The Hong Kong Monetary Authority (HKMA) is setting out sound practices adopted by banks to support transition to carbon neutrality. As part of a series of discussions with banks, HKMA has observed that some banks have developed comprehensive climate strategies and are implementing them with respect to their Hong Kong operations. Apart from incorporating climate risk considerations into their risk management framework, these banks have devoted resources and taken measures beyond risk management to support the goals of the 2015 Paris Agreement and contribute to achieving global net zero emissions. HKMA considers that these sound practices supporting the transition to carbon neutrality would be of reference value to authorized institutions in formulating their own climate strategies.
The practices set out by HKMA are grouped into the following four areas:
- Reducing greenhouse gas emissions of own operations. Leading banks took measures to reduce the greenhouse gas emissions from their operations through energy saving, water and waste reduction, and green office/branch policies. Targets for greenhouse gas emissions reduction are set and quantitative metrics or key performance indicators are used to keep track of reduction progress. To enhance the transparency of their operations and promote accountability, these banks regularly disclose their greenhouse gas emissions reduction progress and measures. By proactively reducing the greenhouse gas emissions of their own operations, these banks seek to cultivate a green and sustainability-centric core value among their staff.
- Reducing financed emissions through portfolio alignment. Given their intermediary role, banks can reduce financed emissions by channeling more funds to greener and more sustainable sectors (such as renewables and clean technologies) in their lending and investment portfolios. Leading banks have developed policies to limit their exposures to high-emitting sectors. Some of them have launched a wide range of green and sustainable products, such as green loans and bonds as well as green deposits and mortgages. These practices not only help the banks align their portfolio with net zero targets, but also meet the increasing market demand for green products. Science-based tools and methodologies are used to assess the banks’ portfolio alignment against pre-set targets and develop transition pathways to achieve the goals of the Paris Agreement.
- Assisting clients to transition. Leading banks provide transition financing to assist their clients, particularly those from “brown” sectors, to progressively transform their operations into greener and more sustainable business models. Transition loans with sustainability-linked pricing structures are offered to high-emitting clients to incentivize changes toward carbon neutrality. Also, through partnership with green certification agencies, some of these banks facilitate their clients to get third-party green certification on the greenness of their projects or use of the proceeds prior to green financing applications. These banks also offer bespoke advisory services and capacity building to increase their clients’ awareness of climate change and to assist them in integrating climate-change-related considerations into their business and financing strategies.
- Promoting collective efforts to assist the economy to net zero transition. Leading banks participate in international or industry climate initiatives, such as the Collective Commitment to Climate Action (CCCA) and the Net Zero Banking Alliance (NZBA), promoting collective efforts to tackle climate-change-related challenges. By delivering concrete progress on their commitments to climate change goals under these initiatives, these banks seek to demonstrate their ambition and responsibility to contribute to achieving net zero globally. This could help them address the increasing expectation of the public and manage the associated reputation risks. Domestically, these banks proactively collaborate with their governments and policymakers to provide suggestions and advice to help shape climate-related policies at the jurisdictional level.
HKMA strongly encourages authorized institutions to enhance their own overall green and sustainability programs to encompass both the management of climate risk and the above supporting measures to contribute to carbon neutrality. They should consider developing metrics to monitor the progress of adopting these sound practices as part of their business strategy. The progress made should be regularly reported to the board to keep it abreast of the institution’s efforts toward green and sustainable banking. HKMA will consider reflecting elements of these sound practices in its greenness assessment framework, with a view to evaluating the overall green and sustainable landscape of the banking sector.
Keywords: Asia Pacific, Hong Kong, Banking, ESG, Low-Carbon Economy, Sustainable Finance, Carbon Neutrality, Climate Change Risk, Transition Risk, Guidance, Best Practices, Paris Agreement, Net Zero Transitions, HKMA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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