Introduction
About Bank of Shanghai (Hong Kong)
Bank of Shanghai Co., Ltd (Head Office) was established on December 29, 1995, on November 16, 2016 a Shanghai Stock Exchange main board listed entity (stock code 601229)
The Bank was established in 2013 by the Head Office as the first wholly-owned subsidiary outside China. The Bank provides loan services, deposit services, and access to financial markets.
Preface
As one of the parties to the Paris Agreement, China has earnestly fulfilled its commitments and continuously driven the construction of ecological civilization. In 2022, the nation proposed mobilizing green and sustainable development and promoting the harmonious coexistence of humans and nature. The notions of respecting, accommodating, and protecting nature have become the inherent requirements to build a modern socialist country in all respects.
Following the publication of the first "Hong Kong Climate Action Plan 2030+" in 2017, the Hong Kong Special Administrative Region (HKSAR) Government actively responded to the national strategic requirements on climate change and published the "Hong Kong Climate Action Plan 2050" in October 2021, which has set out more proactive strategies and measures on reducing carbon emissions, and would pursue more vigorous interim decarbonization targets to ease Hong Kong's carbon emissions by 50 percent before 2035 as compared to the 2005 level. Under the joint efforts of regulators, policymakers, and market stakeholders, Hong Kong has gradually established its position as a regional green finance hub in recent years, striving to become an international green finance centre.
The Hong Kong Green and Sustainable Finance Cross-Agency Steering Group has announced that relevant sectors must disclose their climate-related information in alignment with Task Force on Climate-Related Financial Disclosures (TCFD) recommendations by 2025. The Bank has understood that climate change poses significant challenges to social stability and economic progress, affecting production and operation, technology research and development, etc., in all aspects and at multiple levels, which may be transmitted to financial institutions to cause material financial risks. To strengthen the top-level design, improve the requirements of climate risk management, and enrich the form of climate-related information disclosure, the Bank analysed and disclosed its practices in climate risk response and green investment concept from the governance, strategy, risk management, and metrics and targets, referring to the requirements of the Module GS-1 "Climate Risk Management" in the "Supervisory Policy Manual" issued by HKMA, and the climate change-related information disclosure framework formulated by TCFD.
Bank of Shanghai (Hong Kong)’s Approach to ESG
The Bank is committed to developing sustainable finance as a priority to support green, low-carbon transformation. As such, the Bank shall promote the green and sustainable development concept, paying close attention to the impacts of climate change, and realising sustainable development with strong corporate governance practices while coordinating the development of the economy and society.
In alignment with our Head Office in coping with the climate risk to achieve sustainable development, the Bank incorporated climate considerations into the strategy formulation and has undertaken various activities to support the implementation of its climate strategy.
We actively support the decisions and strategic deployment of our Head Office and the Board. Adhering to the positions of "supporting clients' transition to a low-carbon economy" and "cultivating regional green finance capabilities," we continue to drive development in green and sustainable finance.
In compliance with the Hong Kong Monetary Authority’s (HKMA) requirements under Supervisory Policy Manual GS-1 on Climate Risk Management, the Bank conducts climate risk stress tests to assess the potential impact of transition and physical risks to the business, and supports informed decision-making by the Bank with regards to lending and investment activities and business operations.
In addition to adopting a Climate Risk Management Policy and the development of climate risk management procedures, the Bank is committed to helping our customers commit to and realise the United Nations Sustainable Development Goals (UNSDGs), including supporting an orderly transition to a low carbon future, via the offering of green and sustainable finance products.
The Board’s oversights of ESG related risks and opportunities
To oversee and perform the governance processes associated with the sustainable finance, the Bank has established the ESG Committee. This Committee has a reporting line to the Executive Committee and shall convene on at least a quarterly basis. The Executive Committee reports regularly to the Board on the Bank’s progress on material climate and sustainability-related issues to ensure the Board is aware of relevant issues that may have a material impact on the Bank, as well as assisting the Board in making decisions on sustainability and climate-related opportunities and risks.
Management’s role in assessing and managing ESG related risks and opportunities
As the Bank’s sustainable finance business grows over time, the ESG Committee reviews and considers convening more frequently to enable them to perform their oversight role effectively.
The ESG Committee is responsible for:
(a) Reviewing, evaluating and approving:
The design of green and/or sustainable finance product structures, features, product terms and conditions incl. pricing, borrower eligibility criteria, and any material changes to it - New product structures / features
(b) Oversight of the Bank’s effective implementation of the sustainable finance product framework, including governance over sustainable lending activities and the Green Asset Pool
(c) Oversight of the Bank’s effective implementation of risk management processes and controls to mitigate risks related to green and/or sustainable finance products, incl. greenwashing risks; and alignment with the Bank’s business strategy.
(d) Reporting and escalation
The actual and potential impacts of ESG related risks and opportunities on the organization's businesses, strategy, and financial planning
By formulating comprehensive operational and business strategies, we aim to effectively address potential risks arising from climate change, capture the opportunity of the transition towards a low-carbon economy, and help customers put green and low-carbon transition into practice, creating sustainable value for the Bank's operations.
Main business opportunities, products and services
1. Enrich green financial products
Focusing on the low-carbon transformation trend of the market and needs from customers, enrich and innovate financial products and services to support real enterprises.
Engage the majority of our clients on green and sustainable finance products for a transition to a low-carbon future in their business and operations.
Including but not limited to:
- Green Deposit
- Sustainability Performance Linked Loans
- Green loans
2. Promote the development of green operations
- Actively promote green office practices, paperless and electronic, and realize energy saving, low-carbon and zero-carbon in daily operation.
- Raise employees' awareness in energy saving and environmental protection, and publicize the concept of green office and low-carbon commuting.
3.Make good use of financial technology empowerment and commit to putting enough resources into the specified plans to ensure the bank can deliver on the projects.
Risk Management
1.1. Identifying and Assessing Climate-related Risks
Transmission to Traditional Risk Types
BOSHK evaluated transmission to traditional risk types to understand the impact of climate risk. The climate risk impact may be evaluated quantitatively or qualitatively, depending on the traditional risk types and the maturity of the development. Below illustrates climate risks transmission to traditional risk types.
|
Traditional Risk Types |
Climate Risks Transmission to Traditional Risk Types |
|---|---|
|
Credit Risk |
Climate risk may decrease the ability of loan borrower’s repayment or bond issuer’s coupon payment/notional redemption and may impact BOSHK’s recovery of the loan/bond outstanding in the event of default. Climate risk may also decrease the values of collaterals, which are posted by the borrowers as a measure originally adopted by BOSHK to mitigate credit risk arising from loans, through physical risk drivers. |
|
Market Risk |
Market risk may increase when there is a large, sudden, and negative price adjustment triggered by climate risk drivers, resulting in reduction in values of financial assets. Climate risk could also lead to a breakdown in correlations between assets or a change in market liquidity for assets, undermining risk management assumptions. |
|
Liquidity Risk |
BOSHK’s counterparties may withdraw deposits and draw down credit lines in the event driven by climate risk drivers. As such, BOSHK may need sufficient funding sources to ensure BOSHK can fulfill all obligations as a result of sharply increased cash-out flows. |
|
Operational and Legal Risk |
BOSHK’s operational risk may increase during extreme weather events and the business continuity may be challenged during such time. Increasing legal and regulatory compliance risk may also rise when BOSHK deals with climate-sensitive investments and businesses. |
|
Reputational Risk |
Reputational risk may increase based on changing market or consumer sentiment. Consumer may be in favor of more climate or environmentally friendly products, services, and business practices. Inaction of addressing climate issues may adversely impact market and consumer perception to BOSHK and subsequently impacting BOSHK’s abilities to maintain or establish business relationships. |
|
Strategic Risk |
BOSHK may face strategic risk if failing to respond and address climate issues in a changing market environment. Competitiveness and market standing may be lost during such time when BOSHK misses to adopt climate or environmentally friendly solutions and responsible practices. |
Identifying and Assessing Climate Risks on Portfolio and Counterparty Level
Portfolio Level Assessment
At portfolio level, BOSHK has assessed the impacts of climate risks on its loan and bond portfolio as well as the BOSCI’s bond portfolio through the assessments on portfolio exposure to transition and physical risks.
1) Transition Risk
With reference to HKMA’s pilot CRST exercise, BOSHK has focused its transition risk assessment on loans portfolio, bond investments and BOSCI’s bond investments. To determine the scope of assessment, BOSHK has mapped the industry classifications of loan obligors and bond issuers currently in system to high-carbon industries, i.e., (1) Energy; (2) Utility; (3) Metals and Mining; (4) Manufacturing; (5) Property Development; (6) Construction; (7) Transportation. After the identification of loan obligors and bond issuers in scope for assessment, based on the materiality threshold and sector exposure amounts, BOSHK proceeded to perform qualitative analysis at sector level for immaterial industries (i.e., with exposure less than 1% of total portfolio), while detailed quantitative assessment at counterparty level is performed for sectors with material exposures.
2) Physical Risk
Different from transition risk assessment, since physical risk arises from weather-related events and progressive shifts in climate patterns, the impact of physical risk is less differentiated among industries. Instead, geographical locations are used as an important factor to identify physical risk. Hence, to determine the scope BOSHK’s physical risk assessment, all types of property-related collateral loans are identified and included for counterparty level assessment with details in below section. After identifying locations of collaterals in BOSHK’s portfolio that are impacted by physical risks, BOSHK proceeded to perform detailed quantitative assessment at regional level.
Counterparty Level Assessment
Once determined the scopes for climate risk assessment on the BOSHK and BOSCI’s loans and bonds portfolio, counterparty level assessment is carried out to analyze transition and physical risk impacts.
1) Transition risk
Loan portfolio
The transition risk assessment on the Bank’s loan portfolio is performed under 2 NGFS scenarios (i.e., disorderly and orderly scenarios) over 3 time horizons, including 2025, 2030 and 2035. The assessment begins with an identification of key transition risk factors/scenario dimensions in NGFS scenarios, followed by a comprehensive economic response assessment from designed transmission channels at the sectoral level. The transition risk effects would transmit to potential financial impacts through 4 categories (i.e., Revenues, Expenditures, Assets and Investment) in the financial statements of obligors for each selected high-carbon emission industries.
Subsequently, the Bank has applied the obligors’ stressed financials to the existing PD model to assess the transition risk impacts on the repayment ability of the obligors. Based on the assessment of PD, the Bank would further estimate the change in ECL on the portfolio level with reference to the change in PD results.
Bond portfolio
For the BOSHK and BOSCI’s bond portfolio, under climate risk scenarios, assuming the interest rate and liquidity environments remain unchanged, the climate risk impact would therefore simply be reflected on the increase in credit risk. Hence, the Bank has leveraged the credit spread change of the bonds to estimate the fair value change of bond due to transition risk impacts.
The stressed PDs of high-carbon industries (“industry-level stressed PD”) under loan portfolio have been leveraged for generating the credit spread change. The log-odd of relative change in industry-level stressed PD has been taken as the change in credit spread under climate scenarios for bonds. Subsequently, the Bank has used the credit spread change to derive the stressed market value and assess the transition risk impact to the bond portfolio.
2) Physical risk
The Bank evaluates the exposure of individual clients in the loan portfolios for which property-related collaterals are identified. The geographical location of collateral is used to determine counterparties with higher physical risk impact.
The physical risk assessment on the Bank’s loan portfolio is performed under 2 IPCC scenarios (i.e., RCP 2.6 and RCP 8.5) over 3 timestamps (i.e., 2025, 2030 and 2050). By observing the climate events in Hong Kong and key locations of property-related collaterals identified in the Bank’s loan portfolio, along with the consideration of data availability, the Bank has focused its assessment on physical risk due to tropical cyclone and flooding.
The Bank has assessed the physical risk impacts on the collateral values of property-related loans through 3 physical damage indicators, namely, annual expected damage rate from tropical cyclones, floods, and the consolidated expected damage rate from tropical cyclones and floods. The annual expected damage rates are calculated through relative change in annual damage rates and baseline damage rates, which are obtained from external data sources, such as World Resources Institute’s (“WRI”), NGFS CA Climate Impact Explorer (CIE), and Hong Kong Observatory (“HKO”).
Once obtained the projected stressed damage rates from tropical cyclone and flooding, the Bank has quantified physical risk impacts by calculating stressed collateral values. Subsequently, the stressed collateral values are used as inputs to compute stressed LGD, which is further used to estimate the change in ECL on the Bank’s loan portfolio level.
Identifying and Assessing Climate Risks on Operation Level
Besides climate risk implication to the Bank’s loan and bond investment portfolios, with the consideration that physical assets of the Bank may be impaired and business operation may be impacted during extreme weather event, the physical risk impact on operation is also assessed.
However, it is observed that all operation premises are not owned by the Bank, and existing insurance will cover the damage caused by the natural disasters or accidents. In addition, potential loss in operating income caused by extreme weather events is considered minimal as the Bank has an effective Business Continuity Plan (“BCP”) in place and most of its employees are able to work remotely. Therefore, the Bank has assumed that climate-related impacts on the Bank’s operational risk would be insignificant.
1.2. Processes for Managing Climate-related Risks
To manage climate risk in a holistic manner, BOSHK has established a climate risk management framework, consisting of risk identification, assessment, monitoring, and control and mitigation. Risk identification and assessment aim to collect climate-related data and information to understand the potential climate risks for BOSHK and to qualitatively and quantitatively assess the climate risks BOSHK is exposed to. Monitoring is to ensure the exposures to climate-related risks is consistent with BOSHK’s risk appetite using a set of climate-related risk metrics. Control and mitigation are in place for BOSHK to apply climate-related mitigation measures to manage the exposure to the associated risks.
Monitoring Climate Risks
To facilitate the processes to monitor exposures to climate-related risks, BOSHK regularly evaluates its portfolio and own operation against a set of climate-related metrics. The list of climate risk impact indicators consists of both qualitative and quantitative metrics and is organized into portfolio, counterparty, and operation levels. For both portfolio and counterparty levels, BOSHK has set up metrics for evaluating exposures to physical and transition risks respectively.
Regarding portfolio level, BOSHK has focused its monitoring over its loans and bond investments portfolios, identifying sectors which are more vulnerable to transition risks and locations of collaterals in BOSHK’s portfolio that are more likely to be impacted by physical risks. Besides portfolio level, BOSHK has further set up counterparty level metrics to understand its exposures in a more granular level, analyzing the loan obligors and bond issuers individually. On top of BOSHK’s portfolio, operation level monitoring is also carried out to understand the physical risk exposure of BOSHK to extreme weather events leading to business interruption.
Controlling and Mitigating Climate Risks
BOSHK has set up a number of measures to manage its exposures to climate-related risks, having regard to the policy and procedures of Head Office, its climate risk management strategy, and its risk appetite. BOSHK mitigates such risks by adopting sector-level, counterparty-level and operation-level measures.
At the sectoral perspective, BOSHK has enhanced monitoring of high-risk sectors with material exposures. BOSHK has also applied counterparty-level measures such as strengthening data and information collection to manage exposures to climate-related risks. Apart from considering measures to mitigate the climate risks posed to BOSHK’s portfolio, BOSHK has incorporated climate-related considerations in its Business Continuity Planning (BCP) procedures to prevent climate-related disruptions to its operation.
1.3. Integration to Overall Risk Management
BOSHK has taken climate change into consideration and formulates processes for climate risk management as one of the key actions in the overall risk management.
Given the business risks posed by climate change, BOSHK embeds climate change and its related risks into its current risk management framework, strengthens its climate risk governance and identifies climate change’s potential risks and opportunities in a comprehensive manner. BOSHK has incorporated climate risk into the three lines of defense and enhanced its current policies and procedures from various perspectives, including risk policies, risk appetite statements, and business policies, to ensure climate-related considerations have been incorporated into the existing risk management processes.
Enhancing Risk Management Capability
To address information and data challenges, BOSHK has formulated questionnaire to collect climate-related data and information from customers. The questionnaire would enable BOSHK to strengthen the engagement with clients to develop a better understanding of climate-related impact on clients’ business. It would also enable BOSHK to obtain more climate-related information from clients and thereby applying the appropriate control and mitigation measures. For example, BOSHK would be able to identify whether the counterparty has incorporated climate-related considerations in their risk management and whether the counterparty has any carbon emission targets.