Hong Kong Proposed Climate Risk Guidelines for Banks

With more countries introducing climate risk reporting as part of their regulatory requirements, governing and investment decisions, Hong Kong has helped paved the way to new guidelines.

Climate change poses a distinct threat to our economy, society and the natural environment, resulting in the global focus of governments and policy makers shifting towards greener industries. With more countries introducing climate risk reporting as part of their regulatory requirements, governing and investment decisions.

Hong Kong Money Association (HKMA) published draft guidelines on the 20th of July 2021 regarding the management of climate-related risks by Authorised Institutions (AIs). The guidelines seek to reduce the financial sector’s effects on the environment, while taking active steps to reduce climate change related risks.

Different Types of Climate Risk

HKMA’s proposed guidelines amalgamates elements of the Task Force on Climate-related Financial Disclosures (TCFD), Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and The Basel Committee (BIS). The HKMA’s approach builds on the TCFD systems of physical and transitional risks, while adding liability risks to the framework.

Physical risk

  • Physical risk refers to the impacts of climate and weather-related events and long-term progressive shifts of climate.

Transition risk

  • Transition risk refers to the financial risk related to the process of adjustment towards a lower-carbon economy which can be prompted by, for example, changes in climate policy, technological changes or a change in market sentiment.

Liability risk

  • Liability risk is associated with emerging legal cases related to climate change, including those seeking compensation from financial institutions which are held responsible for loss and damages resulting from the effects of climate change, or which finance companies with activities having negative environmental impacts.

Text extracted from HKMA’s SPM 2021 document

What has the HKMA committed to?

In its 2021 summary, the HKMA mobilises actions through governance. Driven at a board and senior management level, they specifically seek to educate stakeholders in high positions to ensure effective development and implementation of climate strategies. This may include the assurance of resources, processes, systems and controls to assist in the implementation of the strategies. Furthermore, compliant companies are expected to commit resources towards the maintenance, and proper documentation of key climate related risk-assessment features of the company, including:

  • parameters used (e.g. macro-economic variables)
  • assumptions and analytical choices made (e.g. choices of scenarios, time horizons);
  • model limitations;
  • assessment results; and
  • actions undertaken and plans to address risks identified

These reports are expected to be submitted to the board and senior management regularly, to inform decision making. When these reports cannot be made, a comply or explain approach is taken in line with the TCFD guidelines.

Takeaway message

Countries are now adopting core values of the TCFD framework in a bid to address climate change related risks and opportunities. Climate Valuation and XDI can support Authorised Institutions seeking to understand the climate change related physical and financial risks to their investments. We have extensive experience, helping banks and mortgage lenders around the world fulfil their climate risk disclosures and reporting requirements. For more information about our reports and services, visit our commercial products page or contact our team to arrange a consultation.

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