Hong Kong: Green and sustainable finance – How governmental authorities are navigating climate risks

In more detail

Green and sustainable finance in Hong Kong

The World Economic Forum Global Risks Report 2020, published in January 2020, highlighted significant risks that will be seen across the world in the next decade. Five of the top ten risks identified were climate-related. As such, governments, central banks, and other financial institutions are being called to action.

According to the United Nations (UN), Asia-Pacific is one of the regions that is most vulnerable to climate change risks. Globally, there have recently been extreme weather events, such as widespread forest fires and rising sea-levels, and Hong Kong saw its hottest summer on record.

Hong Kong Monetary Authority (HKMA)

The HKMA has become increasingly active in this area. In June 2020, it published a “White Paper on Green and Sustainable Banking” which outlined the HKMA’s initial thinking on supervisory expectations for the management of climate risks by AIs. The White Paper outlines nine guiding principles to assist AIs in developing a governance framework and strategy for managing the relevant risks and opportunities (including, among others, developing an approach to disclose climate-related information).

Following the White Paper, the HKMA produced a circular sharing best practices of selected major AIs which AIs are encouraged to consider in developing their own client risk management approach.

Green and sustainable finance cross-agency steering group

In May 2020, the Green and Sustainable Finance Cross-Agency Steering Group (“Steering Group“) — which includes the HKMA, the Securities and Future Commission (SFC) and other local financial regulators and government departments — was established.

According to the HKMA’s press release, the “Steering Group aims to co-ordinate the management of climate and environmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong and support the Government’s climate strategies.”

In December 2020, the Steering Group launched its green and sustainable finance strategy for Hong Kong.  This outlines a number of key focus areas “for strengthening Hong Kong’s financial ecosystem to support a greener and more sustainable future in the longer term” as well as five near-term action points. Among other things, the action points include (i) making climate-related disclosures aligned with the Task Force on Climate-Related Disclosures (TCFD) mandatory across relevant sectors (including banks, asset managers, insurance companies and pensions trustees) no later than 2025 and (ii) aiming to adopt the Common Ground Taxonomy expected to be developed by mid-2021 by the International Platform on Sustainable Finance (IPSF) Working Group on Taxonomies co-led by the European Union (EU) and China (Mainland). 

The International Finance Corporation (IFC) and the HKMA

On 9 November 2020, the IFC and the HKMA signed a joint partnership to encourage green and sustainable banking awareness among commercial banks in Asia. The HKMA is the first partner to work on the Alliance for Green Commercial Banking initiative with the IFC, and aims to become the “hub for green finance among commercial banks in Asia.”

Over the next five years, the IFC and HKMA will work together to implement initiatives and campaigns and bring together financial institutions, industry, research institutions, etc., to promote the development of green finance and sustainable investment.

Hong Kong’s position in Asia regarding taxonomy

One issue that governments and institutions currently face while advising on climate-related risks is that there is no universally followed global taxonomy determining these risks. This results in different levels of action taken by each jurisdiction. Currently, the two leading taxonomies are those developed by the Mainland and by the EU, and they have their differences.

The two taxonomies: Mainland and EU

The green and sustainable finance taxonomies in the Mainland pre-date those of the EU. In 2015, the Green Finance Committee of China Society of Finance and Banking produced a Green Bond Endorsed Project Catalogue under the People’s Bank of China. This is now often referred to as the “Chinese Green Bond Taxonomy.” The central policy is the Guiding Catalogue for the Green Industry, which was updated in 2019, and is also referred to as “taxonomy”.

The Guiding Catalogue contains a list of eligible sectors and high priority rankings. It has six categories of green industries. Unlike the EU taxonomy, the Mainland Taxonomy does not collect metrics or thresholds.

The EU’s Taxonomy Regulation (EU Regulation), which entered into force on 12 July 2020, sets out the regulatory framework necessary to establish a classification system for sustainable activity. The EU Regulation does not itself set out details regarding how the taxonomy will be applied in practice. Instead, the practical application of this ambitious classification system has been left to a series of what are called “technical screening criteria” (TSC). Application of these granular screening criteria will ultimately determine whether an activity substantially contributes to an environmental objective.

Harmonization

In 2018, the European Investment Bank and the Green Finance Committee of China Society for Finance and Banking published a white paper outlining Phase II of their work towards harmonizing Green Finance Language. This was before the EU Taxonomy was published in 2020.

More recently, in a keynote speech during the Responsible Investor Summer 2020 Digital Festival, Dr. Ma Jun, Chairman of the China Green Finance Committee, indicated that a task force will likely be launched to look into the harmonization of the standards of the different jurisdictions.

China is committed to working with other international bodies to promote green and sustainable finance. In October 2020, five governmental departments, including the Ministry of Ecology and Environment, and the People’s Bank of China, issued Guiding Opinions on Promoting Investment and Financing to Address Climate Change . This is a policy area that is continually being reviewed and amended.

As the EU Taxonomy is a recent development, it is not yet fully implemented. Further, although it will have an extraterritorial effect in the sense that non-EU firms will need to consider it where they have EU institutional investors or where they market products such as fund units into the EU, there is the issue that the EU’s taxonomy will not generally apply to jurisdictions outside of the EU. As such, harmonization of the Mainland and EU taxonomies is still a work in progress. As noted above, the IPSF Working Group on Taxonomies is working on a Common Ground Taxonomy.

Regional co-operation with Guangdong-Hong Kong-Macau Greater Bay Area

In September 2020, the Hong Kong Green Finance Association (HKGFA) announced the establishment of the Guangdong-Hong Kong-Macau Greater Bay Area Green Finance Alliance (GBA-GFA) between Hong Kong, Macau and the Mainland. This alliance is responsible for promoting green finance standards and certification across the Greater Bay Area. It consists of the Hong Kong Green Finance Association, the Green Finance Committee of Guangdong Society for Finance and Banking, the Green Finance Committee of Financial Society of Shenzhen Special Economic Zone, and the Macau Association of Banks.

The three phases of the HKMA’s Approach to Promote Green and Sustainable Banking – where we are now

Throughout 2020, the HKMA has been working with AIs to promote green and sustainable banking and adopted a three-phase plan:

• phase I – development of a common assessment framework for AIs
• phase II – development of supervisory expectations for AIs
• phase III – after setting of targets, implementation, monitoring and evaluation of AIs’ progress

The timeline of the three phases and other HKMA initiatives is as follows:

• July 2019
  • The HKMA created a Working Group on Green and Sustainable Banking, made up of 22 AIs. The aim was to create the common assessment framework. (Phase I)
• May 2020
  • Common assessment framework finalized and first round of assessments launched with 47 AIs (including locally-incorporated AIs and foreign bank branches in Hong Kong) (Phase I)
  • Establishment of Steering Group with the SFC and other members
• June – July 2020
  • White Paper on Green and Sustainable Finance and Circular highlighting best practices published (Phase II)
• August 2020 – present and beyond:
  • First results from the self-assessment received (Phase I)
  • HKMA working with individual AIs to clarify their submissions and seek further information (which, in turn, will assist the HKMA in developing supervisory requirements) (Phases I and II)
  • Continued collaboration with international fora, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Basel high-level Task Force on Climate-related Financial Risks

As we advance in 2021, the HKMA plans to continue working with AIs and the industry to develop the supervisory requirements for AIs. Some of the next steps for the HKMA have been identified as:

• 2021 HKMA industry consultation on supervisory requirements for AIs
• inviting AIs to participate in a pilot climate stress testing exercise
• consultancy studies into obstacles that Hong Kong banks face when developing green and sustainable banking