The guideline includes expectations on governance, strategy, risk management and disclosure. The HKMA plans to allow a 12-month period for implementation.
The HKMA (Hong Kong Monetary Authority) has issued a draft guideline on climate risk management for consultation with the banking industry.
The HKMA has drawn from the work of FSB (Financial Stability Board), BCBS (Basel Committee on Banking Supervision) and NGFS (Network for Greening the Financial System) to develop the SPM module.
The module imposes supervisory expectations on all locally incorporated banks on both a solo-entity basis and consolidated basis. International banking groups operating in Hong Kong would also be expected to have a framework in place for addressing climate-related issues appropriate for their local operations.
The SPM module includes expectations on governance, strategy, risk management and disclosure.
Governance: The board has primary responsibility for a bank’s climate resilience, including oversight of the development and implementation of its strategy for addressing climate-related issues, and how the bank embeds climate-related risks its risk management framework.
The board should ensure there are appropriate resources, processes, systems and controls to support the implementation of the strategy and cultivate a risk culture from the top that embeds climate-related considerations into the business activities and decision-making process.
Senior management should consider the climate-related risks and opportunities in a holistic manner and ensure the bank’s business decisions are commensurate with the magnitude of climate risks. Roles and responsibilities in relation to the bank’s approach to addressing climate-related issues should be defined and articulated.
The board should also set the bank’s overall risk appetite and approve a risk appetite statement, recommended by senior management, which takes into account the bank’s specific circumstances including its strategic goals, risk-taking capacity, and the results of any materiality assessment, climate risk stress testing and scenario analysis.
Strategy: Banks should embed climate considerations throughout the strategy formulation process. A process should be in place to define and document the aspects of climate-related risks that are assessed as most relevant to the bank – including both internal and external factors.
Climate-related risk considerations over different time horizons should be incorporated into the strategy formulation process. In formulating climate strategy, a time horizon of over 10 years should also be adopted to cater for the unique nature of climate risks.
Banks should ensure the effective implementation of their strategy for addressing climate-related issues by properly aligning internal resources and processes, and managing relevant changes. Organisational structures, business policies, processes and resources availability should also be reviewed.
Banks strategic goals should be properly reflected in their business policies, such as to embed climate risk considerations, environmental impacts and transition plans into client risk profiling.
Remuneration policy and practices should also be consistent with banks’ climate strategy, for example by linking achievement of climate-related targets with the evaluation of variable remuneration.
Risk management: Banks should incorporate climate-related risk considerations into their risk management framework, and establish effective risk management processes to identify, measure, monitor, report, control and mitigate climate-related risks. This should be documented in policies and procedures.
Responsibilities of managing climate-related risks should be allocated along three lines of defence.
- The first line should conduct climate-related risk assessments during client on-boarding, credit application and credit review process.
- The second line should oversee climate-related risks in business activities, monitor on-going risks and review relevant policies and procedures.
- The third line should provide assurance and periodic audit evaluation on the effectiveness of the bank’s climate-related risk management.
On risk identification and measurement, Banks should conduct a comprehensive assessment of how the risks posed by climate change may affect credit risk, market risk, liquidity risk, operational risk, legal risk, reputational risk and strategic risk. Where appropriate, they should also formulate plans to build capabilities to address any information and data gaps.
Banks should identify material climate-related risks at the portfolio and counterparty levels, and where appropriate, the transactional level, by assessing the relevant financial implications over both short and longer-term horizons.
At portfolio level, banks should identify high risk asset portfolios based on sectoral/geographical exposures, considering such factors as the physical location of a client’s business operations and assets, potential supply chain disruptions, and potential implications on collateral valuations. Risk criteria such as carbon emission, energy usage and sensitivity to climate policy may be applied to assess vulnerability of exposures to transition risk.
At the counterparty level, banks should assess concentration risk, at least for high risk sectors and portfolios. Counterparty-level risk criteria may include the counterparty’s financial position, transition strategy, exposures to stranded assets and business supply chain.
Banks should also build capability to measure climate-related risks using climate-focused scenario analysis and stress testing. Proper documentation of these methodologies and tools should be maintained to inform management discussion and facilitate ongoing development.
Timely and regular reporting should be made to the board to facilitate oversight and ensure exposures are consistent with their risk appetite. Quantitative and qualitative tools and metrics should be considered to facilitate monitoring, and to provide early warning signals for necessary actions. Banks should be able to control and mitigate exposures to climate-related risks, having regard to their business strategy and risk appetite.
Disclosure: Banks should develop an appropriate approach to disclosing climate-related information to enhance transparency. As a minimum, they should make climate-related disclosures aligned with TCFD recommendations.
For banks which are local subsidiaries or branches of foreign banks, they may rely on the disclosure arrangement at the group or head office level, as long as such disclosures are applicable to the bank’s local operation and meet the requirements in SPM module.
A “comply-or-explain” approach may be adopted by banks, taking into account the significance of the bank’s operations in Hong Kong and the materiality of climate-related risks exposed to the bank.
Banks should start working out a plan to obtain the information needed for Scope 3 emissions reporting. They may also consider assessing and disclosing the impact of their business activities towards the environment.
The SPM module is available here.
The HKMA plans to allow a 12-month period for the implementation of the requirements set out in the SPM module.