Hong Kong Monetary Authority embeds climate risk in banking supervision

Banking authorities strive to ensure strong risk management practices, including the detection, disclosure, and management of risks emanating from climate change. These practices are critical to boosting banks’ resilience to climate-related events and risks.

Since 2019, the Hong Kong Monetary Authority (HKMA), the central banking institution of Hong Kong, has been focusing on climate risk management. It has, accordingly, identified a series of measures to promote green and sustainable banking. In December 2021, the HKMA issued a new Supervisory Policy Manual (SPM) module GS-1 on ‘Climate Risk Management.’ In the same month, it issued a circular to share some sound practices supporting the transition to carbon neutrality and completed a pilot climate risk stress test exercise to assess the resilience of the banking sector.

The HKMA published its circular on embedding climate risks in banking supervision on June 30, 2022. The circular reinstates its focus on how banks can address climate risk by leveraging green, sustainable banking practices. It also details its two-year plan to integrate climate risks into banking supervisory processes.

The plan includes the following initiatives:

  1. Inclusion of climate risk management as a standing item of prudential meetings: For the next two years, the HKMA will check on banks’ compliance with the new SPM module GS-1 and the adoption of measures stated in its circular at the annual prudential meetings with bank management.
  2. Updating the CAMEL rating framework and SPM module SA-1 on risk-based supervisory approach: The HKMA will work on these aspects in the second half of this year and ensure that sufficient emphasis is accorded to climate risk management.
  3. Thematic examinations on select areas of climate risk management: The HKMA will undertake a round of thematic reviews in the second half of 2022 to assess the due diligence processes of banks’ green and sustainable products. It also plans to commence another round of thematic reviews focused on climate-related risk governance in 2023.
  4. Integration of climate risk stress test into a supervisor-driven stress-testing framework: The HKMA intends to conduct a round of climate risk stress tests between 2023 and 2024, as part of its regular supervisor-driven stress test exercise. Banks participating in the exercise will be asked to assess their resilience under multiple stress scenarios featuring extreme climate situations, along with adverse economic and financial environments.
  5. Enhancement of ‘greenness’ assessment framework: The HKMA plans to undertake a ‘greenness’ assessment in the second half of 2022, based on a revised assessment framework.
  6. Keeping the regulatory framework under review: The HKMA is considering incorporating climate risk into its supervisory review process (i.e., Pillar 2 of the Basel regulatory capital framework). It will also closely monitor international discussions on refining the minimum capital requirements under Pillar 1 and disclosure requirements under Pillar 3 to address climate risks.

The HKMA is considering actions that can improve the availability and usability of data and tools, as well as strengthen the green ecosystem. It is working with other financial authorities to explore the development of a local green classification framework. The HKMA had previously collaborated with relevant professional bodies and players in the banking sector to launch the Enhanced Competency Framework (ECF) for banking practitioners. It comprises common, transparent competency standards that enable effective training for new entrants and professional development for the existing practitioners.

Modern banks or financial institutions cannot ignore sustainable, green banking, considering the economic scenario and associated regulatory frameworks. If you want to set off on a path to sustainable operations, reach out to us to discuss how we can support you.

Annie Zhang

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