The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector, including a revision to the policy module SA-1 on risk-based supervisory approach, a report on climate risk measurement, and a collaboration with the Carbon Disclosure Project or CDP.
One of the publications is a revised version of the Supervisory Policy Manual module SA-1 on “Risk-based Supervisory Approach” in the form of a non-statutory guideline. As set out in a circular dated June 30, 2022, HKMA has developed a two-year plan to embed climate risk considerations more fully into its banking supervisory processes. The revisions to SA-1 illustrate the HKMA approach to supervision of emerging risks such as climate risk under its risk-based supervisory approach. They also seek to align the processes described in SA-1 with the current supervisory practices of HKMA. With regard to climate risk management, authorized institutions are encouraged to continue to build up their climate risk management capabilities by implementing measures to comply with the supervisory expectations in SPM module GS-1 on “Climate Risk Management.”
Another publication is a climate risk measurement report from the Hong Kong Institute for Monetary and Financial Research (HKIMR) that reviews the motivations and challenges that financial institutions globally are facing in climate risk measurement. The report introduces a data management framework and a model-risk management framework, which can be helpful in effectively managing the data and model risks in the climate risk measurement process. The report also presents the results of a survey and interviews commissioned by HKIMR that highlight local financial institutions’ practices and challenges associated with climate risk measurement. It also discusses insurers’ long experience in climate risk measurement and explores the insights for other sectors of the financial services industry. The report concludes by offering considerations on the advancement of climate risk measurement in the financial services industry in Hong Kong. Additional considerations include strengthening local and international collaboration and improving the availability and quality of climate-related data and methodologies.
Finally, the Green and Sustainable Finance Cross-Agency Steering Group announced that it has entered into a collaboration arrangement with CDP, an international non-profit organization that runs the global environmental disclosure system for companies, to jointly enhance climate data availability and sustainability reporting in Hong Kong. As part of the collaboration, the Steering Group and CDP have developed a Climate and Environmental Risk Questionnaire, which is the first cross-sector reporting template designed for first-time reporting corporates in Hong Kong, especially SMEs. The SME questionnaire is aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework and comes in three versions (Annexes 1 to 3) with different level of granularity, to cater for variation in the reporting corporates’ size and sophistication. The easy-to-use template is intended to aid corporates’ sustainability reporting processes and raise their sustainability visibility to lenders, investors, and supply chain clients to better access sustainability financing. It will also facilitate financial institutions’ collection and assessment of company-level data for risk assessment and relevant business decisions. The Steering Group and CDP have developed comprehensive guidance and learning materials for the use of the template and will arrange targeted capacity building sessions starting in Q1 2023. The Steering Group is also developing a data portal to collect and allow financial institutions to access relevant corporate data, subject to consent.
Keywords: Asia Pacific, Hong Kong, Banking, Supervisory Policy Manual, Climate Change Risk, ESG, Disclosures, CDP, Sustainable Finance, SA 1, Basel, 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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