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    HKMA Studies Investor Sensitivity to Climate Risk, Issues Banking Code

    December 10, 2021

    The Hong Kong Monetary Authority (HKMA) published a research memorandum exploring the sensitivity of global equity market investors to different types of climate risks and whether this relationship depends on environmental activity and performance of firms. Additionally, HKMA published enhancements to the Code of Banking Practice. The Hong Kong Association of Banks (HKAB) and the DTC Association (DTCA) jointly issue the Code with the endorsement of HKMA. The revised Code came into effect from December 10, 2021. Authorized institutions are expected to achieve full compliance with the new provisions within six months of the effective date, with an extension of up to 12 months for provisions requiring more extensive system enhancements. Meanwhile, HKMA and the industry are reviewing other parts of the Code and will announce the details in due course.

    The key changes to the Code will:

    • Enhance customer experience and protection in digital banking services, including requiring banks to effectively and clearly disclose product information when undertaking promotions through social media, providing channels for the public to authenticate digital promotional activities of banks, and issuing warnings on specific security risk events (like cyber fraud and bogus advertisements) to customers.
    • Strengthen protection and transparency of banking services, such as providing more information on credit card chargeback mechanism, enhancing information disclosure on local and cross-boundary transfers, and strengthening the procedures for handling mis-transfer of funds by customers
    • Further promote financial inclusion, to ensure that customers with different needs are provided with appropriate banking services, to require banks to take into account the needs of customers for physical banking services when modifying their branch networks, and to accommodate the needs of different customers when providing services or information through digital means

    Coming back to the research memorandum, the authors have constructed news-based indices capturing public perception of climate-related physical and transition risks. Estimates show that global stock prices respond negatively to increases in both types of climate risk and being “green” is rewarded while being "brown” is penalized by the market. The research finds that environmental, social, and governance (ESG) rankings and emission intensity are important drivers of stock market fluctuations. Subsample analysis further reveal that these findings are driven primarily by firms headquartered in advanced economies, with the stock prices of emerging market firms yielding modest if not insignificant responses to changes in climate-related risks and their interactions with environmental performance. As emerging markets are more vulnerable to the impact of climate change and less able to afford its consequences, this raises the concern of disruptive financial market repricing when investors eventually come to terms with the very real threats climate change poses to firms in these economies. The results highlight the importance for emerging markets to scale up ESG integration and boost awareness of the virtues of “green” efforts and performance among investors of emerging market firms. In Hong Kong, rapid improvement in emissions disclosure has coincided with heightened investor scrutiny of firms’ carbon disclosure and intensity, suggesting corporate disclosure and dissemination of environmental data can facilitate the assessment of climate-related risks.

    Keywords: Asia Pacific, Hong Kong, Banking, Securities, Code of Banking Practice, Climate Change Risk, ESG, Transition Risk, Green Finance, Disclosures, HKMA

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