The Hong Kong Monetary Authority (HKMA) is consulting on a draft Supervisory Policy Manual (SPM) module GS-1 on climate risk management. The module offers guidance, to authorized institutions, on the key elements of climate risk management by describing the regulator's approach and expectations with respect to reviewing the climate risk management by authorized institutions. The comment period for this consultation ends on August 20, 2021.
In developing this module, HKMA has not only drawn on the relevant work of the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), and the Network for Greening the Financial System (NGFS) but has also considered the industry practices in managing climate risks. The module sets out requirements with regard to authorized institutions' governance, strategy, risk management, and disclosures in building climate resilience:
- Governance. The board has primary responsibility for climate resilience for authorized institutions whereas the senior management is responsible for the proper functioning of the or authorized institutions' risk management framework and for driving necessary changes in addressing climate related issues. This includes ensuring the effectiveness of the framework through regular review, formulation, and implementation of relevant policies and processes. The senior management should put in place effective escalation channels for reporting material risks and exceptions.
- Strategy. Authorized institutions should embed climate considerations throughout the current strategy formulation process, from strategic assessment to action plan development. They should ensure the effective implementation of their strategy for addressing climate-related issues by properly aligning internal resources and processes, and managing relevant changes. Organizational structures, business policies, processes and resources availability should be reviewed.
- Risk management. An appropriate framework for managing climate-related risks should be based on a comprehensive assessment on how, and to what extent, climate change would affect an authorized institutions' portfolios and operations. In view of the unique characteristics of climate change, the financial, reputational, and strategic risk implications should be properly considered. Authorized institutions are expected to have sufficient understanding of how climate risks could be transmitted into the traditional risks faced by them and assess the potential impact on their business. They should adopt the techniques of climate-focused scenario analysis and stress testing to regularly assess vulnerability under different plausible climate scenarios; they should also implement processes to monitor and report exposures to climate risks to ensure that such exposures are consistent with their risk appetite.
- Disclosures. Authorized institutions should develop an appropriate approach to disclosing climate-related information to enhance transparency. At a minimum, authorized institutions should make climate-related disclosures aligned with the recommendations from the Taskforce on Climate-Related Financial Disclosures, also known as TCFD.
The locally incorporated authorized institutions should apply these requirements on a solo-entity basis and, where applicable, on a consolidated basis covering their subsidiaries. To the extent practicable and if the risks are assessed as material, they should also consider applying it to their associated companies and joint ventures. This module should be read in conjunction with other relevant modules of SPM including IC-1 on risk management framework, IC-5 on stress testing, and the various modules on the effective management of the relevant inherent risks such as RR1 on reputational risk and SR-1 on strategic risk. While this module focuses on climate risk management, authorized institutions should not overlook the risks and opportunities from other environmental and sustainability related issues. This would better enable an authorized institution to deal with the challenges posed by increasing expectation of its stakeholders and the public on this front.
Comment Due Date: August 20, 2021
Keywords: Asia Pacific, Hong Kong, Banking, Climate Change Risk, ESG, GS 1, Supervisory Policy Manual, Governance, Disclosures, TCFD, Stress Testing, Scenario Analysis, HKMA
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