The guideline includes expectations for governance, strategy, risk management and disclosure. The HKMA plans to grant an implementation period of 12 months.

The Hong Kong Monetary Authority (HKMA) has released a draft directive on climate risk management for consultation with the banking sector.

The HKMA drew on the work of the FSB (Financial Stability Board), BCBS (Basel Committee on Banking Supervision) and NGFS (Network for Greening the Financial System) to develop the GPS module.

The module imposes prudential expectations on all locally incorporated banks, both on an individual basis and on a consolidated basis. International banking groups operating in Hong Kong should also have a framework to deal with climate-related issues appropriate to their local operations.

The GPS module includes governance, strategy, risk management and disclosure expectations.

Governance: The board has primary responsibility for a bank’s climate resilience, including overseeing the development and implementation of its strategy to address climate-related issues, and how the bank integrates climate-related risks into its risk management framework.

The board should ensure that there are appropriate resources, processes, systems and controls to support strategy implementation and cultivate a risk culture at the top that integrates climate considerations into business activities and decision-making.

Senior management should consider climate risks and opportunities holistically and ensure that the bank’s business decisions are commensurate with the magnitude of climate risks. Roles and responsibilities related to the bank’s approach to addressing climate-related issues need to be defined and articulated.

The board should also define the bank’s overall risk appetite and approve a risk appetite statement, recommended by senior management, which takes into account the specific circumstances of the bank, including its strategic objectives, risk taking capacity and the results of any materiality assessment, climate risk stress testing and scenario analysis.

Strategy: Banks should integrate 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 internal and external factors.

Considerations of climate-related risks over different time horizons should be integrated into the strategy formulation process. When formulating the climate strategy, a time horizon of more than 10 years should also be adopted to take into account the unique nature of climate risks.

Banks must ensure the effective implementation of their strategy for dealing with climate-related issues by properly aligning internal resources and processes and managing relevant changes. Organizational structures, business policies, processes and resource availability should also be examined.

Banks ‘strategic objectives should be properly reflected in their business policies, for example to integrate climate risk considerations, environmental impacts and transition plans into clients’ risk profiles.

Remuneration policy and practices should also be consistent with the banks’ climate strategy, for example by linking the achievement of climate-related objectives to the assessment of variable remuneration.

Risk management: Banks should integrate climate 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 for managing climate-related risks should be divided along three lines of defense.

  • The first line should perform climate risk assessments during customer onboarding, credit application and credit review process.
  • The second line should oversee climate-related risks in business activities, monitor ongoing risks, and review relevant policies and procedures.
  • The third line should provide assurance and periodic audit assessment on the effectiveness of the bank’s climate risk management.

When it comes to identifying and measuring risks, 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 capacity to address information and data gaps.

Banks should identify significant climate-related risks at the portfolio and counterparty level, and, where applicable, at the transactional level, by assessing the relevant short and long-term financial implications.

At the portfolio level, banks should identify high risk asset portfolios based on sector / geographic exposures, taking into account factors such as the physical location of a client’s business operations and assets, potential disruption of the supply chain and the potential implications for warranty valuations. Risk criteria such as carbon emissions, energy consumption and climate policy sensitivity can be applied to assess the vulnerability of exposures to transition risk.

At the counterparty level, banks should assess concentration risk, at least for high risk sectors and portfolios. Counterparty risk criteria may include the financial condition of the counterparty, its transition strategy, its stranded asset exposures and its supply chain.

Banks should also strengthen their capacity to measure climate-related risks using climate-focused scenario analysis and stress testing. Appropriate documentation of these methodologies and tools should be maintained to inform management discussions and facilitate continued development.

Timely and regular reports should be presented to the board to facilitate oversight and ensure that exposures are in line with their risk appetite. Quantitative and qualitative tools and measures should be considered to facilitate monitoring and provide early warning signals for necessary actions. Banks should be able to control and mitigate climate risk exposures, given their business strategy and risk appetite.

Disclosure: Banks should develop an appropriate approach for the disclosure of climate-related information in order to improve transparency. At a minimum, they should make climate-related disclosures aligned with TCFD recommendations.

For banks that are local subsidiaries or branches of foreign banks, they may rely on the disclosure mechanism at group or head office level, provided that such disclosures are applicable to the local operations of the bank and meet the requirements SPM module requirements.

A “comply or explain” approach can be adopted by banks, taking into account the importance of the bank’s operations in Hong Kong and the materiality of the climate-related risks to which the bank is exposed.

Banks should start developing a plan to obtain the information needed to report Scope 3 emissions. They may also consider assessing and disclosing the impact of their business activities on the environment.

The SPM module is available here.

The HKMA plans to grant a period of 12 months for the implementation of the requirements set out in the GPS module.