Hong Kong Proposes Climate Risk Management Guidelines For Banks

Published date29 July 2021
Subject MatterEnvironment, Climate Change
Law FirmMayer Brown
AuthorMr Alexander W. Burdulia, Susanne J. Harris, Wei Na Sim and Mark R Uhrynuk

On 20 July 2021, the Hong Kong Monetary Authority (HKMA) issued draft guidelines (the Draft Guidelines) on the management of climate-related risks by authorised institutions (AIs). The Draft Guidelines further develop the HKMA's approach to climate risk, initially outlined in its June 2020 White Paper on Green and Sustainable Banking, and incorporate leading international standards and practices to provide comprehensive climate risk management guidance for banks in the areas of governance, strategy, risk management and disclosure.

In this Blog Post, we highlight key aspects of the Draft Guidelines and takeaways for AIs considering how to approach these new proposals in Hong Kong. For more information about evolving regulatory approaches to climate disclosure and risk management around the world, please see our comprehensive analysis, Climate Disclosure and Risk Management: Global Approaches.

The HKMA's Climate Risk Framework

The HKMA has drawn upon the work of the Task Force on Climate-related Financial Disclosures (TCFD), the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Basel Committee on Banking Supervision to develop its approach to climate-related risks. Conceptually, the HKMA adopts the TCFD approach to classifying climate-related risks into both physical and transition risks, with an additional category of liability risks:

  • Physical Risks include the impacts of climate and weather-related events and long-term progressive shifts in climate (e.g., heatwaves, floods and sea-level rise).
  • Transition Risks include the financial risks related to the process of adjusting to a lower-carbon economy (e.g., changes in climate policy, technological changes and changes in market sentiment).
  • Liability Risks are associated with emerging legal cases related to climate change (e.g., individuals seeking compensation from financial institutions that finance companies with activities having negative environmental impacts).

Against this framework for understanding climate-related risk, the HKMA highlights several unique characteristics of climate change that differentiate it from conventional financial risks, including:

  • Far reaching breadth and magnitude: Climate change will affect all agents in the economy, across all sectors and geographies.
  • Foreseeability, but uncertainty as to timing and outcome: There is a high degree of certainty that physical and transition risks will materialise, but the exact timing outcome and future pathway of these risks remain uncertain.
  • Irreversibility: There is high degree of confidence that climate change will have irreversible effects once a threshold amount of greenhouse gasses are emitted...

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