Green Central Banking: The Hong Kong Monetary Authority (HKMA) has unleashed a steady volley of green finance policies in recent years, from guiding banks to bake climate risks into their balance sheets, to mandating financial institutions hit net zero in their operations by 2030 and financed emissions by 2050.
Hong Kong is putting its money where its mouth is, bolstered by the government’s sustainable bond programme which by the end of August 2024 had a total underlying debt issuance of around US$120bn. In Asia, Hong Kong’s green bond market stands out, surpassing its regional peers in both ambition and scale.
This steadfast commitment to building sustainable finance markets stands in stark contrast to the US withdrawal and political headwinds in Europe.
Hong Kong’s bet is strategic: while sustainability efforts continue to be bogged down in the west, the city has made them a core component of its growth strategy. By positioning itself as the platform for channelling green capital between China – the world’s clean energy and green investment juggernaut – and the rest of the world, Hong Kong is not only preserving its position as Asia’s financial hub but also sharpening its competitive edge.
Maintaining this position as a link between east and west will be difficult. In some ways, the proliferation of taxonomies has fractured sustainable finance. The Asia Pacific region alone juggles at least 10 competing green standards, leaving international investors navigating a Rubik’s cube of sustainability definitions.
The common ground taxonomy (CGT) developed by the EU and China, launched in 2021, proved that alignment pays off. According to one report, Chinese issuers of CGT-aligned bonds recorded a 30-basis-point “greenium”. While the precise size of a greenium may continue to be debated in academic circles, the lesson here is evident: clarity lowers costs.
By finding common ground between definitions, issuers and project developers across markets can communicate how their planned investments can meet the expectations of a wider range or deeper pool of investors, potentially helping to reduce borrowing costs and accelerating the transition.
Enter the Hong Kong Taxonomy for Sustainable Finance. True to the city’s hybrid east-west DNA, it is the first to align with the CGT while keeping both Chinese and European contexts in mind.
However, maintaining this position as the HKMA continues to expand the Hong Kong taxonomy will require careful consideration. The EU’s approach to defining what constitutes a substantial contribution to climate change mitigation in the energy sector is notable for its straightforward methodology: dividing the EU’s remaining carbon budget towards 2050 targets by its anticipated energy demand to arrive at a threshold of approximately 100g of CO2 equivalent per kilowatt hour. Technologies operating below this threshold are considered green as they aid in mitigating climate change.
In contrast, China has adopted an allowlist strategy, categorising specific technologies as green without necessitating a demonstration of meeting emission intensity criteria. This disparity between technical screening and allowlist approaches poses challenges for EU investors evaluating investments like Chinese green bonds against EU standards, often requiring additional data collection and analysis to reconcile differences.
The HKMA could step in by adopting a nuanced approach tailored to realities outside the west. For instance, it could adopt a methodology for setting transition finance thresholds in the energy sector based on a market’s carbon budget (its share of allowable emissions), forecasted energy demand, and average emissions intensity (a measure of pollution per unit of economic output). This would align with the EU’s approach but continue to reflect other markets’ development status and conditions.
To streamline this further, the HKMA could introduce a dual-labelling system: one label for Hong Kong-based projects, customised to regional priorities, and another aligned with global standards for international ventures, balancing local relevance with worldwide appeal.
To fully unlock the potential, Hong Kong must solve green finance’s trillion-dollar riddle: what qualifies as credible transition investment? Asia’s economic engines – its high-emitting industries – have been left in the shadows as capital chases pristine green assets. As a result, emerging markets bear unintended fallout.
The HKMA is working to plug the gaps in the CGT by incorporating transition activities crucial to regional decarbonisation – particularly as it pertains to the production of electricity from gaseous fuels, all vital to mainland China, the Greater Bay Area and other Asean economies. An updated prototype is slated for public consultation in the first half of this year.
Closer to home, Hong Kong has committed to enabling the low-carbon transition by expanding its hydrogen economy. This pivot demands hefty investment in infrastructure, not just in hydrogen production facilities but in technologies that use hydrogen fuel. Yet what constitutes a green or transitional investment in hydrogen remains unclear.
The challenge is stark. For hydrogen-powered buses, trucks, ships or factories to take off, supply must be plentiful and priced to compete. But green hydrogen, made via renewable-powered electrolysis, remains neither cost-competitive nor sufficiently scalable. Worse, diverting renewable resources to hydrogen production often makes less sense than feeding it straight into power grids. Transition finance standards for hydrogen production need to wrestle with these realities.
If Hong Kong can broker consensus on transition finance, it won’t just be the bridge to green capital; it will also create the design blueprints which can be referenced globally. Developing a transition taxonomy is no simple feat but it’s the pragmatic path forward. Hong Kong, a trailblazer in transition finance, sparked the trend with local power company Castle Peak’s inaugural $500mn transition bond in 2017, the world’s first.
By defining clear, robust standards, the HKMA can dispel fears of greenwashing (or its murkier cousin, transition-washing) and unlock investor confidence to fuel a real, resilient economic shift in Asia.
Originally published on Green Central Banking on 22 May 2025. Written by Lionel Mok.
