Blog: Common Ground Taxonomy: An Analytical Tool – Regulation Asia

The HKGFA is looking to address misconceptions about the EU-China Common Ground Taxonomy and how it is meant to be used, says Chaoni Huang. 

The HKGFA (Hong Kong Green Finance Association) this week plans to release a guidance paper aimed at helping the industry better understand the use cases of the CGT (Common Ground Taxonomy) – part of efforts to boost its adoption and push forward the development of Greater Bay sustainable finance markets.

Founded in September 2018, the HKGFA is a not-for-profit platform that aims to connect the public and private sectors to promote sustainable finance in Hong Kong, with the objective of building the city into a leading sustainable finance hub and achieving both the climate mission and the rest of the UN SDGs (Sustainable Development Goals).

To date, over 160 members from banks, asset managers, insurance, corporates and civil society groups have joined the HKGFA, which provides input to regulators to support policy development and sustainable finance market growth, as well as the technical know-how needed to facilitate capacity-building across industries.

Common Ground Taxonomy

Among several working groups, one is leading work on promoting the adoption of the CGT and product alignment across borders, with a view to building a more harmonised green finance market between Hong Kong and the rest of Greater Bay Area.

Initiated in July 2020, the CGT project saw the IPSF (International Platform for Sustainable Finance) establish a working group – co-chaired by the PBOC (People’s Bank of China) and the European Commission – to compare China’s catalogue of green bond-supported projects and the EU’s sustainable finance classification scheme.

The result of this was the publication of the first version of the CGT in November 2021, and then an updated version in June 2022. By design, the CGT provides an analytical tool to compare how green activities are defined across the EU and China’s taxonomies, initially focusing on activities that contribute to climate change mitigation.

The CGT helps to determine whether an activity defined as green under China’s green bond catalogue would also qualify as green under the EU taxonomy, and vice versa. For Chinese companies, this provides a way to ensure their offshore green bond issuances will appeal to EU investors.

To date, four public bond issuances aligned to the CGT have been completed – by China Construction Bank’s Macau Branch, China Merchants Bank’s Sydney Branch, Industrial Bank’s Hong Kong Branch, and Bank of China’s Frankfurt Branch. An account receivable financing facility aligned to the CGT was also provided by Deutsche Bank to China’s Huaneng Tiancheng Financial Leasing Co Ltd.

ICMA Intersection

Chaoni Huang, Vice President, Secretary General, HKGFA; Managing Director, Head of Sustainable Capital Markets, Global Markets APAC, BNP Paribas

Why haven’t there been more issuances? According to Chaoni Huang, Vice President and Secretary General of the HKGFA, unfavourable market conditions have played a significant role in slowing down offshore issuances by Chinese companies, but there is also a lack of awareness and understanding of the CGT and how it is meant to be used.

“The objective of CGT is to harmonise standards and improve cross-border capital flows, based on a consensus understanding on what is green,” says Ms Huang, who is also Managing Director and Head of Sustainable Capital Markets, Global Markets APAC at BNP Paribas. “But the CGT is not meant to stand alone. For offshore bond issuance by Chinese firms, it should be used in conjunction with the ICMA green bond principles.”

She explains that there has been some confusion about what the CGT is, what it means for the green bond issuance process, and how it intersects with the ICMA green bond principles. Some issuers are under the impression that the CGT is meant to replace the ICMA standards, where in fact they complement one another.

“At the end of the day, the CGT is a mapping exercise between the EU taxonomy and the China green bond catalogue. It tells you what are the commonalities between the two frameworks, and what are the differences,” Ms Huang says. “Chinese issuers can use the CGT as a tool to ensure their offshore bonds will be accepted in the EU market, but they would still use the ICMA standards for the issuance.”

Some in the industry are also under the impression that the CGT does not cover the “do no significant harm” and “minimum social safeguards” principles that we see in the EU taxonomy. But given that the CGT was intended to be an analytical tool, its scope was primarily to compare how green activities are defined and classified under the China and EU taxonomies.

“The fact that these principles were not part of the scope does not necessarily mean it’s a limitation of CGT or a reason not to use CGT,” Ms Huang says. “When it comes to the governance of the green bond issuance process and the pre- and post-issuance assessments, the issuer would leverage the ICMA of other similar principles or guidelines to ensure their environmental objectives are being met, and not at the expense of other environmental or social objectives.”

Works Both Ways

The CGT is designed to work both ways: just as the CGT can be used by Chinese issuers in conjunction with the ICMA green bond principles for offshore bond issuances, it can be used by European issuers with China’s green bond principles to issue green bonds in the Mainland panda bond market.

Although there haven’t yet been any European public issuances in China using the CGT so far, in the medium term we may see European players referencing the CGT as the basis for green bond selection. “This will ultimately help them to speak to domestic investors in China,” Ms Huang says.

“The CGT is a tool to help issuers pick those activities that clearly overlap between EU and China. That’s when you can avoid any accusation of greenwashing, ensure Chinese issuers have a better chance of appealing to international investors, increase the appeal of European issuances to Mainland investors.”

Raising Awareness

As the market environment improves, we are likely to see more Chinese issuances are using CGT as the basis for project selection in the international bond space. In the meantime, the HKGFA has been making a conscious effort to raise awareness of the CGT and its ability to facilitate product alignment across the Greater Bay Area and beyond.

On Thursday (22 September), the HKGFA will hold its 2022 GBA-GFA | HKGFA Annual Meetings, where it will seek to provide the industry with a better understanding of how the CGT can be applied, beyond just green bond issuances.

“We felt there was a need for us to put forward a paper to really explained what the CGT is and what it is not, as well as set out its use cases beyond what you see in green bond market,” Ms Huang says. “There is broader application for the CGT in investment strategies, corporate disclosure, investor disclosure, index development, and policy development.”

“We do not see the CGT as merely a labeling exercise. The idea is to use it as the basis for potential classification, so there’s a huge need to also promote the CGT to support policy development.”

Promoting Harmonisation

The HKGFA is ultimately seeking to prevent market fragmentation, and sees the CGT as a forming a sound basis for any potential taxonomy development. Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group has already committed to adopting the CGT as a reference for developing the city’s own taxonomy, for instance.

Hong Kong is expected to play a significant role in the global sustainable finance market. As an international hub, the city draws in companies from Europe, China and elsewhere across the world to raise capital. Ms Huang says this makes it “increasingly important to develop a local framework that is interoperable across different jurisdictions, to make sure international investors will support the activity you’re trying to finance.”

So far, the IPSF has analysed 79 activities for whether they provide clear climate mitigation benefits. The CGT categorises each activity based on the overlap between the EU and Chinese definitions.

“In some cases, the China definition is more stringent, and in others, the EU is more stringent,” Ms Huang says. “The hope is that in time, the IPSF platform will also serve to address these fundamental differences at the local level. This would be another level of harmonisation we would welcome.”

The CGT is viewed as a live document. The IPSF will continue to analyse more activities to identify overlaps between the EU and China taxonomies, which will ultimately make the CGT more inclusive, in time covering  all the other environmental objectives and activities. “This is good news for the sustainable finance market, and good news for users of the CGT,” Ms Huang says.

“What’s more, the CGT has provided an analytical framework and methodology for comparing taxonomies. So naturally, in the future we should be able to apply the same methodology to compare other taxonomies and their definitions, identify their overlaps, and ultimately take larger steps to achieve global harmonisation.”

Register to attend the 2022 GBA-GFA | HKGFA Annual Meetings on Thursday (22 September) from 9:00 – 17:30 HKT.

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