The Hong Kong Money Authority (HKMA)’s Guidance for banks on Climate Risk Practices

12 August 2020, Banking & Finance, Newsletter by Simon Deane, Bonnie Wong

The Hong Kong Money Authority (HKMA) published a White Paper on 30 June 2020 to set out its recommendations and supervisory expectations on green and sustainable banking around four areas: governance, strategy, risk management and disclosure. The HKMA advised AIs which are subsidiaries of international banks to assess relevance of any parent bank’s climate policy in the context of its Hong Kong operations and ensure that local specialties are addressed.

In formulating these recommendations, the HKMA has recently consulted selected AIs about their approach to climate risk management in the four areas. Some of the key measures adopted by these AIs are noted and have been used as practical guidance in the White Paper (see HKMA circular dated 7 July 2020 and Annex).

Below is an overview of the recommendations set out by the HKMA: 

i. 

Governance: Board’s accountability in climate resilience and oversight of climate strategy development and implementation

The HKMA noted that the most advanced AIs have:

  • assigned accountability to the board of directors and senior management for oversight of the management of climate risks and implementation of risk management frameworks respectively, while tasking existing committees or individuals to consider climate change risks and possible remedies
  • embedded climate-related risks into an overall climate risk appetite framework, with some receiving regular updates on project progress to facilitate their oversight
  • to track performance, set target positions for sustainable financing in an external sustainability ranking, with performance reviewed annually and evaluated against senior management. 
ii.   Strategy: AIs should embed climate considerations throughout the strategy formulation process, while organisational structures, business policies, processes and resources availability should be reviewed and enhanced to ensure effective strategy implementation.

The HKMA noted that advanced AIs have adopted 3 board initiatives:

  • made changes to organisational structure, with several AIs having created a dedicated unit for climate risks consulting and cross-functional working groups to support the AIs’ climate agenda. A three-lines-of-defence structure, involving (1) business teams, (2) risk departments and (3) audit, was also set up with each line scrutinizing and challenging climate risk profiles created by the previous line                                                                                                           
  • conducted reviews to ensure adequate resources for managing climate risks
  • adopted a top-down approach to raise staff awareness, including specialist training on climate change, external and internal communication (e.g. international conferences and circulation of featured articles) and recruitment of environmental experts.
iii.  Risk Management: AIs are expected to incorporate climate risk considerations into their existing risk management framework.

The HKMA noted that advanced AIs have:

  • conducted holistic reviews to identify their exposures at portfolio level, client level (and operational level)
  • conducted scenarios analysis including climate change scenarios, sector level assessments and customer level assessment (assessing potential financial impact at customer level)
  • adopted multiple metrics (e.g. carbon-related assets as a percentage of total banking products) across their portfolios to monitor exposure including climate vulnerability assessments for clients. Based on risk identification, these AIs are establishing internal concentration limits or have excluded sectors and projects highly sensitive to climate change. 
iv.  Disclosure: AIs should develop an approach to disclosing climate-related information to enhance transparency, taking the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as the core reference.

The HKMA noted that advanced AIs aimed to develop a voluntary, consistent climate-related financial risk disclosure framework for firms to report information to stakeholders—some AIs have even included climate-related disclosures in their annual reports. Through disclosures, AIs can help stakeholders make informed decisions and improve climate risk management in the banking industry.

Please refer to the White Paper for more information regarding the above recommendations.