Hong Kong SAR: HKMA Climate Risk: Stress Tests and Risk Management

The Hong Kong Monetary Authority (HKMA) has recently published the results of the pilot climate risk stress test (CRST) exercise for banks in Hong Kong, as well as the final version of the new module GS-1 in the Supervisory Policy Manual (SPM) on ‘Climate Risk Management’. The publications underline that, while banks may be making good progress in pushing sustainable finance up the agenda, there is more that must be done to strengthen their climate risk management in order to ensure their ongoing resilience against climate risks.

SPM: Climate Risk Management

The final version of GS-1 is largely the same as the text the HKMA proposed in its 2021 consultation (see our previous client alert) with some limited amendments and clarifications. However, the substance of the module remains the same. For example, the final version of GS-1 has amended the wording on the Board’s responsibility in section 3 to make clear that the board has primary responsibility for the oversight of an Authorized Institution’s (AI’s) approach to managing climate risks and opportunities, which is fundamental to an AI’s climate resilience, making clear that the role of the board is oversight of an AI’s approach to managing climate risk and opportunities rather than responsibility for AI’s climate resilience.

The overall position remains that the HKMA expects AIs to demonstrate that the GS-1 requirements on governance, strategy, risk management and disclosure of climate related risks are implemented, but that a proportionate approach will be taken when assessing AIs in their compliance with the HKMA’s supervisory expectations.

This new module is now in force, but the HKMA is allowing a 12-month transition period (that is up to 30 December 2022) for AIs to implement the requirements set out in GS-1.

Stress Test Results 

The CRST was launched in January 2021 and looked at three climate change scenarios; a physical risk scenario of a worsening climate situation and two transition risk scenarios representing different pathways (i.e. disorderly and orderly) to a low emission economy. The participants in the exercise included 20 retail banks and seven branches of international banking groups.

The results showed that climate risks are projected to reduce banks’ profitability and negatively affect capital positions, as well as potentially affect banks’ operations when looking at the affects of the physical risk. However, as the banks have built up strong capital buffers, overall the banking sector in Hong Kong should remain resilient. As this is a new area of testing, participants did highlight several areas of concern (which have been raised in industry discussions) around gaps in data availability and assessment methodologies, related to the lack of widely accepted standards for risk identification and insufficient modelling expertise.

The HKMA notes it will continue to engage the industry to support their capability building and enhance the CRST framework for a more comprehensive assessment of the banking sector’s climate resilience, as well as engaging with overseas regulators to promote consistency. A further climate risk stress test is planned for two years’ time.