Planning for net-zero transition (PDF File, 201.8 KB)

The Hong Kong Monetary Authority, HKMA, has issued a circular primarily addressed at banks operating in Hong Kong in connection with institutions‘ transition planning. Specifically, in the circular, the Authority provides some high level principles for banks to effectively plan and navigate the transition to a net-zero economy, while ensuring safety and soundness in their operations. The regulator finds such principles to be necessary, particularly in light of the fact that transition planning is still evolving and new recommendations and guidelines are emerging nearly „daily“.
#### The key content of the noted high level principles is outlined below:
(1) Setting clear objectives and targets: Authorized Institutions (AIs) must establish well-defined objectives harmonized with the pursuit of a net-zero transition and in accordance with the objectives of the 2015 Paris Agreement. As their proficiency in transition planning advances, AIs should institute quantitative targets, drawing from scientifically grounded pathways. Scenario analysis is a valuable tool for shaping transition strategies.
(2) Establishing a robust governance framework and integration: Board and executive leadership play pivotal roles in facilitating the implementation of transition planning. Embedding considerations for an orderly transition into internal frameworks such as governance, accountability and risk management is imperative. If possible, these considerations should also be incorporated into an AI’s business strategies, models, products, and services.
(3) Devising appropriate initiatives and actions: The initiatives and actions undertaken to advance the transition planning process should be closely aligned with the stated purposes and objectives. For instance, if an AI’s transition planning centers on strategy, it will entail a series of actions accompanied by quantitative targets and metrics, translating long-term objectives into concrete steps and milestones. When relevant, these actions should adhere to pertinent standards and frameworks, such as taxonomies for identifying environmentally friendly or transition-oriented projects. Milestones serve as crucial checkpoints for evaluating progress. In cases where transition planning primarily serves risk management, actions should focus on integrating transition considerations into governance and risk management frameworks.
(4) Engaging with clients: The transition planning of AIs is intricately linked with the transition pathways of their clients. To align their planning process with client strategies effectively, it is essential for AIs to actively engage with clients. This may involve gathering pertinent information from clients and gaining insights into the risks and opportunities within their respective sectors concerning the transition to a net-zero economy.
(5) Performing reviews and updates: Given the evolving nature of climate scenarios and sectoral pathways, it is imperative to ensure that the transition planning process remains current and relevant. This involves conducting periodic reviews and updates, particularly when fundamental changes occur within underlying scenarios, pathways, and assumptions. It is also vital to consider the transition progress of the real economy in this context.
(f) Maintaining transparency: Recognizing the increasing expectations from stakeholders and emerging demands for the disclosure of climate-related information, AIs should proactively consider enhancing the transparency of their transition planning process and the disclosure of transition plans. This aligns with the evolving landscape of stakeholder requirements in this regard.