The Hong Kong Monetary Authority (HKMA) announced that the applicable jurisdictional countercyclical capital buffer (CCyB) ratio for Hong Kong remains unchanged at 1%. Although the latest indicative buffer guide, calculated based on data from the first quarter of 2022, signals a CCyB of 0%, uncertainties about global and domestic economic environment have remained high. Thus, HKMA decided to retain the CCyB at 1%. HKMA also published a study that aims to examine the effect of economy-wide environmental, social, and governance (ESG) performance on sovereign credit risk.
The study examines the impact of ESG factors on sovereign credit risk over time and across economies. It addressed four key questions covering impact of ESG performance on reduction of sovereign credit risk, impact of faster ESG debt market development on reduction of sovereign credit risk, inclusion of ESG factors in investment decision making by investors, and determination on whether the ESG effect on sovereign credit risk is homogeneous across advanced economies and emerging market economies. This assessment is expected to provide important insights for ESG-related policymaking in the medium to long term.
The results of the study show that investors have generally factored in ESG performance and the development of the ESG debt market when pricing sovereign credit risk in recent years, and that the impact of ESG is significant in both advanced economies and emerging market economies. However, the emerging market economies’ sovereign credit risk appeared to be less sensitive to the ESG debt market size due to the still-underdeveloped ESG markets. The study also shows some differences in the sensitivity of sovereign credit risk to the individual E, S, and G factors, depending on the stage of economic development. The study found that sovereign credit risk of the advanced economies is insensitive to their governance performance while that of the emerging market economies is insensitive to their environmental performance. The findings suggest that policymakers should continue to support ESG-related developments and foster stronger international cooperation to improve the environmental performance of emerging market economies—for example, technology transfer via foreign direct investment to mitigate carbon emission.
Keywords: Asia Pacific, Hong Kong, Banking, Basel, Regulatory Capital, CCyB, ESG, Climate Change Risk, Low Carbon Economy, Sovereign Credit Risk, HKMA
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