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
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