IMPACT ANALYSIS: Hong Kong, Singapore banks face compliance obligations in communication with clients on climate risk management

Growing pressure on financial institutions to mitigate climate-related risks within their business models has highlighted the need for banks to have standardized methods to assess the decarbonization efforts of their corporate clients.

As regulators in Singapore and Hong Kong implement increasingly detailed regulatory requirements for climate-related risk management, banks in the region face challenges in engaging clients on data collection, risk assessment and transition planning.

Singapore issues template guidance for client environmental risk assessment

The Association of Banks in Singapore (ABS) recently released a standard template, in the form of a questionnaire (PDF), for banks in Singapore to use in discussions with corporate clients on environmental risk issues, gather data and identify opportunities to finance efforts to transition into a lower carbon economy.

The ABS Environmental Risk Questionnaire (ERQ) is among the deliverables of the Green Finance Industry Taskforce on Risk Management, which includes a work group of international and regional banks. The taskforce is responsible for embedding guidelines on environmental risk management from the Monetary Authority of Singapore (MAS).

The ERQ is meant to set out best practices for banks to work with clients to assess and mitigate their environmental risks, which will be essential for banks to meet increasingly detailed regulatory requirements from MAS on environmental risk management in the finance sector.

Presently, the ERQ will apply to five high-risk sectors that have been identified by the taskforce: agriculture and forestry/land use, construction/real estate, transportation and fuel, energy (including upstream), and industrial.

Banks in Singapore should use the ERQ with clients with a credit exposure of $10 million or more, and are advised to incorporate the questionnaire into their existing internal risk assessment frameworks as soon as practicable.

The questions in the ERQ cover a range of environmental risk assessment issues, including governance, metrics and identifying opportunities for sustainable financing. Banks that are a part of the taskforce working group have welcomed the initiative, citing the need for a more consistent approach to gathering environmental risk data across different sectors of the economy.

Hong Kong moves to align with international standards

Efforts to develop climate-related risk management guidelines for financial institutions are also underway in Hong Kong. The Hong Kong Monetary Authority (HKMA) consulted draft guidance (PDF) on proposed governance and risk assessment policies last summer and is expected to release a finalized guideline imminently. Authorized institutions will have a 12-month period, upon implementation, to comply with the new rules.

The draft guideline is consistent with recommendations from international standard-setting bodies such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The HKMA has adopted guidance from TCFD on classifying climate-related risks and has officially endorsed the implementation of recommendations (PDF) set by the organization. Authorized institutions will be expected to make their first TCFD disclosures by 2025 at the latest.

Engaging corporate clients to collect data on climate risk and discuss longer-term planning to manage transition risk will be an integral part of efforts by firms in Hong Kong to meet the HKMA’s regulatory expectations. However, regulators in Hong Kong have yet to offer more detailed guidance on how financial institutions should assess data from clients across different industries as a part of their broader risk management strategy.

Regional resistance

Despite regulatory pressure to do more to assist regional and international initiatives to transition to lower-carbon economies, banks may find pockets of resistance throughout the Asia-Pacific region. For some businesses and even governments, mitigating climate risk is taking a backseat to supply chain disruption, food shortages and rising inflation.

Countries such as South Korea and China are expected to prioritize economic growth and consumption in coming years, potentially at the expense of environmental conservation. South Korea’s incoming president-elect, Yoon Seok-yeol, is expected to de-regulate the private sector, giving favour to policies that would enable manufacturers to operate around the clock.

China, which is widely considered one of the world’s top carbon emitters, has pledged to transition to a lower emissions economy and invest in renewable energy. The Chinese government has said that it intends to bring carbon emissions to a peak in 2030 before transitioning to net zero emissions by 2060. Until 2030, emissions of greenhouse gases and coal consumption are expected to rise year on year as the Chinese economy struggles to recover from the pandemic.

In Malaysia, policymakers have set a national goal to reach carbon neutrality by 2050. However, near-term priorities focus heavily on spurring post-pandemic economic growth. Under the 12th Malaysia Plan, the government will spend 400 billion ringgit ($95.53 billion) on development projects between 2021-2025, compared to a previously budgeted 260 billion ringgit in the 11th Malaysia Plan. These projects include many resource-heavy initiatives such as the construction of new highways and rail networks.

Takeaways

Banks with corporate clients in the Asia-Pacific region face a growing regulatory burden on climate and environmental risk management. At the same time, macroeconomic conditions and shortages of essential materials are exerting pressure on governments in some regions and private-sector businesses to prioritize growth in higher carbon-emitting industries.

Aligning risk appetite frameworks between these two extremes could be challenging for banks and will require regulators to offer more policy tools such as the ERQ that are designed to standardize and aid risk assessment efforts.

Helen Chan is a regulatory intelligence expert at Thomson Reuters in Hong Kong. She covers compliance-related issues for the financial services sector in Canada and across the Greater China region for Thomson Reuters Regulatory Intelligence.

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