As published on regulationasia.com, Friday 2 October, 2020.
A pilot climate stress testing exercise involving Hong Kong banks will commence early next year. A local green taxonomy is under development.
The HKMA (Hong Kong Monetary Authority) has published a feature article, alongside its half-yearly monetary and financial stability report, providing an update on the latest developments in its green and sustainable banking initiatives.
In the article, the HKMA says it is pushing ahead with its initiatives to address climate-related issues, support sustainable finance and promote green and sustainable banking.
Over the past year, a common assessment framework has been developed to measure the “greenness baseline” of individual authorised institutions. This has already been used to complete the first round of self-assessments by 47 authorised institutions.
The self-assessments found that about 31% of institutions had not started incorporating climate and environmental issues into their business process, and another 38% were in the midst of planning such efforts. The remaining 31% had already progressed to implementation or improvement – with large and international institutions taking the lead.
Though banks are starting to become more advanced in dealing with environmental and climate risks in their lending policies, data availability was cited as a major challenge in climate risk management. In addition, scenario analysis and stress testing were found to be major areas for development.
In June, the HKMA published a whitepaper on green and sustainable banking to outline its initial thinking on supervisory expectations, and in July, a range of climate risk management practices was outlined, based on observations at the more advanced institutions.
These actions were intended as a precursor to Phase II of the HKMA’s three-phase approach to green finance development in Hong Kong. The second phase will focus on the development of supervisory requirements on climate risk management for authorised institutions.
The development of the supervisory requirements will take into account the “greenness assessment” results, feedback from the HKMA’s industry engagement, and international developments. The HKMA plans to consult on the supervisory requirements in the first half of 2021.
The HKMA is also exploring ways to facilitate authorised institutions’ management of climate-related risks and to grow green business. As part of these efforts, it plans to invite authorised institutions to participate in a pilot climate stress testing exercise (expected to commence in early 2021) to assess the resilience of the financial sector to climate risks.
Consultancy studies will also be conducted to review and address potential obstacles to the development of green and sustainable banking in Hong Kong, the HKMA added.
Further, the HKMA is working with local financial regulators (including the SFC) and government departments through the ‘Sustainable Finance Cross-Agency Steering Group’ – established in May 2020 – to study and address cross-sectoral regulatory issues and co-ordinate cross-agency market development efforts and capacity building.
Speaking at the HKIB Annual Banking Conference 2020 on Monday (28 September), HKMA Chief Eddie Yue said one of the first tasks of the Steering Group is to develop a local green taxonomy that would incorporate the harmonisation work currently being done by Mainland and EU authorities.
“The aim is simple: there should only be one local taxonomy for use by all financial regulators in Hong Kong,” Yue said.
The feature article also highlights the HKMA’s collaboration in the international community through the NGFS (Network of Central Banks and Supervisors for Greening the Financial System) and the Basel high-level Task Force on climate-related Financial Risks, among other fora.
“Our participation in international initiatives provides an opportunity for the HKMA to contribute to the central banking and regulatory community in addressing climate change and, in return, we also benefit from the experience and insights of other jurisdictions when developing our local framework,” the HKMA said.