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Climate change
Opinion
Johnson Kong
Serena Chow
Johnson KongandSerena Chow

Hong Kong banks must do more to reduce their impact on climate change, not just avoid risk

  • Building a resilient banking system is not the same as fostering environmental and social sustainability, despite overlaps in some areas
  • For Hong Kong’s sustainable banking to live up to its name, more consideration should be given to banks’ management of their environmental and social impact

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An aerial view of a deforested piece of land in the Amazon rainforest near Porto Velho in Rondonia, northern Brazil, on August 23, 2019. Unlike other jurisdictions, Hong Kong’s banks are not required to make public whether the projects or companies they finance are linked to environmentally damaging practices. Photo: AFP
Johnson KongandSerena Chow
The Hong Kong Monetary Authority recently released a white paper on green and sustainable banking. Amid the economic gloom of Covid-19 and the global trend towards sustainability, the regulatory authority is taking an admirable step in making the city’s banks more sustainable. Praiseworthy as it is, though, the question remains how much the kind of banking envisioned in the paper will contribute towards environmental and social sustainability, if at all.
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The primary focus of the paper is on “the risks posed by climate change to banks”. Climate change could generate significant risks to banks’ portfolios, such as farm loans not being repaid because of poor crop yields following droughts or utility companies defaulting amid new legislation on carbon emissions. Making sure banks stay strong is certainly important for the HKMA as a banking regulator.

Focused on four key areas – governance, strategy, risk management and disclosure – the HKMA sets out its initial supervisory expectations on how banks should build resilience to climate-related risks. For example, it prompts banks to gauge how their portfolios would be affected under varying scenarios of temperature rises in the future.

However, building a resilient banking system is not the same as fostering environmental and social sustainability, despite overlaps in some areas. To contribute towards sustainability, banks would need to manage their environmental and social impact as well as risks.

In the case of climate change, managing climate risks concerns how climate change affects the banking system, whereas managing the impact relates to how banking activities influence the climate, especially through the economic activities they finance. The latter would, for instance, require banks to cease financing coal power and provide more capital to renewable energy projects.

Unfortunately, banks’ environmental and social impacts take a back seat to risks in the HKMA’s new supervisory expectations. To be fair, the regulator does encourage banks to develop sustainability-related business, but the regulatory focus remains on climate-related risks.

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