Sustainable finance in Hong Kong: HKMA shares initial thinking on supervisory approach and range of practices by banks

The Hong Kong Monetary Authority (HKMA) has recently published its White Paper on Green and Sustainable Banking, as well as a circular to share a range of practices adopted by major authorised institutions (AIs) for managing climate risks (7 July Circular). These form part of a series of initiatives by the HKMA that are intended to help shape a greener and more climate-resilient banking system.

Among other things, the white paper:

• provides an update of the HKMA’s progress on its sustainable banking initiatives and future steps;

• sets out the HKMA’s initial thinking on supervisory expectations, summarised in nine guiding principles under four areas relating to governance, strategy, risk management and disclosure;

• provides some background on climate and environmental issues, and discusses the impact of climate change on the Hong Kong banking industry (including risks as well as opportunities).

In formulating its initial thinking on supervisory expectations, the HKMA engaged selected major AIs in a series of discussions, during which it observed a range of practices which the more advanced AIs had adopted or planned to adopt in their management of climate risks. These practices are set out in the white paper and are further elaborated in the 7 July Circular.

The early communication of the HKMA’s initial thoughts will enable the industry to start making preparations to build climate resilience. Although the HKMA is planning to finalise its proposed guiding principles and consult the industry on them in the first half of 2021, AIs should start reviewing their climate strategy and governance and risk management systems as early as possible. They should also consider the range of practices shared by the HKMA to see if those practices are suitable for their organisations.

HKMA initiatives: state of play and future steps

Assessing greenness baseline of AIs

Following industry consultation, the HKMA finalised a common framework to assess the greenness baseline of AIs, focusing on six areas – (a) governance, (b) corporate planning and tools, (c) risk management process, (d) business policies, products and services, (e) performance and resources, and (f) disclosure and communication. The first round of self-assessment for around 50 AIs was launched in May 2020. 

The HKMA expects to receive the self-assessment results in August 2020, which will inform its work in setting supervisory expectations.

The assessment exercise will initially be conducted on an annual basis, although a longer timeframe may be considered if circumstances justify it.

Initial thinking on supervisory expectations for building climate resilience

Pending the receipt of self-assessment results from AIs, the HKMA has in the meantime indicated its initial thinking on supervisory expectations for building climate resilience, summarised in the white paper in nine guiding principles under four areas (governance, strategy, risk management and disclosure). Please click here for an overview.

The guiding principles are intended to be relevant to all AIs. However, they will be applied to AIs on a proportionate basis, as there is a wide spectrum among AIs in terms of size, nature of business, complexity of operations and stage of development in their capability in addressing climate related issues.

The HKMA intends to initially focus on larger AIs which have a greater impact on the Hong Kong economy and the financial system as a whole.

Where AIs are local subsidiaries or branches of foreign banks, the management of the risks and opportunities of climate change may well be led by the group or head office. AIs should assess whether the policy, setup and practice of their parent banks or head offices are relevant to their Hong Kong operations, and ensure that any local specialities are addressed in a way that is commensurate with the size, nature of business, and complexity of operation of their Hong Kong office.

The HKMA plans to finalise its proposed supervisory expectations and consult the industry on them in the first half of 2021.

Range of practices adopted by AIs

In the white paper, the HKMA also provides a summary of its observations (including a range of practices adopted by AIs), set out under each of the relevant guiding principles. Further details of such practices by more advanced AIs are provided in the 7 July Circular.

AIs are recommended to consider these practices when developing their climate risk management framework. They should take into account the nature, scale and complexity of their businesses, and ensure that their risk management framework is proportionate and fit for purpose.

AIs are also reminded to note the importance of being agile when managing climate risks, which are products of multiple interacting forces (for example, natural, technological and societal) and are therefore inherently uncertain and prone to changes. They should keep abreast of the latest standards on climate risk management and make adjustments to their approach based on actual developments.

Pilot climate change stress testing exercise

The HKMA plans to invite AIs to participate in a pilot climate change stress testing exercise with a view to assessing the climate resilience of the sector as a whole. The HKMA will first collect feedback from the participating AIs on the scope, scenario and output of the exercise before launching it next year. 

Facilitating AIs’ development in management of climate-related risks and business

The HKMA is exploring ways to facilitate AIs’ development in the management of climate-related risks and business. It plans to conduct studies on potential obstacles to the development of green and sustainable banking in Hong Kong.

Other recent developments in Hong Kong

Climate change and other sustainability issues have been high on the agenda of financial regulators in Hong Kong (as well as globally) in recent years. 

• In May 2020, we saw the establishment of the Green and Sustainable Finance Cross-Agency Steering Group in Hong Kong comprising of five financial regulators (including the HKMA) and two government bureaux (see our bulletin of 8 May 2020 for further details). 

• Last month, the Hong Kong Exchanges and Clearing Limited announced its plan to launch “STAGE” (Sustainable and Green Exchange), which will act as a central hub for data and information on sustainable and green finance investments in the region.

• Recently, the Financial Services Development Council published Hong Kong – Developing into the Global ESG Investment Hub of Asia, which summarises views gathered from asset and wealth owners and managers, and other corporates, and sets out recommendations to further strengthen Hong Kong’s role as the preferred ESG investment hub in the region.