HKMA Indicates Its Supervisory Approach to Addressing Climate Risks

The paper first describes sustainability issues such as climate change and discusses how climate-related risks can be transmitted to the banking sector, how banks in Hong Kong may be affected, and how climate change brings opportunities to banks. It then describes the regulatory development and its three-phased approach of HKMA to promoting green and sustainable banking in Hong Kong. Finally, the paper presents the initial thoughts of HKMA on supervisory expectations and requirements. HKMA hopes that the white paper can enable authorized institutions to have a grasp of the issue and help shape a greener, better, and more climate-resilient banking system. HKMA appreciates further discussion with the banking industry about the thinking presented in the white paper, before proceeding with a formal consultation of the supervisory requirements. The initial thoughts of HKMA on the supervisory expectations of authorized institutions have been summarized in the following nine guiding principles:

• The board has primary responsibility for an authorized institutions' climate resilience. It should have sufficient understanding of the climate-related issues in determining the authorized institutions approach to address them.
• The board should exercise oversight of the development and implementation of the authorized institutions climate strategy, including embedding climate-related risks into the authorized institutions risk appetite framework
• Climate considerations should be embedded throughout the strategy formulation process, from strategic assessment to action plan development.
• Organizational structures, business policies, processes, and resource availability should be reviewed and enhanced to ensure effective integration of climate strategy into the operation and corporate development of an authorized institutions.
• Authorized institutions should identify the transmission channels and assess the impacts of physical and transition risks arising from climate change on their business. Concrete plans should be devised to address any information and data gaps.
• Authorized institutions should build capability over time to measure climate-related risks using various methodologies and tools, among which scenario analysis should be actively explored.
• Authorized institutions should implement processes to monitor and report exposures to climate-related risks to ensure that such exposures are consistent with their risk appetite and that timely and regular updates are provided to the board and senior management.
• Authorized institutions should carry out measures to control and mitigate exposures to climate-related risks to ensure effective management of these risks.
• Authorized institutions should develop an appropriate approach to disclosing climate related information to enhance transparency. When considering the information to be disclosed, authorized institutions should take  recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as the core reference.

HKMA recognizes that there is a wide spectrum among authorized institutions in terms of size, nature of business, complexity of operations and stage of development in their capability in addressing climate-related issues. As such, HKMA expects that these principles will be applied to authorized institutions' on a proportionate basis, and will initially focus on larger authorized institutions' which have a greater impact on the Hong Kong economy and the financial system as a whole.

Keywords: Asia Pacific, Hong Kong, Banking, Climate Change Risk, ESG, Disclosures, Sustainable Finance, Reporting, Stress Testing, Governance, HKMA