HKMA Sets Out Principles for Supervisory Approach on Climate

The HKMA expects the results of the industry greenness self-assessments in August 2020, which will inform its supervisory expectations ahead of a consultation next year. 

The HKMA (Hong Kong Monetary Authority) has published a new whitepaper on green and sustainable banking, explaining the rationale for its supervisory approach to addressing climate-related issues, as a precursor to a formal consultation to be launched next year.

As part of its green and sustainable banking initiative launched in May 2019, the HKMA asked AIs in May 2020 to complete a self-assessment on their existing practices and readiness for climate-related risks and environmental risks – representing Phase I of the initiative.

The greenness assessment framework aims to collect information on governance; corporate planning and tools;  risk management processes; business policies; products and services; performance and resources; and disclosure and communication.

The self-assessment results are expected in August 2020, following which the HKMA may engage with individual AIs seeking further information or clarification to inform Phase II policy settings and supervisory expectations.

Phase II of the initiative involves engaging the industry to establish supervisory expectations and requirements on green and sustainable banking.

The paper provides nine guiding principles on which the HKMA”s forthcoming supervisory expectations will be based.

Governance

  • Principle 1: Board’s accountability in climate resilience – The board has primary responsibility for an AI’s climate resilience. It should have sufficient understanding of the climate-related issues in determining the AI’s approach to address them.
  • Principle 2: Board’s oversight of climate strategy development and implementation – The board should exercise oversight of the development and implementation of the AI’s climate strategy, including embedding climate-related risks into the AI’s risk appetite framework.

Strategy

  • Principle 3: Formulation – Climate considerations should be embedded throughout the strategy formulation process, from strategic assessment to action plan development.
  • Principle 4: Implementation – Organisational structures, business policies, processes and resources availability should be reviewed and enhanced to ensure effective integration of climate strategy into the operation and corporate development of an AI.

Risk Management

  • Principle 5: Identification – AIs should identify the transmission channels and assess the impacts of physical and transition risks arising from climate change on their business. Concrete plans should be devised to address any information and data gaps.
  • Principle 6: Measurement – AIs should build capability over time to measure climate-related risks using various methodologies and tools, among which scenario analysis should be actively explored.
  • Principle 7: Monitoring and reporting – AIs should implement processes to monitor and report exposures to climate-related risks to ensure that such exposures are consistent with their risk appetite, and that timely and regular updates are provided to the board and senior management.
  • Principle 8: Control and mitigation – AIs should carry out measures to control and mitigate exposures to climate-related risks to ensure effective management of these risks.

Disclosure

  • Principle 9: Disclosure – AIs should develop an appropriate approach to disclosing climate-related information to enhance transparency. When considering the information to be disclosed, AIs should take the TCFD recommendations as the core reference.

 

The HKMA plans to consult the industry in the first half of 2021 on its supervisory expectations, which will be applied on a proportionate basis, accounting for the size, nature, complexity, and stage of development for addressing climate-related issues at individual AIs.

Phase III of the initiative will involve implementation, monitoring and evaluation of banks’ progress to meet target deliverables.

The full whitepaper is available here.

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