HKMA says carbon emissions offer insight into banks’ climate risks

Key points

• Carbon emissions can provide an indirect indication of the transition risk associated with companies financed by banks, according to a senior Hong Kong Monetary Authority (HKMA) official.

• The HKMA does not currently require banks to disclose financed emissions, which can substantially exceed their direct emissions.

• The authority is preparing a separate sustainability disclosure standard for the banking sector for market consultation. Its updated sustainable finance taxonomy adds 24 adaptation-related measures and includes transition pathways for air transport, iron and steel.

• The HKMA’s physical risk assessment platform now allows banks to assess assets anywhere in the world under different climate scenarios.

Carbon emissions are a good indicator of the level of physical and transition climate risk that banks are expected to manage, said a senior official from the Hong Kong Monetary Authority (HKMA).

“We are not talking about carbon metrics per se, but as the banking regulator for Hong Kong… we expect them to look at physical climate risk and transition climate risk,” said the central bank’s head of sustainable banking development Ronald Young during Hong Kong Green Week in early September.

“The level of transition risk can be indirectly indicated by the level of carbon,” stated Young, adding that higher emissions could suggest higher transition risk in a company financed by a bank.

According to many scientists he has spoken to, Young said that higher temperatures as a result of rising greenhouse gas emissions also raise physical risk, due to heavier rainfall and more vigorous storms.

“Carbon also influences the temperature and in turn influences physical risk,” said Young. “We want [banks] to look at the vulnerabilities and risks, and carbon will give a very good indication in terms of the level of the risk.”

While HKMA does not currently require banks to disclose financed emissions – often 700 times greater than their own direct emissions – a study by the City University of Hong Kong previously estimated that the figure stood at over 380m tonnes of carbon dioxide equivalent in 2021.

The central bank primarily addresses climate risks through transition planning guidelines and sustainability disclosure rules aligned with the International Sustainability Standards Board (ISSB) framework and the Basel Committee on Banking Supervision.

On the panel, Young revealed that the central bank is currently working on a separate sustainability disclosure standard for the banking sector, which is expected to be released “sometime by the end of the year or next year” for market consultation.

Green taxonomy updates

HKMA recently launched a public consultation on its updated sustainable finance taxonomy, which was expanded to include 24 more adaptation-related measures that span the water, energy, transportation, buildings, information and communications technology (ICT) as well as risk management sectors.

Under the latest taxonomy, “key enabling technologies” that support the development of several decarbonisation applications, such as the manufacturing and recycling of batteries, can now qualify for financing under the transition label, which was first introduced in January. 

Additionally, the updated framework provides transition pathways for certain hard-to-abate sectors, including air transport as well as iron and steel. However, natural gas, nuclear, hydrogen, hydropower, sustainable aviation fuel and carbon capture, usage and storage – which were previously flagged as some areas under consideration in future iterations – remain excluded from the taxonomy.

HKMA’s deputy chief executive Arthur Yuen, who kicked off Hong Kong Green Week with the announcement, said that several banks and corporations have already adopted the taxonomy in their sustainable finance frameworks and begun to issue taxonomy-aligned bonds and loans. 

One example he cited was the Bank of China Hong Kong’s recent financing of the jurisdiction’s first public hydrogen refuelling station through a HK$70m (US$8.9m) taxonomy-aligned green loan.

The central bank is working with the industry to build capacity so that “taxonomy alignment becomes the go-to for assessing green and sustainable investment” rather than an exception, said Yuen.

Earlier this year, HKMA also updated the data coverage on its physical risk assessment platform, allowing banks to assess the risk to assets located anywhere in the world under different climate scenarios. 

The tool, which was rolled out in 2024, was previously limited to assets within Hong Kong. Since its launch, about 2 million assets have been analysed, said Yuen.

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