HKMA Studies Carbon Market Opportunities & Climate Stress Test Results

The financial stability report highlights that the robust capital and liquidity positions of the banking sector continue to provide strong buffers for banks to withstand shocks. From a longer-term perspective, climate-related risks will likely have significant implications for financial stability. The report highlights that the longer-term impact of climate transition risks on firms’ default risks will be significantly smaller in the “orderly transition” scenario than in the “disorderly transition” scenario. Also, the impact of physical risks under these two scenarios is found to be lower than the “no action” scenario. Together, these results support the notion that there are clear benefits to taking climate action and acting early. As part of the Quarterly Bulletin, HKMA published feature articles on the country's bond market in 2021 and the pilot climate risk stress test exercise of 2021. In view of the climate risk stress test results, which were released in December 2021, the participating banks have developed plans to enhance their climate strategies and risk-governance frameworks. The feature article notes that HKMA will continue to engage with the industry to support their capability building and refine the climate risk stress test framework with the aim of developing a more comprehensive approach to assessing the climate risks of banking sector in future exercises.

The paper on preliminary feasibility assessment of carbon market opportunities for Hong Kong was prepared by the Carbon Market Workstream of the Green and Sustainable Finance Cross-Agency Steering Group. Based on its assessment, the Steering Group intends to proceed with the following next steps in parallel to support the development of Hong Kong as a regional carbon trading center:

• Develop Hong Kong into a global, high-quality voluntary carbon market, leveraging Hong Kong’s status as a champion of international standards, a facilitator to channel global capital into the Mainland, and an international financial center with a stable and mature regulatory system
• Collaborate with relevant authorities and stakeholders to work toward establishing the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) Unified Carbon Market in line with Mainland policies to strengthen GBA cooperation
• Explore opportunities to link up international investors with the GBA Unified Carbon Market and potentially the national emissions trading system
• Strengthen cooperation with the Guangzhou Futures Exchange on carbon market development to enable Hong Kong to act as the Mainland’s offshore risk management center

The Carbon Market Workstream, which is co-chaired by the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEX) will consider which market and regulatory model would be the most appropriate and prepare a detailed roadmap, implementation plan, and indicative timeline after consulting with market experts and relevant authorities. 

Keywords: Asia Pacific, Hong Kong, Banking, Securities, Financial Stability Report, Quarterly Bulletin, Climate Change Risk, Stress Testing, ESG, Carbon Markets, Sustainable Finance, Bond Issuance, HKMA