HKMA has set out a range of practices that have been adopted, or planned to be adopted, by major banks for management of climate risks. These practices are grouped in accordance with the nine guidance principles that have been set out in an earlier HKMA white paper that sets out its initial thoughts on the supervisory expectations on green and sustainable banking. The nine guiding principles, under which these practices fall, are in the areas of governance, strategy, risk management, and disclosures. HKMA also announced that it will invite the interested authorized institutions to participate in a pilot climate change stress testing exercise. Noting that the use of stress testing to measure climate risks is a relatively new development, HKMA will collect feedback from the participating banks on the scope, scenario, and outputs of the exercise before launching the exercise next year. More details regarding the pilot exercise will be provided to the industry in due course.
Among other practices, HKMA highlights that the more advanced authorized institutions seek to disclose overarching issues and information related to climate change to stakeholders. Enhanced transparency via increased risk disclosures brings a number of benefits, ranging from supporting stakeholders to analyze climate-related risks and providing them with opportunities to make informed decisions, to generating new sources of information, which can contribute to a more efficient allocation of capital and to support the transition to a low-carbon economy. Disclosing climate-related risk management information, especially that on less developed areas (for example, details of methodology on climate-related scenarios to assess exposures to physical and transition risks), also provides useful references for improving climate risk management in the banking industry.
In formulating its initial thoughts, HKMA engaged selected major banks in a series of discussions to understand their approach to managing climate risks in these four areas. During the discussions, HKMA observed a range of practices that the more advanced authorized institutions have adopted or plan to adopt in their management of climate risks, which may be of reference value to other institutions. Authorized institutions are recommended to give consideration to these practices when developing their risk management framework. This update is intended to inspire rather than prescribe how authorized institutions should develop their approach to the management of climate risks. Authorized institutions should take into consideration the nature, scale, and complexity of their businesses and ensure that their risk management framework is proportionate and fit for purpose.
Furthermore, authorized institutions should note the importance of being agile and responsive to changes when managing climate risks, given their distinctive nature. Climate risks are the products of multiple interacting forces (for example, natural, technological and societal) and are, thus, inherently uncertain and prone to changes. Compared to the traditional risk types, climate risks are more susceptible to non-linearity and fat-tailed distributions, which means authorized institutions will not be able to solely rely on historical data or established patterns when conducting modeling, nor could they rule out the possibility of more extreme events. Accordingly, authorized institutions should keep abreast of the latest standards on climate risk management and make adjustments to their approach based on actual developments.
Keywords: Asia Pacific, Hong Kong, Banking, Climate Change Risk, Governance, ESG, Disclosures, Sustainable Finance, Stress Testing, HKMA
Previous ArticleHKMA Keeps Countercyclical Capital Buffer Unchanged at 1%
BIS published a report that presents the results of a survey among more than 60 central banks in late 2020 about their engagement in central bank digital currency (CBDC) work, their motivations, and their intentions regarding CBDC issuance.
OSFI issued a letter to federally regulated deposit-taking institutions on the capital treatment of new loans to businesses through the Highly Affected Sectors Credit Availability Program (HASCAP).
BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.
EC launched a targeted consultation on the review of crisis management and deposit insurance framework in EU.
EIOPA published a paper that sets out the methodological principles of insurance stress testing with a focus on the liquidity component.
BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.
EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.
BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.
PRA published Version 3 of the questions and answers (Q&A) on the Branch Return form, with this version superseding the version published in October 2020.
IAIS is consulting on a draft application paper on the supervision of control functions.