Approach to disclosure General requirements

6.2.1 AIs should develop an appropriate approach to disclosing climate-related information to enhance transparency. As a minimum, AIs should make climate-related disclosures aligned with TCFD recommendations.

TCFD’s recommended disclosures

6.2.2 The TCFD’s 11 recommendations surrounding four thematic areas (i.e. governance, strategy, risk management, and metrics and targets) address financial risks and opportunities posed by climate change. The recommendations and recommended disclosures of the TCFD are presented below. The examples quoted are for illustration and not exhaustive. AIs should strive to work along these recommendations taking into account their unique circumstances²².

TCFD’s recommendations on governance

20 In December 2015, the FSB established the industry-led TCFD to design a set of recommendations for consistent “disclosures that will help financial market participants understand their climate-related risks”.

The TCFD released its final recommendations in June 2017.

21 Source: TCFD, TCFD status report 2021, October 2021.

22 AIs may refer to “Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures” (June 2017), and the updated guidance in “Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures” (October 2021) which provides supplemental guidance to assist preparers in certain sectors including the banking sector.

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Disclose the organisation’s governance around climate-related risks and opportunities.

a) Describe the board’s oversights of climate–related risks and opportunities

b) Describe management’s role in assessing and managing climate-related risks and opportunities.

6.2.3 For example, AIs may disclose:

 the committee or key personnel in charge of overseeing the climate-related issues within the AI and / or setting AI’s climate strategy;

 processes and frequency by which the board or designated committees are informed of climate-related issues;

 description of the roles and responsibility assigned to senior management related to climate risk management;

 description of the relevant organisational structure;

and

 key aspects and issues of climate-related risks and opportunities as discussed and reviewed by the board and senior management during the reporting period.

TCFD’s recommendations on strategy

Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.

a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.

b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning.

c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2^oC or lower scenario.

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6.2.4 For example, AIs may disclose:

 relevant short-, medium- and long-term time horizons being considered and determined by the AI, with regard to the useful life of assets;

 specific climate-related issues potentially arising in each time horizon (short, medium, and long term) that can have a material financial impact (in terms of business lines, revenue, costs, balance sheet assets);

 the materiality assessment process undertaken by the AI, e.g. process and methodology used to identify the impacts of climate-related risks and opportunities;

 any scenario analysis conducted, such as the scenario, assumptions, methodology, coverage of business lines and portfolios;

 results of scenario analysis conducted and any implications on the AI’s strategy; and

 any plans for transitioning to a low-carbon economy, which could include GHG emissions targets and specific activities intended to reduce GHG emissions or to support the transition.

TCFD’s recommendations on risk management

Disclose how the organisation identifies, assesses and manages climate-related risks.

a) Describe the organisation’s processes for identifying and assessing climate-related risks.

b) Describe the organisation’s processes for managing climate-related risks.

c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.

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6.2.5 For example, AIs may disclose: -

 key processes for identifying and assessing climate risks;

 method or techniques in measuring, monitoring and mitigating climate risks (e.g. relevant models, limits and metrics);

 quantification of exposures in relation to climate risks;

 definitions of risk terminology used or references to existing risk classification framework; and

 progress being made in enhancing risk management capabilities and incorporation of climate risk into existing risk management framework.

TCFD’s recommendations on metrics and targets

Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.

b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas emissions, and the related risks.

c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

6.2.6 For example, AIs may disclose:

 risk and alignment metrics and targets²³ used to measure climate-related risks and opportunities;

23 Risk metrics such as probabilities of default, adjusted risk rating, exposure to carbon sensitive sectors, and alignment metrics such as carbon footprints, carbon intensity and implied temperature rise, can be actively explored. AIs may also keep in view of the developments of initiatives such as Partnership for Carbon Accounting Financials (PCAF), and Science Based Targets Initiative (SBTi).

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 breakdown of metrics and targets by industry, geography, credit quality and tenor;

 scope 1 and 2 emissions of AI’s own operation;

 methodology used in relation to such metrics and targets (e.g. calculation, standard adopted); and

 any verification and assurance of the disclosed metrics (e.g. emission).

Timeline and location

6.2.7 The HKMA would expect AIs to take actions to prepare climate-related disclosures in accordance with TCFD recommendations as soon as practicable, and make their first disclosures no later than mid-2023.

Recognising the potential challenges for AIs in implementing the TCFD recommendations, the HKMA will be pragmatic in monitoring such disclosures initially²⁴, with a view to aligning disclosures of AIs with the TCFD framework no later than 2025.

6.2.8 AIs should make such disclosure at least on an annual basis. Regarding location of disclosure, AIs may consider making use of their sustainability reports, website, annual reports, or a combination of them to facilitate public access.

Disclosures at group or head office level

6.2.9 For AIs which are local subsidiaries or branches of foreign banks, they may rely on the disclosure arrangement at the group or head office level, as long as such disclosures are applicable to the AI’s local operation and meet the requirements in this section.

Comply-or-explain approach

24 For example, we would expect more meaningful disclosures for the areas of “governance” and “risk management” by AIs.

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6.2.10 In the light of the evolving development in climate-related disclosures and the burden, a “comply-or-explain”

approach may be adopted by AIs, taking into account:

 the significance of an AI’s operation, including the nature and size of business (particularly lending and investment activities) in Hong Kong²⁵; and

 the materiality of climate-related risks exposed to the AI.

6.2.11 AIs adopting such approach should explain, in their disclosure, their circumstances, the difficulties encountered and any plans for future enhancements to their climate-related financial disclosures (and if possible, a timeline for implementing such plan).

The evolving landscape

6.2.12 In view of the evolving disclosure landscape, AIs should keep abreast of the development globally²⁶, and should plan ahead to progressively enhance their disclosure.

For instance, while most AIs may be less ready at this stage to report Scope 3 emissions, they should start working out a plan to obtain relevant information such as by collecting emission data from their clients. Moreover, AIs may also consider assessing and disclosing the impact of their business activities towards the environment²⁷.

25 For instance, those currently exempted from making relevant disclosures under the Banking (Disclosure) Rules.

26 For example, on 3 November 2021, a new International Sustainability Standards Board was formed to develop global baseline of high-quality sustainability disclosure standards.

27 Please refer to TCFD status reports for more examples of disclosure practices. For example, the 2021 status report is available at https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf .