Weekly roundup: Hong Kong stress test and Malaysia climate requirements

A climate risk stress test of Hong Kong banks, new regulations for Malaysian banks, a review of research on monetary policy and climate risk and more from this week in green central banking.

HKMA publishes climate stress test results

The Hong Kong Monetary Authority has released the results of a pilot climate risk stress test. The test involved 20 major retail banks and seven branches of international banking groups, accounting for 80% of lending from Hong Kong’s banking sector. Banks were tested under a physical risk scenario of worsening climatic effects and two transition risk scenarios representing a disorderly and orderly transition to a low-emission economy.

The assessment found that climate risks can give rise to “significant adverse impacts on the banks’ profitability, capital positions and operations”, but that the Hong Kong banking sector remains resilient to climate-related shocks given existing strong capital buffers.

BNM releases draft guidelines on climate risk and scenario analysis

The Bank Negara Malaysia has published a draft of proposed requirements and guidance for financial institutions on climate risk management and scenario analysis. The mandatory requirements and voluntary guidelines are largely aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures. However, they go further in requiring that financial institutions consider material climate-related risks when assessing the internal capital adequacy over relevant time horizons. Feedback on the draft policy document must be submitted by 31 March 2022 and the final draft will come into effect on 1 June 2022.

Fossil fuel financing still the main issue

Despite a concerted shift among major global lenders to highlight their sustainability and environmental, social and governance (ESG) efforts, greenwashing by financial institutions is still a serious problem, writes Monica Johnson in International Banker.

While welcoming the net-zero funding pledge of the Glasgow Financial Alliance for Net Zero (GFANZ), Johnson points to the glaring omission of any mention of reducing funding of fossil fuels. She also notes that many of the world’s biggest financiers of fossil-fuel projects have signed up to GFANZ.

“One may well applaud banks’ objectives to reduce their carbon footprints to net-zero by 2050,” concludes Johnson. “But the lack of willingness to sufficiently demonstrate in 2021 much of an attempt toward achieving such objectives, especially regarding fossil-fuel financing, means that such long-term commitments are rendered effectively meaningless.”

UK MP calls for climate QE

UK member of parliament Caroline Lucas has called for both quantitative easing (QE) and special drawing rights (SDRs) to be used to fund climate adaptation and mitigation measures.

Writing in the Independent, the UK’s only Green MP said that while investment is pouring into the renewable energy sector, this is not happening for nature-based solutions because there is no clear financial profit to be had. The responsible creation of new money using QE could fund such activities, Lucas says, while SDRs created by the International Monetary Fund could have a similar impact for developing countries.

Central banks have created US$24.5tn using QE since the 2008 financial crash, the vast majority of which has been used to purchase sovereign bonds.

Monetary policy and climate risk

Miles Parker, senior lead economist at the European Central Bank, has curated a list of the most important recent papers that examine the impact of climate-related physical risks on central banks’ price stability mandate.

Writing in the E-Axes Forum’s January digest, Parker identifies and summarises seven papers on macroeconomic physical climate risk, climate-related negative supply shocks, and the available policy space for central bank response.

“The research highlights the need for careful thought surrounding the size and nature of the shock, and what the implications may be for available policy space,” Parker says. “Taken together, these papers suggest the impact of physical risks on central banks’ primary mandate of price stability merits continued attention and further investigation.”