exchange of Hong Kong’s Listing Rules Appendix 27 (ESG Reporting Guide) was amended in April 2024 to require listed issuers to disclose the extent to which their green and sustainable finance activities align with the Taxonomy. This is a “comply or explain” requirement — issuers must either state that their green bonds or ESG-linked loans meet the Taxonomy criteria, or explain why they do not. The HKEX’s guidance note of 19 April 2024 provides a template for this disclosure.

Practical Compliance Steps for Financial Institutions

Step 1: Classify each financial product against the Taxonomy’s 12 economic activities. The HKMA has published a downloadable mapping tool on its website that allows institutions to input their project or asset details and receive a preliminary classification. This tool is not a substitute for a formal external review, but it provides a starting point for internal due diligence.

Step 2: Obtain an external review from an approved verifier. The HKMA maintains a list of recognised external reviewers, which includes entities such as Hong Kong Quality Assurance Agency (HKQAA), DNV GL, and SGS. The review must confirm that the product meets the Taxonomy’s technical screening criteria, the “do no significant harm” principle, and the minimum social safeguards. The review report must be submitted to the relevant regulator — the SFC for fund products, the HKMA for bond issuances under the grant scheme, and the HKEX for listed issuers’ ESG disclosures.

Step 3: Ensure ongoing monitoring and annual reporting. The Taxonomy is not a one-time certification. The HKMA requires that bond issuers provide annual reports on the use of proceeds and the environmental performance of the underlying projects. For SFC-authorised funds, the fund manager must include in the annual report a breakdown of the proportion of assets aligned with the Taxonomy, and any changes in classification during the reporting period. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Cap. 571) requires that all such disclosures be accurate and not misleading.

Step 4: Prepare for the mandatory climate-related disclosure regime. The HKMA and SFC have indicated that the Taxonomy will serve as the basis for mandatory climate-related financial disclosures under the forthcoming Climate and Sustainability Disclosure Standards, expected to be finalised by the end of 2025. These standards will adopt the International Sustainability Standards Board (ISSB) framework, with the Taxonomy providing the sector-specific criteria for “green” activities. Firms that align their products now will have a compliance advantage when the mandatory regime takes effect.

Key Challenges and Market Implications

The Taxonomy’s technical screening criteria are more stringent than many existing green bond frameworks. For example, the International Capital Market Association’s (ICMA) Green Bond Principles do not require specific emission intensity thresholds for power generation — they rely on the issuer’s own definition of “green.” The Taxonomy, by contrast, sets a hard threshold of 100g CO2e/kWh. This means that some existing green bonds issued under ICMA principles may not qualify under the Taxonomy. The HKMA’s grant scheme explicitly excludes bonds that do not meet the Taxonomy criteria, even if they carry a “green” label under other frameworks.

Transition finance is explicitly recognised but narrowly defined. The Taxonomy’s Tier 2 category covers activities that reduce emissions but do not yet meet the green threshold. However, the criteria are strict — for example, natural gas-fired power generation qualifies as transitional only if it replaces coal-fired generation and achieves a 50% reduction in lifecycle emissions compared to the coal baseline. This is narrower than the European Union’s Taxonomy, which includes a broader range of transitional activities. The HKMA has stated that the Tier 2 criteria will be reviewed annually and may be tightened as technology improves.

Smaller institutions face higher relative compliance costs. The external review process, which costs between HKD 100,000 and HKD 500,000 depending on the complexity of the product, is a fixed cost that disproportionately affects smaller issuers. The HKMA’s grant scheme partially offsets this — the HKD 800,000 cap for external review costs covers the full expense for most small issuances — but the administrative burden of classification, documentation, and annual reporting remains significant. The SFC has indicated that it is considering simplified disclosure requirements for funds with less than HKD 1 billion in assets under management, but no formal proposal has been published as of June 2024.

Actionable Takeaways

1. The Taxonomy applies immediately to all new SFC-authorised ESG funds and HKMA grant scheme applications, and existing funds must align their portfolios by the next annual reporting date.
2. The “do no significant harm” principle requires a compliance check against Cap. 311 and Cap. 358 before any product can claim Taxonomy alignment.
3. External review from an HKMA-approved verifier is mandatory for grant scheme eligibility and is strongly recommended for all other Taxonomy-aligned products.
4. Transitional (Tier 2) activities qualify for the grant scheme but must demonstrate a clear, quantified decarbonisation pathway with annual verification.
5. The mandatory climate disclosure regime expected in 2025 will use the Taxonomy as its classification backbone — alignment now reduces future compliance risk.

This does not constitute legal advice. Consult a licensed solicitor or regulatory advisor for your specific product structure and compliance obligations.