HKMA Sets Out Two-Year Plan on Supervision of Climate Risks

The two-year plan comprises the following key initiatives:

• Including climate risk management as a standing item of prudential meetings. HKMA plans to make use of the annual prudential meetings with bank management for the next two years to check on the progress made by individual institutions in addressing climate risk, including their compliance with the new Supervisory Policy Manual (SPM) GS-1 on climate risk management and adoption of the measures in the HKMA’s circular on “Sound practices supporting the transition to carbon-neutrality.”
• Updating the CAMEL rating framework and the SPM module SA-1 on “Risk-based Supervisory Approach.” HKMA will update the CAMEL rating framework and the SPM module SA-1 on “Risk-based Supervisory Approach” in the second half of 2022 to ensure that sufficient emphasis is accorded to climate risk management by HKMA supervisors.
• Conducting thematic examinations on selected areas of climate risk management. HKMA plans to undertake a round of thematic reviews in the second half of 2022 to assess the due diligence processes of authorized institutions, with a view to understanding how the industry is mitigating and managing the potential greenwashing risks. HKMA also plans to commence another round of thematic reviews focused on climate-related risk governance in 2023, after the 12-month implementation period for achieving compliance with the new SPM module GS-1 on “Climate Risk Management” has lapsed.
• Integrating climate risk stress test into the supervisor-driven stress-testing framework. HKMA plans to integrate climate risk stress test into the supervisor-driven stress-testing framework. HKMA intends to conduct another round of climate risk stress test between 2023 and 2024, as part of the regular supervisor-driven stress test exercise. The participating authorized institutions in the exercise will be asked to assess their resilience under multiple stress scenarios featuring extreme climate situations and adverse economic and financial environment.
• Enhancing the “greenness” assessment framework. HKMA will review the framework to better encompass measures taken by banks in managing climate risk, as well as to explore a wider scope, such as other environmental risks and transition considerations. The second “greenness” assessment is expected to commence in the second half of 2022, based on the revised assessment framework.
• Keeping the regulatory framework under review. HKMA will consider whether and how to incorporate climate risk into its Supervisory Review Process (that is, Pillar 2 of the Basel regulatory capital framework), with a view to incentivizing authorized institutions to enhance their risk management framework to address risks related to climate change and transition to carbon neutrality.

HKMA took into consideration the incremental demand this plan would place on the resources of authorized institutions. To support the industry in dealing with the challenges arising from climate change, HKMA will continue to support the institutions in developing their climate risk management capabilities. The Alliance for Green  Commercial Banks, established jointly by the HKMA and the International Finance Corporation, organizes capacity building events regularly to promote the understanding of green finance in Hong Kong as well as other emerging financial markets in the region. A green and sustainable finance module under the Enhanced Competency Framework for Banking Practitioners is also being developed. HKMA is also exploring measures to improve the availability and usability of data and possible tools as well as to strengthen the green ecosystem. In collaboration with other financial authorities under the Green and Sustainable Finance Cross-Agency Steering Group (CASG), the development of a local green classification framework is also being explored.

Keywords: Asia Pacific, Hong Kong, Banking, Climate Change Risk, ESG, Stress Testing, Basel, SPM GS-1, Greenwashing, Supervisory Review Process, Pillar 2, Regulatory Capital, Carbon Neutrality, HKMA