Climate Risk Measurement The Existing Landscape and Developments in Hong Kong's Financial Services Industry

Climate Risk Measurement
The existing landscape and developments in Hong Kong’s

financial services industry
December 2022
Hong Kong Institute for Monetary and Financial Research

HKIMR Applied Research Report No.3/2022
Contents
Pages
Foreword 2
Acknowledgements 3
Executive Summary 4
Chapter 1 Climate Risk Measurement: The International Experience 7

Motivations and prevalent challenges for financial institutions
Chapter 2 Data and Model-risk Management 18

A framework for climate risk measurement
Chapter 3 Climate Risk Measurement in Hong Kong’s Financial Services 25

Industry
Market views on status quo, challenges, and future plans
Chapter 4 Leveraging Insurers’ Experience 36

Practices and key insights
Chapter 5 Enhancing Climate Risk Measurement in Hong Kong 47

A few thoughts for future developments
Conclusion 55
Appendix A: Survey Background 56
Appendix B: References 57
Foreword
With rising temperatures and intensifying frequency commissioned by the Hong Kong Institute for
of extreme weather events, climate change is Monetary and Financial Research that highlight local
exerting a significant beyond-border influence on financial institutions’ practices and challenges
our societies. In light of the recent 27th Conference associated with climate risk measurement. It also
of the Parties to the United Nations Framework discusses insurers’ long experience in climate risk
Convention on Climate Change (COP27), we are measurement and explores its insights for other
witnessing paradigm changes in global business sectors of the financial services industry. The report
under a new “carbon budget”. There is momentum concludes by offering considerations on the
in the financial services industry to incorporate advancement of climate risk measurement in Hong
climate risk into strategic planning and risk Kong’s financial services industry.
management in the context of investor appetites
and policy developments. However, market By illustrating market participants’ practices and
participants are continuously highlighting challenges developments related to climate risk measurement,
that inhibit the industry’s efforts and improvements we hope that this report can provide financial
in measuring climate risk. At this juncture, it is institutions and regulators with useful insights that
important to do a deep dive into financial institutions’ will help them advance efforts in climate risk
current practices and pain points in climate risk measurement. This, in turn, will further consolidate
measurement to explore how to address these and strengthen Hong Kong’s position as a green and
challenges and facilitate further improvements in sustainable finance hub both regionally and
climate risk measurement, which will benefit both internationally.
the financial services industry and society as a whole.
This report reviews the motivations and challenges

that financial institutions globally are facing in Mr Darryl Chan
climate risk measurement and introduces a data Deputy Chief Executive
management framework and a model-risk Hong Kong Monetary Authority
management framework, which can be helpful in
effectively managing the data and model risks in the Deputy Chairman
climate risk measurement process. In addition, the Hong Kong Institute for Monetary and Financial
report presents the results of a survey and interviews Research
2 Climate Risk Measurement

Acknowledgements
We are grateful for our collaboration with KPMG

Advisory (Hong Kong) Limited in designing and
administering a survey, entitled Climate risk
measurement: Existing experience and data issues in
Hong Kong’s financial industry, from July to August
2022, and in conducting interviews with market
participants, including banks, insurers, and asset
managers. We thank the Insurance Authority, the
Mandatory Provident Fund Schemes Authority, the
Securities and Futures Commission, and various
departments and divisions of the Hong Kong
M o net ar y Aut h o rity, in clu d ing the Ma rk e t
Development Division, Banking Policy Department,
Banking Supervision Department, and Communications
Division, for their valuable comments and suggestions.
We would also like to thank the HKIMR Council of
Advisers for Applied Research for their continuing
support and guidance related to the Institute’s
research activities.
Hong Kong Institute for Monetary and Financial Research • December 2022 3
Executive Summary
Climate risk is a systemic risk that has notable standardised and consistent measurement
effects on the business and operations of financial methodologies. The lack of expertise poses
institutions. With the degradation of climate additional barriers because climate risk measurement
conditions and the development of policies, requires cross-disciplinary talent with a high degree
technologies, and investors’ demand, climate risk of specialisation and expertise. Financial institutions
measurement is gaining momentum in the financial engaged in cross-boundary and international
services industry. Regulators across jurisdictions and business and operations are also challenged by the
international organisations have rolled out a range multitude of data protocols and regulatory
of initiatives to facilitate financial institutions’ requirements, imbalanced data availability and
climate risk measurement and management. reliability across jurisdictions, and difficulties in
However, there remain challenges that impede assessing the cross-boundary and international
financial institutions’ efforts and advances in climate spillover effects of climate risk.
risk measurement.
A data management framework and a model-
This report reviews the motivations and challenges risk management framework can be helpful in
that financial institutions globally are facing in effectively managing the data and model risks
climate risk measurement and introduces a data in the climate risk measurement process. These
management framework and a model-risk frameworks are potentially applicable to all financial
management framework, which can be helpful in institutions. A data management framework
effectively managing the data and model risks in enhances the usability, reliability, and quality of data
the climate risk measurement process. In addition, assets, facilitating organisations’ data-driven
the report describes local financial institutions’ decisions and supporting their achievement of
practices and challenges in the field of climate risk strategic objectives. A robust and comprehensive
measurement through a survey and interviews model-risk management framework can be helpful
commissioned by the Hong Kong Institute for in identifying, managing, and controlling the
Monetary and Financial Research (HKIMR). It also potential model risks stemming from inappropriate
discusses the established experience of insurers in climate-related models, technical errors, and
climate risk measurement and explores its insights incorrect usage.
for other sectors of the financial services industry.
The report concludes by offering considerations on There is positive engagement currently among
the further advancement of climate risk measurement Hong Kong’s financial institutions in climate
in Hong Kong’s financial services industry. risk measurement. According to a survey
commissioned by the HKIMR, 53% of the surveyed
The prevalent challenges in climate risk financial institutions have measured climate risk.
measurement facing global financial institutions The key drivers of climate risk measurement
i n v o l v e t h e a v a i l a b i l i t y, re l i a b i l i t y a n d reported by the survey respondents included not
transparency, comparability, and complexity of only external factors such as policy developments
climate-related data, as well as the lack of a n d c o m p l i a n c e , a n d i n d u s t r y t re n d s a n d
stakeholders’ demand, but also internal factors such

Executive Summary
as reputation improvement, strategic imperatives, unavailable, and other data may suffer from limited
and overall risk management. coverage, granularity, reliability, and transparency.
A lack of consistency related to measurement
With respect to the two types of climate risk methodologies can lead to invalid and incomparable
(i.e. physical and transition risks), most financial outputs for financial institutions. Additional
institutions consider the measurement of both challenges identified by the survey respondents
to be relevant to their business and operations, engaged in cross-boundary and international
with approximately 77% of the survey activities were a lack of consistency across
respondents measuring both risks. Overall, there jurisdictions in data definition and taxonomy, data
was a stronger emphasis on transition risk than quality, and regulatory guidance and frameworks.
physical risk. The reasons for this shared by
interviewees were not only financial institutions’ The industry is keen to making progress in
role in facilitating the low-carbon transitions of their climate risk measurement, with 76% of
own operations and customers but also some financial institutions planning to allocate
financial institutions’ limited awareness, knowledge, similar or more resources over the next 12
and resources (e.g., limited availability of physical months. Moreover, 80% of the survey respondents
risk data) to measure the impacts of physical risk. who were not measuring climate risk planned to
The major physical risk covered by the surveyed measure in the future. The most widely adopted
financial institutions reflects global concerns about strategy for the next 12 months was to align the
increasing temperatures and the material physical industry’s efforts with policy developments, an
risk that presents to Hong Kong’s climate, such as approach suggested by approximately 60% of the
tropical cyclones, extreme precipitation and survey participants. Resourcing also appeared to be
flooding, and rising sea levels. The transition risk among the top considerations, including upskilling
related to the developments of policies, consumer the current workforce and leveraging third-party
and investor preference, and technology were all resources, such as the long experience of insurers
important considerations for surveyed financial in climate risk measurement.
institutions.
Leveraging insurers’ established experience in
Challenges remain in the field of climate risk climate risk measurement is beneficial for other
measurement, including data availability, data sectors of the financial services industry.
quality issues (reliability and transparency, Insurers’ experience in the field of climate risk
comparability, and complexity), and the lack of measurement provides insights for other sectors of
standardised and consistent methodologies. the financial services industry, such as enhancing
The availability of climate-related data and the understanding of climate risk, broadening
standardised measurement methodologies were the climate risk coverage, improving data management,
top two barriers to climate risk measurement in strengthening the application of advanced
Hong Kong, as suggested by 68% and 59%, methodologies, and facilitating the good usage of
respectively, of the survey respondents. Some measurement outputs.
climate-related data was considered simply
Executive Summary
Taking into account the insights of market

participants and the recent developments
aimed at facilitating climate risk measurement
both internationally and in Hong Kong, we
p ro p o s e s o m e c o n s i d e r a t i o n s t h a t c a n
contribute to the discussion on how to advance
climate risk measurement in Hong Kong’s
financial services industry. Coordinated efforts
between financial regulators and market participants
are important. In fact, financial regulators can play
a critical role in promoting a common taxonomy
and mandatory climate risk disclosures, such as
emissions Scope 1, 2, and 3 as defined by the
Greenhouse Gas Protocol. Clear climate policies are
integral to providing guidance to market participants.
The public and market participants should deepen
the awareness and knowledge of climate risk, which
serves as the foundation of the industry’s further
progress in climate risk measurement. Additional
considerations include strengthening local and
international collaboration, and improving the
availability and quality of climate-related data and
methodologies. It is also important to facilitate
talent development, capacity building, and
knowledge sharing.

Chapter 1
Climate Risk Measurement:
The International Experience
Motivations and prevalent challenges for financial
institutions
HIGHLIGHTS:
• Key motivations for financial institutions to measure climate risk may include
mitigating negative impacts and seizing accompanying opportunities,
collaborating with regulators to achieve a low-carbon transition, meeting the
expectations of stakeholders, and facilitating institutions’ strategic planning
and risk management.
• The prevalent challenges in climate risk measurement confronting financial

institutions internationally involve the availability, reliability and transparency,
comparability, and complexity of climate-related data, along with the lack of
standardised and consistent measurement approaches and expertise.
• Additional challenges have been identified by financial institutions engaged

in cross-boundary and international business and operations, such as the
multitude of data protocols and regulatory requirements, imbalanced data
availability and reliability across jurisdictions, and the need to assess the
cross-boundary and international spillover effects of climate risk.
Chapter 1: Climate Risk Measurement: The International Experience
1.1. HOW IMPORTANT IS IT TO institutions to navigate, enhance, and even benefit

from the transition to a low-carbon economy. For
MEASURE CLIMATE RISK? example, although achieving the target of net-zero
Chapter 1
carbon emissions requires carbon-intensive firms to

In recent decades, climate change has been change their business models, it will direct a large
accelerating, as demonstrated by rising global amount of capital to help finance sustainable projects
temperatures and intensifying natural disasters. from fund providers, such as banks and pension
Climate change poses widespread threats to humanity, funds. In the meantime, insurance companies may
the ecosystem, and the world economy. According to also embrace the opportunity to provide new
the latest research in climate science, global surface insurance products for sustainable projects.
temperatures will continue to increase until at least
mid-century, and many changes in the climate system, In addition to the heightened risks and associated
including extreme heat, heavy precipitation, and opportunities that may motivate financial institutions
agricultural droughts, will become more severe in to address climate risk, factors such as cooperation
direct relation to increasing global warming.1 These with regulators and the expectations of stakeholders,
changes will inflict considerable economic losses if along with strategic planning and risk management,
timely and effective actions are not taken.2 may also play a vital role in prompting financial
institutions to tackle climate risk.
Climate change is a systemic risk that impacts all sectors
of the economy, including the financial services industry. Financial institutions need to cooperate with regulators
In addition to directly affecting financial institutions’ seeking to achieve the objective of transitioning to a
operations, climate change can also translate into low-carbon economy. Relevant supervisory bodies have
traditional financial risks and disrupt financial institutions’ rolled out policies and initiatives to enhance climate
lending, underwriting, and investment activities. For risk management, such as requiring financial institutions
instance, intensifying tropical cyclones can cause to incorporate climate-related factors into their
significant damage to coastal properties and thus investment processes, developing climate-related risk
increase the credit risk faced by commercial banks disclosure frameworks, and conducting industry-wide
holding these properties as collateral. With the climate risk stress tests. For example, in 2021, Hong
implementation of carbon pricing schemes, the stock Kong’s Securities and Futures Commission (SFC) issued
prices of high-emitting firms may decline, creating a Consultation Conclusions on the Management and
market risk for asset managers holding the securities. Disclosure of Climate-related Risks by Fund Managers,
The results of the climate risk stress tests conducted by which requires fund managers to take climate-related
regulators around the world indicate that climate risk risks into consideration in their investment and risk
has the potential to affect the vulnerability of financial management processes and to make appropriate
institutions and the stability of the financial system.3 disclosures. The Hong Kong Monetary Authority
(HKMA) launched its pilot climate risk stress test (CRST)
Although climate change may negatively affect in 2021, with participating banks accounting for 80%
financial institutions’ business and operations, its of the banking sector’s total lending. The CRST aimed
accompanying opportunities may be significant. The to assess the climate resilience of the Hong Kong
unique role of the financial services industry as the banking sector as a whole and facilitate the capability
intermediary of the economy enables financial building of banks for measuring climate risk. The
1
IPCC (2021).
2
For example, the Swiss Re Institute (2021) shows that compared with a world without climate change, the global GDP loss could be up to 18.1% by
2050 in a severe climate scenario of a 3.2°C rise in temperatures. The loss can be narrowed to 4.2% if the Paris Agreement’s target of limiting the rise
to well below 2°C is reached.
3
See, for example, BoE (2022) and ECB (2022). Please refer to AGCB and HKIMR (2022) for more details about the results of pre-2022 climate risk stress
tests.

Mandatory Provident Fund Schemes Authority also Moreover, financial institutions may be motivated by
issued a set of guiding principles to MPF trustees in strategic planning and risk management
2021 which laid down a high level framework in considerations. The acceleration of climate change is
Chapter 1
integrating ESG factors into the investment and risk altering the context and priorities of financial
management processes of MPF funds and making institutions’ strategic planning. The evidence confirms
relevant disclosures to MPF scheme members.4 that financial institutions’ management bodies are
becoming increasingly concerned about exposure to
Financial institutions need to meet the increasing climate-related risks.6 They incorporate these risks into
expectations of stakeholders who prefer to invest in the development of institutions’ overall business
companies with a good reputation and solid strategy and objectives and exercise effective oversight
performance in addressing climate risk. The evidence of these risks. On the risk management front,
suggests that many investors view climate change as although the standard risk management framework
a significant factor in or even the centre of their considers various traditional financial risks, the
investment decisions in the next two years. 5 In incorporation of climate risk will further improve the
addition, investors require more granular, accurate, framework by preparing financial institutions for
and transparent disclosures of climate-related risks to possible scenarios related to climate change and the
mitigate associated problems such as greenwashing. associated economic transition. A survey conducted
Reputational risk increases when a financial institution by the Australian Prudential Regulation Authority
is perceived to have fallen short of its stakeholders’ shows that most financial institutions have started to
expectations. For example, an asset management firm embed climate risk into elements of their risk
will suffer from reputational damage if its capital is management framework and recognise climate risk
diverted to industries and companies that rely heavily in their risk taxonomy or risk register.7
on fossil fuel despite the firm’s commitment to invest
in environmentally friendly projects.
Figure 1.1: Key motivations for financial institutions to address climate risk
Mitigate negative impacts Collaborate with

and seize accompanying regulators to achieve
opportunities low-carbon transition
Facilitate strategic
Meet the expectations of
planning and risk
stakeholders
management
Sources: HKIMR staff compilation.
4
For more detail, please refer to the following website: https://www.mpfa.org.hk/-/media/files/information-centre/legislation-and-regulations/circulars/
mpf/20211126/cir-20211126.pdf
5
Robeco (2021).
6
ECB (2021a).
7
APRA (2022).
To achieve the goals of minimising the adverse 1.2. CHALLENGES IN CLIMATE RISK
impacts of climate change and seizing the
accompanying opportunities, cooperating with MEASUREMENT
Chapter 1
regulators and meeting the expectations of

stakeholders, and improving strategic planning and Although measuring climate risk is critical for
risk management, financial institutions should take financial institutions to achieve the goals mentioned
early action to manage the impacts of climate risk. before numerous challenges impede them from
If financial institutions are to develop any effective obtaining decision-useful measurement outputs. This
response to the impacts of climate change, they section explores the prevalent challenges facing
must be able to measure the scope and severity of financial institutions in climate risk measurement
climate-related risks in an objective and accurate with the aim of helping financial institutions to
manner. Therefore, climate risk measurement obtain an understanding of these challenges. The
exhibits its significance as the first and fundamental discussion centres on the challenges related to the
step in the process of addressing climate risk. This availability, reliability, comparability, and complexity
report focuses on financial institutions’ current of climate-related data, along with issues arising
climate risk measurement practices, examines the from a lack of appropriate measurement tools and
associated challenges confronting financial methods, a lack of expertise, and engagement in
institutions, and highlights the potential implications cross-boundary and international activities (Figure
of those practices and challenges for policymakers 1.2).
and industry players.
Figure 1.2: Major challenges in climate risk measurement for global financial institutions
Availability of
Challenges related climate-related data
Reliability and
to cross-boundary
transparency of
and international
climate-related data
business
Lack of expertise Comparability of

Lack of standardised
Complexity of
and consistent tools
and methods
Source: HKIMR staff compilation.

1.2.1. Availability of climate-related data small and medium-sized enterprises, and securities
traded on over-the-counter markets.9
As highlighted in numerous studies,8 the lack of
Chapter 1
available data is one of the most fundamental Another availability issue arises from the insufficient
challenges in measuring climate risk (Figure 1.3). In level of disaggregation of climate-related data.10 For
addition, there is an improving and evolving example, it is challenging to obtain relevant data that
understanding of the science of climate risk and its measure the physical risk carried by a facility in a
impacts on financial institutions. In the absence of specific location or the transition risk for projects with
climate-related data and suitable methodologies, the underlying dependencies on financial institutions.
measurement of climate risk may depend mostly on
subjective beliefs, which limits the usability of the The third availability issue is associated with the lack
resulting outputs. of forward-looking data, such as the data describing
firms’ projected carbon emissions pathways, their
One availability issue results from limited data vulnerability and resilience to certain types of climate
coverage, as some data are either unavailable or only risks, and their adaptation and mitigation measures to
partially available for certain geographical locations, address future climate risks.11 Moreover, it is difficult
economic sectors, enterprise populations, or asset to use existing data to forecast the evolution of policies,
classes. For instance, there are limited climate-related technologies, and consumer preferences and to gauge
data for emerging markets and developing countries, their effects on the financial services industry.12
Figure 1.3: Challenges associated with data availability
Limited data coverage
Insufficient level of disaggregation
Lack of forward-looking data
Low accessibility to data sources
Shortage of specific data items
8
See, for example, FSB (2021), IMF (2021), and NGFS (2021, 2022).
9
BoE (2022), DNB (2022), ESRB (2021), IMF (2021), and NGFS (2021, 2022).
10
FRB (2021) and NGFS (2021, 2022).
11
ESRB (2021), IMF (2021, 2022), and NGFS (2021, 2022).
12
ECB (2022) and IMF (2021).
Low accessibility to potential data sources is another Additional issues may be associated with the
challenge.13 Because of the lack of centralised data availability of specific data items. As a typical
repositories, financial institutions may spend a example, there is a shortage of data on value chain
Chapter 1
substantial amount of effort locating the sources of emissions, avoided emissions, and financed
desirable data. Although data from public sources emissions, all of which are essential to a complete
are free of charge, they may not be stored in understanding of the climate risk facing financial
machine-readable formats. Data from private sources institutions’ counterparties.15 Furthermore, there are
are usually more structured and granular, but their limited data with which to assess how climate risk
high cost may be a burden for many financial is transferred or amplified through the interlinkages
institutions.14 of financial institutions, via financial securities
transactions, and through the feedback mechanism
between the financial system and the real economy.16
Because of the lack of
centralised data repositories, 1.2.2. Reliability of climate-related data
financial institutions may spend The unreliability of climate-related data presents
a substantial amount of efforts another major challenge in measuring climate risk
locating the sources of desirable (Figure 1.4). Unreliable climate-related data can lead
climate-related data. to incomplete, misleading, or incorrect measurement
Figure 1.4: Major barriers to data reliability
Reliance on historical information
Underdeveloped data verification process
Conflicting data definitions
Intransparent data construction
Ambiguous data interpretation
13
DNB (2021) and NGFS (2021, 2022).
14
FRB (2021).
15
BoE (2022), ESRB (2020), and NGFS (2022).
16
FSB (2021).

outputs, thereby reducing the usefulness and or supplied by private data vendors, such as
robustness of these outputs in supporting financial environmental, social, and governance (ESG) rating
institutions to address climate risk. agencies.23 This issue is particularly troublesome when
Chapter 1
no or only limited information about how data are
One major reliability issue arises from the reliance on collected, transformed, and estimated is disclosed,
historical information. 17 Given the distinct making it difficult for financial institutions to
characteristics of climate risk, such as its non- understand what the data really measure. For
linearity,18 heterogeneity,19 and high uncertainty, example, the problems caused by applying inconsistent
physical risk indicators relying on historical information principles, criteria, and methods when constructing
may fall short of capturing the risks that can be ESG scores have received considerable attention and
expected as a result of climate change, raising the have been extensively investigated in a number of
need to integrate forward-looking information.20 studies.24
Due to the lack of mandatory and homogeneous

climate-risk disclosure requirements, the data reported The lack of transparency in the
by private firms may be partial, unaudited, or construction of climate-related
missing.21 This is exacerbated by the underdevelopment data is a distinguishing
of, and lack of requirement for, data verification or
assurance process. This issue also opens the door for
reliability concern, especially
greenwashing, which arises from insufficient for data disclosed by private
accreditation of firms’ sustainable activities. firms or supplied by private
data vendors.
Another related reliability issue results from conflicting
data definitions.22 For instance, green taxonomies that
determine whether a firm’s activities facilitate the The ambiguous interpretation of some climate-
transition to a low-carbon economy are not entirely related data items also undermines their reliability.
consistent across different regions and industries, For instance, it is customary in academic studies25 to
which limits the power of the corresponding green/ use the carbon emission indicator as a proxy of
brown share indicators in reflecting the level of transition risk. However, that indicator may only
transition risk to which a firm is exposed. reveal firms’ historical reliance on fossil fuel resources
and not their plans to cut carbon emissions because
The lack of transparency in the construction of of the prospect of more stringent climate
climate-related data is also a distinguishing reliability regulations.26
concern, especially for data disclosed by private firms
17
FRB (2021).
18
Small and incremental developments in climate may lead to large and abrupt changes in the ecological system, which may subsequently cause serious
and unexpected damage to the economy.
19
The effect of climate risk varies across locations and industries and should be understood within its geographic and economic context.
20
ESRB (2021).
21
BoE (2022), ESRB (2020), and NGFS (2021, 2022).
22
IMF (2021).
23
BdF (2022) and NGFS (2021).
24
See, for example, EC (2021a) and IOSCO (2021).
25
See, for example, Bolton and Kacperczyk (2021), Hsu et al. (2020), and Alessi et al. (2021).
26
AGCB-HKIMR (2022) and DNB (2022).
Figure 1.5: Key issues related to data comparability

Chapter 1
Difficulty in determining the greenness of a firm
Constructed using different methods
Obtained from different sources
Lacking common definitions or unique identifiers
Lacking a relevant benchmark
1.2.3. Comparability of climate-related data Data with similar concepts also may not be
comparable if they are constructed using different
The lack of comparability is also a significant challenge methods or are obtained from disparate sources.27
encountered by financial institutions when measuring This issue is more serious if the original data sources
climate risk (Figure 1.5). If sets of climate-related data contain little information about their coverage,
cannot be compared, the measurement outputs may timing, underlying assumptions, and estimation
not be comparable either and thus will be less useful methods.28 For example, the climate risk stress test
for decision-making. conducted by the ECB 29 reveals that the use of
varying proxy techniques and data providers in
One challenge arises out of the difficulty in determining estimating Scope 3 carbon emissions leads to a high
the degree of greenness of a company based on level of disparity in the reported results.30 The lack
different metrics. For example, although both carbon of a standardised climate-related data disclosure
emission indicators and green/brown share indicators framework also prevents direct comparisons of
measure the transition risk, it is not straightforward financial reports prepared under different disclosure
to tell whether a firm emitting a larger amount of frameworks.31
greenhouse gases or a firm producing a lower share
of eco-friendly products has greater exposure to
transition risk.
27
FRB (2021).
28
NGFS (2021).
29
ECB (2022).
30
The definitions of the three scopes of carbon emissions can be found in GGP (2004).
31
BdF (2022).

Comparability issues may also originate from the lack representative in capturing the nature of climate risk.
of common definitions, technical standards, or unique For example, given the nonlinearity and high
identifiers for companies and financial assets.32 The uncertainty of climate risk, using the average historical
Chapter 1
last issue creates significant barriers in linking climate- losses caused by extreme weather events may
related data to financial data, thus obstructing the underestimate their potential to cause future damage.
process of evaluating the impacts of climate risk on
financial institutions’ business. Data complexity issues also emerge from the difficulty
of integrating data from scattered sources or in
The fact that climate policies differ across industries different formats.34 For example, to gain a holistic
and geographies increases the difficulty of comparing view of how climate risk affects a financial institution’s
climate data retrieved from different sources. It should business and operations, it may be necessary to collect
be emphasised that even when climate-related data both numerical and geographical data from public
are comparable, the lack of a relevant benchmark and private data sources and to conduct an extensive
renders the comparison less meaningful.33 procedure of validating, cleaning, standardising, and
merging the data.
1.2.4. Complexity of climate-related data
Another problem results from the complexity
The complexity of climate-related data also creates embedded in the rules and methods that govern the
obstacles to measuring climate risk (Figure 1.6). It collection and estimation procedures of different
increases the cost of correctly understanding and data. 35 For instance, prior knowledge of the
utilising climate-related data while reducing the geographic information system is fundamental to
interpretability of the measurement outputs. comprehending the patterns and relationships
inherent in geographical data, which itself is essential
One important complexity issue stems from the fact to correctly and efficiently utilising geographical data
that some climate-related data may not be to measure climate risk.
Figure 1.6: Top challenges relevant to data complexity
Inability to capture the distinct nature of climate risk
Challenging to integrate data from disparate sources
Complexity embedded in rules governing data processing
32
BIS (2021) and NGFS (2021, 2022).
33
NGFS (2022).
34
FRB (2021) and NGFS (2021).
35
NGFS (2021).
1.2.5. Lack of standardised and consistent

methods and tools Although there are a variety of
available methods and tools for
Chapter 1
Challenges related to climate risk measurement may

further arise from the difficulty in choosing the measuring climate risk, there is
appropriate measurement methods and tools (Figure no criteria to guide financial
1.7). institutions to select the one
that yields the most accurate and
Although public and private organisations offer a robust measurement outputs.
variety of methods and tools for measuring climate
risk, there is no criteria to guide financial institutions
to select the one that yields the most accurate and
Issues may also arise from the difficulty of measuring
robust measurement outputs.36 One observation of
the impacts of climate risk within the traditional
the climate risk stress test created by the Bank of
financial risk modelling framework.38 For example, it
England is that more sophisticated approaches require
is unclear how and to what extent climate-related
more intensive data inputs and calibration efforts,37
risks affect the risk weights, probabilities of default,
which suggests that the collection of data and choice
or other parameters in credit risk modelling.
of methods are not independent but rather require a
Furthermore, the portfolio invariance assumption in
trade-off to be made between them.
credit risk models is at odds with the uneven impacts
of climate risk on different economic sectors and
Another challenge is the issue of how to generalise
geographical locations and may need to be changed.
measurement methods and tools that are only applied
in specific regions or industries. For example, the
Like the challenges regarding climate-related data,
insurance sector has a long history of using natural
financial institutions may encounter issues related
catastrophe models to assess the impacts of natural
to the availability, reliability, comparability, and
disasters on the underwriting business, leaving open
complexity of methods and tools. For example,
the question of how such methods can be adapted
certain measurement objectives of financial
and broadly used by banks and asset managers to
institutions, such as quantifying the impacts of
measure the impacts of acute physical risk.
Figure 1.7: Challenges associated with the lack of standardised and consistent methods and tools
Lack of criterion to select tools / methods
Difficult to extend the applicability of specific tools / methods
Hard to measure climate risk with traditional financial models
36
NGFS (2021).
37
BoE (2022).
38
ECB (2021b).

climate risk over decades or measuring firms’ international spillover effects of climate risk through
mitigation efforts in tackling climate risk,39 may not trading activities and financial transactions, yet this
be achievable using existing methods and tools. information is essential for gaining a clear picture of
Chapter 1
climate risk.
1.2.6. Lack of expertise
The lack of expertise poses additional layers of The availability and reliability
difficulty to climate risk measurement. Collecting, of data are skewed towards more
processing, and analysing climate-related data may
necessitate a high degree of specialisation and a
advanced economies, which may
considerable amount of capacity, which are beyond create an imbalance for
the reach of many financial institutions, especially financial institutions operating
small and medium-sized institutions.40 In addition, the in both developed and
shortage of experienced and cross-disciplinary talent developing economies.
in climate risk measurement, along with the modest
supply of tertiary education programs and professional
qualifications, hinder financial institutions from The prevalence and materiality of the challenges
accessing a qualified workforce that can measure outlined above prevent financial institutions from
climate risk. a c h i e v i n g t h e i r v a r i o u s g o a l s t h ro u g h t h e
measurement of climate risk. As emphasised in many
1.2.7. Challenges related to cross-boundary
reports,42 it is essential for financial regulators to
and international business
develop decision-useful climate risk metrics,
implement standardised climate risk disclosure
In addition to the major challenges mentioned above,
frameworks, and promote globally consistent climate
financial institutions that engage in cross-boundary
finance taxonomies. From the standpoint of financial
and international businesses may face additional
institutions, a good industry practice would be to
challenges in climate risk measurement. For example,
adopt a high-level climate risk measurement
the multitude of data protocols and regulatory
architecture that encompasses a data management
requirements across jurisdictions increases the
framework aiming to improve the quality of data,
difficulty for financial institutions to compare and
along with a model-risk management framework
combine the data collected from different geographical
that aims to reduce the risks embedded in its tools
areas.41 Moreover, the availability and reliability of
or methods. As discussed in the next chapter, this
data and skewed towards more advanced economies,
architecture will help financial institutions to better
which may create an imbalance for financial
address the above challenges in a more consistent
institutions operating in both developed and
and effective manner.
developing economies. Furthermore, it remains
unclear how to measure the cross-boundary and
39
ECB (2022) and FRB (2021).
40
BIS (2021), ESRB (2021), FRB (2021), IMF (2021), and NGFS (2021, 2022).
41
IMF (2021).
42
For example, AGCB-HKIMR (2022), EC (2021b), IMF (2021, 2022), and NGFS (2021, 2022).
Chapter 2
Data and Model-risk Management
A framework for climate risk measurement
HIGHLIGHTS:
• Data and model-risk management within financial institutions can be helpful
in facilitating climate risk measurement, which is composed of inputs, analysis,
and output and usage.
• A data management framework enhances the usability, reliability, and quality

of data assets, facilitating organisations’ data-driven decisions and supporting
their achievement of strategic objectives.
• A robust and comprehensive model-risk framework is helpful in identifying,

managing, and controlling the potential risks stemming from inappropriate
climate-related models, technical errors, and incorrect model usage.
Chapter 2: Data and Model-risk Management
Figure 2.1: Data and model-risk management in the climate risk measurement process
Data management framework
Analysis
• Data • Estimation
• Information • Decision and strategy
• Stress testing
Chapter 2
• Sensitivity analysis
Inputs Output and
usage
Model-risk management framework
Financial institutions are facing various challenges in strategies (Figure 2.1). Below, we separately
climate risk measurement, which mainly focuses on introduce a high-level data management framework
climate-related data and methodologies. Regulators, and a model-risk management framework that
international organisations, and industry associations financial institutions can use to manage the climate-
have rolled out a broad range of initiatives to address related data and model-risks.
these challenges, repeatedly emphasising the
management of data and model-risks throughout 2.1. DATA MANAGEMENT
the procedures of inputs, analysis, and output and
usage.43 Data and model-risks management within
FRAMEWORK
financial institutions can be helpful in facilitating
Climate-related data serve as the foundation for
climate risk measurement, which is composed of
financial institutions to gain business intelligence in
inputs, analysis, and output and usage. Inputs,
climate risk measurement. A data management
including climate-related data and qualitative
framework is a framework that treats these data as
information from various sources, are fed into
a strategic asset and aims to extract their maximum
different climate-related models, such as stress
value. It enhances the usability, reliability, and quality
testing and sensitivity analysis, for analysis and
of the data assets, facilitating an organisation’s data-
processing. Estimation outputs generated from the
driven decisions and supporting its achievement of
models are subject to verification and validation and
strategic objectives.
can be used for making decisions and formulating
43
For instance, HKMA (2021a) emphasises that financial institutions should be aware of the possible model risks. MAS (2020) advises businesses to take
appropriate measures to guarantee the accuracy of their data and to perform independent reviews with the help of internal control and audit units.
Insufficient data management can generate low- cycle management, (3) metadata management, and
quality outputs and distort business decisions in (4) data quality management (Figure 2.2).44
addressing climate risk, exposing financial
institutions to various types of business and Data governance
operational risks. First, poor data management
generally requires staff to spend a considerable Data governance is the exercise of authority and
amount of time validating and fixing data errors, control, including planning, monitoring, and
and the final output is typically of low quality and enforcement, over the management of data assets.
limited reliability. Financial institutions relying on Data governance is an overarching function that
these data and outputs can make biased and guides all other data management functions and is
incorrect estimations of climate risk’s impacts on implemented within the context of a broad business
Chapter 2
their business, causing additional financial losses and data management strategy. It emphasises the
and missed business opportunities. Second, the rules, people’s roles, processes, and technologies
maintenance of good data management and quality that work together to align everyone in the
can mean the difference between compliance and organisation to ensure the proper usage of data. A
millions of dollars in fines. Compliance is an ongoing data governance function enables an organisation
issue as governments and regulators around the to be data-driven by implementing the strategy and
world are putting more effort into and emphasis on supporting the principles, policies, and stewardship
climate risk disclosures and management. Third, practices that ensure that the organisation recognises
customers and investors may also lose confidence and acts on opportunities to obtain value from its
and trust in financial institutions that disclose low- data. A data governance committee may be
quality climate-related data and information, which established as a forum to escalate data issues and
adversely influence those institutions’ long-term maintain oversight of all data-related activities.
development.
Data life cycle management
A data management framework All data have a life cycle – from initial collection,
storage, usage, and archival to final deletion. Data
enhances the usability, life cycle management specifies the rules, processes,
reliability, and quality of the and procedures of managing data throughout their
data assets, facilitating an life and ensures that an organisation implements the
organisations’ data-driven right policies at each stage of the data life cycle. Data
decisions and supporting their life cycle management involves planning and
achievement of strategic designing for reliable and high-quality data,
objectives. establishing processes through which data can be
enabled for use and then maintained, and using the
data for various analyses to enhance their value.
A data management framework plays a pivotal role

Climate-related data are associated with diverse
in eliminating or mitigating the potential risks arising
challenges, namely, availability and quality issues
from the insufficient data management mentioned
(reliability and transparency, comparability, and
above. The data management framework includes
complexity), making it necessary to establish a
four key elements: (1) data governance, (2) data life
44
Our data management framework references the framework in DAMA (2017), which is one of the commonly referred data management frameworks.
Our framework is further revised to better suit the context of climate-related data management.

Figure 2.2: Data management framework
Data governance
Data life cycle management
Collection Storage Usage Archival Deletion
Chapter 2
Metadata management
Data quality management
Source: DAMA (2017) and HKIMR staff compilation.
programme of data life cycle management that accessed, integrated, analysed, and maintained
facilitates data creation, integration and interoperability, effectively across the organisation.
usage and documentation, and data warehousing. For
instance, financial institutions may formulate plans to Because data play an increasingly pivotal role in
enhance the data collection process by strengthening financial institutions’ business decision-making
their engagement with clients to develop a better processes, metadata management is integral to
understanding of the impacts of climate-related risks enhancing the consistency and trustworthiness of
on the clients’ business and obtaining an increased the data and improving the efficiency of business
amount of climate-related or environmental information operations. For instance, because climate-related
from the clients.45 data are usually multi-sourced and may have
different formats or degrees of granularity, metadata
Metadata management management enables organisations to learn about
the data’s context to use them appropriately and
Metadata are data about data. Metadata help an assess their availability, quality, and usability.
organisation understand the information underlying Financial institutions are advised to define a
data, including information about the content and metadata strategy that is clearly defined and aligned
context of data (e.g., the title and creator), physical with the business’s goals and vision, adopt metadata
structure (e.g., the file format), and information used standards to ensure the proper use of data, and
to manage data (e.g., the method and time they were select appropriate metadata tools based on business
created). Metadata management involves establishing goals and the technology infrastructure.
policies and processes that ensure that data can be
45
HKMA (2021a).
Data quality management enhance the quality of the data and extract their
maximum value. In addition to climate-related data,
Data quality management can be defined as a set of models are another key element in producing
practices undertaken by a data manager or a data desirable outputs for financial institutions’ decision
organisation to maintain high-quality information to making related to climate risk. A framework that
assure that it is fit for consumption and meets the provides guidance for model usage and alleviates
needs of data consumers. Robust and efficient data relevant risks is integral to financial institutions’ overall
quality management encompasses several key risk management. The commonly used methods in
elements, including developing and establishing data climate risk measurement include climate risk
quality and compliance policies and standards, indicators and scenario-based methods, the latter of
identifying and coordinating the involvement and which encompass stress testing and sensitivity
Chapter 2
efforts of relevant staff, reporting and sharing data analysis.48 Regardless of the complexity level of the
quality assessment results with relevant staff, and models, financial institutions may be subject to model
identifying opportunities to improve data quality. risks, which refer to the risk of errors in the process
of developing, implementing, or using climate risk
Financial institutions that rely on low-quality climate- models.
related data may not only incorrectly assess their
exposure to climate risk, leading to biased and
incomplete business decisions, but also damage their A robust and comprehensive
reputation and lose revenue and customers. Certain model-risk framework is helpful
dimensions can be utilised to assess data quality.
Although there is not a one-size-fits-all set of data
in identifying, managing, and
quality dimensions, the options have some controlling the potential risks
commonalities. Dimensions focus on whether there stemming from inappropriate
are enough data (completeness), whether they are climate-related models,
correct (accuracy, validity), how well they fit together technical errors, and incorrect
(consistency, integrity, uniqueness), and whether they model usage.
are up to date (timeliness), accessible, usable, and
secure.46 Because it is not uncommon for financial
institutions to source some climate-related data from
The sources of model risks may stem from
external consultants or vendors, they should have an
inappropriate climate-related models, technical
appropriate process to assess the quality and reliability
errors, and incorrect model usage. First, financial
of data products or services. For instance, they may
institutions may use incorrect models that make
seek to understand data coverage, data sources, key
unrealistic or unwarranted assumptions about
assumptions, and limitations.47
climate risk or omit climate risk factors that are
important to their business and operations, such as
2.2. MODEL-RISK MANAGEMENT the linkage of rising temperatures and physical
FRAMEWORK climate events, the interaction and feedback loop
between climate change and corresponding policies,
and the actual influence of climate change on
The data governance framework specifies the
various economic sectors. Second, technical errors
principles and procedures that financial institutions
may result from poor management and control of
can follow in dealing with climate-related data to
climate-related data collection, input, model design,
46
DAMA (2017).
47
HKMA (2021a).
48
A detailed description of these methods can be found in AGCB-HKIMR (2022)

implementation, and validation. Such errors can also Organisation and governance
be caused by staff members lacking the necessary
competence to rigorously and promptly monitor Effective oversight of climate risk models by the board
climate risk models, especially given that climate- and senior management provides assurance that
related work usually requires multi-disciplinary model risks are evaluated at a sufficiently senior level
background and knowledge. Third, incorrect model and provides a foundation for internal controls. Firms
usage may come from management’s limited can establish a model inventory as a centralised model
knowledge of climate risk and inappropriate governance system to manage the various models in
decisions due to their failure to fully understand the use, including climate risk models. Inventory is used
model results. The outputs of non-comparable to identify, track, and document model usage and to
climate risk models may be compared, leading to regularly review models.
Chapter 2
meaningless conclusions.49
To reduce model risks resulting from an opaque process
A robust and comprehensible framework will be of model design and development, unclear lines of
helpful in identifying, managing, and controlling the authority and responsibility, or an absence of thorough
potential model risks described above. The main documentation and instructions for handover
blocks of such a model-risk management framework procedures, firms are advised to provide a clear
include (1) organisation and governance, (2) model explanation of the roles and duties of model developers,
standards, (3) model validation and monitoring, and owners, reviewers, and internal auditors, along with
(4) the model-risk management culture (Figure 2.3).50 policies and guidelines covering all of the procedures
and components of model-risk management.51
Figure 2.3: Model-risk management framework
Organisation
and governance
Model standards
Model validation
and monitoring Model-risk
management
culture
Source: Deloitte (2020), KPMG (2019) and HKIMR staff compilation.
49
Deloitte (2020).
50
Deloitte (2020), KPMG (2019).
51
KPMG (2016).
Model standards models before they are put into use can identify
model errors in a timely manner. For climate risk
Establishing standards for the full workflow of a models that are still in their infancy, the basic setup
climate risk model – from definition, development, of the model can be reviewed, the reasonableness
commissioning, review, validation, and approval to of the climate scenarios can be assessed, and the
application, realignment, and documentation – helps reliability and comparability of the results across
ensure transparency and rule-based rigor throughout scenarios and analytical methods can be checked.
the model’s life cycle. These standards enable The process and output of the model also need to
companies to fully meet compliance requirements or be monitored on an ongoing basis so that the
to leverage industry best practices. Detailed standards company can respond quickly and appropriately to
and documentation also allow internal and external address the issues and deficiencies identified in the
Chapter 2
experts to independently validate models. A model.

standardised model output report can clearly display
the model’s inputs, assumptions, and outputs and can Model-risk management culture
explain the model’s limitations so that senior
management can make informed decisions. The defence structure, consisting of the model’s
owner, independent compliance, and the internal
Model validation and monitoring auditor, provides a systematic approach to model-risk
management through a clear hierarchy of tasks. In
Because of the immaturity of climate risk models, addition to the general monitoring described above,
which lack historical data and standards for model the involvement of the internal auditor can further
validation, financial institutions may choose to use improve the quality of model-risk monitoring and
statistical model setups that are inappropriate for ensure that related activities are compliant and
the complex interrelationships between factors and functionally effective. Good communication and
result in anomalous model results.52 Climate-related collaboration between the three lines of defence can
models placing an undue emphasis on historical data promote greater understanding of model use and its
and insufficiently accounting for forward-looking impacts, eliminate potential conflicts of interest or
information may lead financial institutions to incompatible responsibilities, transform the
underestimate the impacts of climate risk, particularly governance mindset, and embed model-risk
transition risk.53 For financial institutions relying on management into the organisation’s culture.
climate risk models provided by third parties,
mismatches and non-applicability of the black-box Although a model-risk management framework does
models to their business models also pose risks. not necessarily mean that financial institutions can be
Because of the lack of standards in model usage, the immune from all of the risks embedded in models, it
relevant assumptions, and the data inputs in the is useful to decrease the risk of errors in the process
industry, the outputs across sectors, firms, and even of developing, implementing, and using climate risk
within the same firm are occasionally non- models. In addition, the framework can help financial
comparable. institutions more accurately evaluate their exposure
to climate risk and to make business decisions that
An independent and competent team using a adapt their strategy to various environmental
customised approach to testing and validating conditions.
52
HKMA (2021b).
53
MAS (2022).

Chapter 3
Climate Risk Measurement in Hong Kong’s
Financial Services Industry
Market views on status quo, challenges, and future
plans
HIGHLIGHTS:
• The key drivers of surveyed financial institutions’ climate risk measurement
comprised policy developments and compliance, industry trends and
stakeholders’ demand, reputation improvement, strategic imperatives, and
overall risk management.
• Most financial institutions considered the measurement of both physical and

transition risks to be relevant to their business and operations, with
approximately 77% of the survey respondents measuring both risks.
• Challenges remain in climate risk measurement, including the availability of

climate-related data, data quality issues (reliability and transparency,
comparability, and complexity), and the lack of standardised and consistent
measurement methodologies.
• 76% of the survey respondents have planned to allocate similar or more

resources to climate risk measurement in the next 12 months compared with
the last 12 months, signalling the industry’s interest in making progress.
Chapter 3: Climate Risk Measurement in Hong Kong’s Financial Services Industry
Market participants’ insights are integral to learning stakeholders’ demand (Figure 3.1). Other important
about the financial services industry’s experience and considerations included reputation improvement,
pain points in the area of climate risk measurement. strategic imperatives, and overall risk management.
To collect relevant information from local market The interviewees’ responses echo these survey
participants, the HKIMR commissioned a survey results.
entitled Climate risk measurement: Existing experience
and data issues in Hong Kong’s financial services Policy developments and compliance goals were
industry (hereinafter, the Climate Risk Measurement cited as the top drivers of climate risk measurement,
Survey) from July to August 2022. Survey with 88% of the surveyed financial institutions
questionnaires were sent to market participants across aiming to align their practices with policy
financial sectors in Hong Kong, including banks, developments and 70% seeking to comply with
insurers, and asset managers, and some of the requirements involving climate-related disclosures.
participants were also involved in provision of Financial regulators in Hong Kong have issued
pension-related services. In addition, some banks, guidelines on climate risk management.54, 55, 56 In
insurers, and asset managers were invited to attend November 2021, the Stock Exchange of Hong Kong
interviews to share their in-depth insights on this Limited (HKEX) published its Guidance on Climate
topic. The following sections of this chapter present Disclosures to facilitate TCFD-aligned57 reporting.
the key findings of the survey and interviews. Furthermore, the Green and Sustainable Finance
Cross-Agency Steering Group (CASG)58 announced
Chapter 3
3.1. DRIVERS OF FINANCIAL plans to impose mandatory TCFD-aligned climate-

related disclosures by 2025. The SFC and the HKEX
INSTITUTIONS’ CLIMATE RISK are evaluating a climate-first approach to implement
MEASUREMENT the ISSB standards for Hong Kong listed companies.59
The survey results show that more than half of the Following industry trends and meeting stakeholders’
surveyed financial institutions have measured climate demand were additional drivers of climate risk
risk (53%). The key drivers reported by these measurement, suggested by 73% and 64%,
financial institutions comprised policy developments respectively, of the survey respondents. International
and compliance, along with industry trends and clients – especially clients from jurisdictions where
54
In December 2021, the HKMA announced its supervisory expectations for authorised institutions to incorporate climate risk considerations into their
strategies and frameworks in Supervisory Policy Manual Module GS-1, titled ‘Climate Risk Management’. The HKMA also issued a circular to provide
the industry with information about sound practices that support the transition to carbon neutrality, and it completed a pilot climate risk stress test
exercise to assess the climate resilience of the banking sector.
55
In August 2021, the SFC issued its Consultation Conclusions on the Management and Disclosure of Climate-related Risks by Fund Managers and
amended its Fund Manager Code of Conduct (FMCC) to require fund managers managing collective investment schemes to consider climate-related
risks in their investment and risk management processes and to make appropriate disclosures.
56
In November 2021, the MPFA issued the Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds
which laid down a high level framework to MPF trustees in integrating ESG factors into the investment and risk management processes of MPF funds
and making relevant disclosures to MPF scheme members.
57
TCFD refers to the Task Force on Climate-Related Financial Disclosures, which was created by the Financial Stability Board (FSB) in 2015. In 2017, the
TCFD released climate-related ﬁnancial disclosure recommendations designed to help companies provide better information to support informed capital
allocation.
58
The CASG was co-created by the HKMA and the SFC together with other public organisations, including the Insurance Authority and the MPFA. The
CASG aims to co-ordinate the management of climate and environmental risks in the financial sector, accelerate the growth of green and sustainable
finance in Hong Kong, and support the government’s climate strategies.
59
For more detail, please refer to the website here: https://www.info.gov.hk/gia/general/202206/21/P2022062100307p.htm.

Figure 3.1: Climate risk measurement: Key drivers
Align with policy developments 88%
Follow international trends in the industry 73%
Comply with requirements on climate-related disclosures 70%
Meet the expectations of stakeholders 64%
Improve the institution’s reputation 63%
Facilitate the institution’s strategic planning 43%
Facilitate the institution’s risk management 41%
Other 5%
Chapter 3
Source: HKIMR staff calculations based on the Climate Risk Measurement Survey.
sustainability is an established concept – were cited More than 40% of the surveyed financial institutions
as demanding more sustainable investment strategies viewed climate risk as a material risk that needs to be
and products. Increasing demand of investors and incorporated into the overall risk management
customers means that banks, insurers, and asset framework. Although different institutions may have
managers need to incorporate their capabilities of adopted varying approaches – from treating climate
addressing climate risk as part of their product and risk as an independent risk type to treating it as a
service offerings to remain competitive, meet transverse risk across the organisation, most of the
c u s t o m e r n e e d s , a n d c a p t u re t h e g ro w t h surveyed financial institutions were embedding climate
opportunities provided by emerging trends. risk into their current risk taxonomies, risk management
frameworks, and enterprise management systems.
Building on investor and customer sentiments, many
survey respondents deemed that measuring climate
risk could improve the institution’s reputation and The key drivers of financial
facilitate its strategic planning. ESG is the core of institutions’ climate risk
many institutions’ strategic goals, including net zero measurement included policy
commitments and transition plans. The transparent
communication and measurable execution of an
developments and compliance,
institution’s climate risk strategy is now key for industry trends and stakeholders’
financial institutions that wish to maintain a good demand, reputation improvement,
reputation in the competitive market. Several strategic imperatives, and risk
interviewees were proactively striving to become management.
industry leaders through their ESG strategies.
A growing number of financial institutions have 3.2. THE MEASUREMENT OF

realised the adverse impacts of climate risk on their
financial risks. The survey results show that most of PHYSICAL AND TRANSITION
the respondents deemed operational risk, credit risk, RISKS AMONG FINANCIAL
and market risk to be influenced by climate risk, with INSTITUTIONS
varying degrees of impacts from physical risk and
transition risk (Figure 3.2). 60 A majority of the Regarding the focus on physical and transition risks,
respondents (73%) agreed that physical risk has approximately 77% of the surveyed financial institutions
strong impacts on operational risk, likely because of measured both physical and transition risks, about
its impacts on physical assets and business continuity. 20% measured transition risk only, and more than 3%
Transition risk were considered exerting considerable measured physical risk only (Figure 3.3). This indicates
impacts on market risk and credit risk, as suggested that a majority of financial institutions considered the
by 76% and 66%, respectively, of the respondents, measurement of both physical risk and transition risk
likely because market sentiments and capital to be relevant to their business and operations and
allocation are expected to shift with the transition to were implementing strategies to measure the associated
a low-carbon economy. With the broad impacts of impacts of both risks.
climate risk becoming clearer to the market, some
survey respondents saw climate change as a source
of both risks and opportunities for their businesses. Some financial institutions have
Chapter 3
According to several of the interviewees, more

limited awareness about rarely
research needs to be done to provide them with a
better understanding of the impacts of climate risk
occurred events, and insufficient
on their business and operations. knowledge and resources with
which to measure the impacts of
Figure 3.2: Financial risks most affected by physical risk on their business
climate risk: Views of survey respondents and operations.
76%
73%
71% Overall, there was a stronger emphasis on transition
66% risk than physical risk. The interviewees expressed two
64% 64% likely reasons for this. First, financial institutions may
not only pledge to meet net zero commitments in
their operations but may also help their clients in
achieving low-carbon transitions through their role in
Operational Credit Market financed emissions.61 Accordingly, it is crucial for them
risk risk risk to understand the impacts of transition risk on the
portfolios. For example, banks need to understand
Impacts of physical risk Impacts of transition risk
their customers’ transition plans so that they can
provide appropriate support (e.g., financing
Source: HKIMR staff calculations based on the Climate Risk Measurement
Survey.
60
The channels through which physical risk and transition risk exert influence on financial risks may be different. To give a concrete example, impacts of
physical risk on operational risk (e.g., severe weather events disrupting an institution's operability); on credit risk (e.g., devaluation of properties leading
to increased default probabilities); on market risk (e.g., higher stock market volatility due to intensifying physical hazards). Impacts of transition risk on
operational risk (e.g., increased cost of utilising renewable resources); on credit risk (e.g., high default probability for carbon-intensive firms); on market
risk (e.g., changes in climate policy leading to abrupt repricing of financial assets).
61
Financed emissions are emissions generated as a result of financial services, investments, and lending by the investors and companies that provide
financial services.

sustainable projects through green loans). For asset understand the relationship between physical risk
managers, a good knowledge of how transition risk and human health, which may imply that in the
can impact their investment portfolios may influence future, life and health insurers will increase their
their engagement strategy with stakeholders so that emphasis on physical risk.
they can align that strategy with the stakeholders’
net zero ambitions. Second, some financial institutions The top four physical risk measured by the survey
have limited awareness about rarely occurred events,62 respondents across the three sectors were consistent,
and insufficient knowledge and resources (e.g., including global concerned increasing temperatures,
limited physical risk data) with which to measure the and the material physical risk related to Hong Kong’s
impacts of physical risk on their business and climate – tropical cyclones, extreme precipitation and
operations. flooding, and rising sea levels (Figure 3.4). It’s worth
noting that the risk of tropical cyclones was covered
Figure 3.3: The measurement of the two by 100% of the surveyed insurers that measured
types of climate risk among financial physical risk. This is consistent with the interviewees’
institutions view that tropical cyclones are a key physical risk in
Hong Kong, especially for property and casualty
(P&C) insurers, given their significant impacts on
commercial properties and the economy. The
20% transition risk related to policy developments,
Chapter 3
consumer and investor preference changes, and
3%
technology developments were all cited as important
considerations by a great majority of the surveyed
financial institutions across the three sectors.
77%
The survey also asked financial institutions about the
impacts of climate risk on their pension-related
Both physical risk and transition risk services, given that the investment horizon of MPF
funds stretches over several decades, making them
Only transition risk Only physical risk
vulnerable to long-term investment risks. Climate
risk is among those evolving long-term investment
Source: HKIMR staff calculations based on the Climate Risk Measurement
Survey.
risks that should be taken into account in the
investment and risk management processes. The
Notably, physical risk was a focus of general survey results show that 65% of the respondents
insurance underwriting and real estate investment either took climate risk into account to some extent
firms, as stated by several interviewees. For general or planned to take it into account when providing
insurers, measuring physical risk is integral to their pension-related services, and the rest did not yet
underwriting business, along with the coverage and have a plan or believed that it was too soon to arrive
premium they can offer to policyholders, which at a conclusion. These responses indicate that
impacts their liabilities. From the perspective of although there is overall good appetite for climate
investment firms, physical risk can adversely impact risk measurement within the industry, there is still
the value of their real estate portfolios. Some insurers room for greater engagement among market
stated that more research is needed to better participants.
62
This phenomenon may be related to agents’ rational inattention to rare events, as proposed by Mackowiak
’ and Wiederholt (2018).
Of the pension services providers, 45% indicated that companies, with each being selected by more than
it was too soon to decide whether physical or half of the respondents (Figure 3.4). Because no data
transition risk would have a larger impacts on their source provides a complete coverage of climate-
businesses, indicating that more research and related data, 79% of the surveyed financial institutions
guidance may be required. Another 40% of the relied on more than one data source. Banks deviated
respondents63 expected transition risk to exert a larger from insurers and asset managers in utilising more
or similar impacts, which is aligned with the fact that information collected from clients, as suggested by
transition risk is covered by more market participants 50% of the banks. Based on the interviews, some
because of their role in financed emissions. Some banks collected client data as part of their on-
interviewees stated that physical risk was not yet a boarding and risk assessment process and to facilitate
short-term risk to consider in their business and their support for their clients’ efforts to achieve net
operations. zero transition.
3.3. DATA AND METHODS ADOPTED On the methodology side, climate risk indicators
were widely used by the surveyed financial institutions
IN CLIMATE RISK to measure both physical risk and transition risk.
MEASUREMENT Figure 3.5 shows the top three indicators adopted
by the survey respondents to measure physical and
Data and methods comprise the basic elements that transition risks respectively. The most widely used
Chapter 3
financial institutions utilise to produce outputs of physical risk indicators include attributes of physical
climate risk measurement, such as their exposure to assets (e.g., location and age of assets), damage and
specific types of climate risk. On the data side, the losses induced by physical hazards, and characteristics
surveyed financial institutions commonly used third- of climate and weather events (e.g., frequency and
party providers (private and/or public data providers), severity of natural disasters).
internal proprietary data, and public disclosures by
Figure 3.4: Data sources used to measure climate risk
66% 66% 64%

59%
38%
7%
Private data Public data Internal Public disclosures Information Other

providers providers proprietary by companies collected
data from clients
63
This includes 33% of banks, 75% of insurers, and 30% of asset managers that responded to this question.

Figure 3.5: Common indicators to measure physical and transition risks
Physical risk Transition risk
Attributes of Carbon emission

physical assets CO2 and pricing
indicators
ESG
Damage and losses ESG ratings
induced by physical and scores
hazards
Characteristics of Energy usage

climate and weather indicators
events
Chapter 3
Source: HKIMR staff calculations based on the Climate Risk Measurement Survey.:
The three most commonly used indicators to measure the FMCC issued by the SFC required fund managers
transition risk among the survey respondents comprise to accelerate their assessment and disclosures of
carbon emission and pricing indicators (e.g., Scopes climate risk, particularly GHG emissions. Compliance
1, 2, and 3 of greenhouse gas (GHG) emissions64 and with these initiatives and regulatory requirements may
carbon taxes), ESG ratings and scores, and energy have led to increased use of carbon emissions and
usage indicators (e.g., the ratio of fossil fuel to pricing metrics by banks and asset managers.
renewable energy usage). It is noteworthy from the
survey results that a slightly higher percentage of Some banks and asset managers mentioned in the
surveyed banks and asset managers used carbon interviews that they have developed client-level and
emission and pricing indicators than ESG ratings and portfolio-level climate assessment frameworks based
scores, while the opposite condition held true for on ESG or climate checklists, and utilised metrics
surveyed insurers. This is likely because carbon that are closely linked to their business practices.
emission and pricing indicators are central to Such metrics include carbon value at risk, which
international initiatives and regulatory requirements measures the impacts of rising carbon costs on a
for banks and asset managers. For instance, several company’s profitability, and emission reductions,
banks indicated that they were grappling with which account for the impacts of a company’s
disclosing under the TCFD framework, with GHG mitigating plans. Several institutions were reported
emissions being one of the most important metrics. to align with the Science Based Targets initiative
Some of the interviewed asset managers noted that (SBTi), which enable firms to set science-based
64
Greenhouse gas emissions are categorised into three groups, or ‘Scopes’, by the most widely used international accounting tool, the Greenhouse Gas
Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of the purchased
electricity, steam, heating, and cooling consumed by the reporting company. Scope 3 includes all of the other indirect emissions that occur in a company’s
value chain.
emissions reduction targets. Advanced practices incorporate firm-specific conditions into the model
disclosed by interviewees included adopting the (Figure 3.6). Scenario analyses through third-party
CDP-WWF temperature rating methodology, which services, regulatory initiatives (e.g., HKMA climate risk
is an open source methodology that can be applied stress test), and public tools were also utilised by a
at the level of an individual emissions target, a considerable number of financial institutions. The
company, or an investment portfolio, and can assess survey and interview participants also indicated that
the ambition of any public GHG emission reduction their usage of proprietary and third-party tools
target. depended on their institutions’ expertise level in
climate risk measurement and the resources at hand.
Some respondents stated that their choice of The respondents stated that they were exploring the
indicators also depended on the methods and best way to conduct scenario analyses given the lack
scenarios in use, along with the relevance of the data of standardisation in the industry.66
items to the underlying assets. The survey and
interview respondents underscored standardisation The most commonly used scenario-based methods
and guidance from regulators as important for across the three sectors were scenario analysis and
measuring, disclosing, and using these indicators. stress testing, as suggested by 85% and 71%,
respectively, of the survey respondents. Catastrophe
Moreover, 61% of the survey respondents that were modelling67 was applied by a substantial majority of
measuring climate risk also conducted scenario-based insurers (83%), which is especially applicable to
Chapter 3
analyses. Of the survey respondents, 77% conducted analysing physical risk in the insurance industry and
scenario analyses through in-house modelling,65 the potential usage of which by banks and asset
which is more resource-demanding but can better managers can be explored.68
Figure 3.6: Methods used by financial institutions to conduct scenario analyses
77%
47%
35% 32%
3%
In-house modelling Third-party services Regulatory initiatives Public tools Other
65
In-house modelling was the most commonly adopted method across the three sectors.
66
For example, whereas HKMA GS-1 provides suggestions for AIs to conduct scenario analysis and stress testing, AIs need to determine scenarios and
time horizons based on their business model and risk profile.
67
Catastrophe modelling is the process of using computer-assisted calculations to estimate the losses that might be sustained due to a catastrophic event
such as a hurricane or earthquake.
68
For more details, please refer to Box 4.1 in Chapter 4 of this report.

3.4. REMAINING CHALLENGES: The availability of climate-related data was most

often cited (68%) as a major challenge by the
DATA, METHODS, AND OTHER surveyed financial institutions (Figure 3.7). The
ISSUES survey respondents stated that it is difficult for them
to locate sources of desirable data or to obtain data
Although financial institutions can leverage various from various data sources simply because some
resources to measure climate risk, challenges remain. climate-related data are not captured by the
The challenges most cited by the surveyed financial appropriate entities (e.g., climate targets and
institutions involved the availability of climate-related adaptive capacity). The currently available data was
data, data quality issues (reliability and transparency, cited as far too limited in its coverage (e.g., across
comparability, and complexity), and the availability of geographic regions, sectors, and asset classes),
standardised and consistent methodologies. depth, and granularity to meet institutional
requirements. The high cost of data services posed
another challenge for financial institutions, especially
The challenges most cited by the small and medium-sized enterprises with limited
surveyed financial institutions budgets and resources.
involved the availability of
Issues associated with the availability of standardised
climate-related data, data quality
and consistent measurement methodologies were
Chapter 3
issues, and the lack of considered another major challenge, as suggested
standardised and consistent by approximately 60% of the survey participants.
methodologies. Whereas public and private providers offered some
solutions to help address climate risk, financial
Figure 3.7: Climate risk measurement: Major challenges
Availability of climate-related data 68%
Lack of standardised and consistent methodologies 59%
Reliability and transparency of climate-related data 41%
Complexity of climate-related data 39%
Comparability of climate-related data 39%
Identification of climate-related risk 27%
Lack of expertise 25%
Other 2%
institutions found it difficult to identify desirable In addition, the survey respondents across the three
tools and methods because of a lack of standards sectors indicated that they experienced additional
for selecting and determining the robustness and challenges when engaging in cross-boundary and
usefulness of models. Even when there were international activities. These challenges mainly
methods available, the survey respondents stated concerned a lack of consistency across jurisdictions
that they often lacked relevant knowledge and in data definition and taxonomy, data quality, and
background for a good understanding and use of regulatory frameworks and guidance. These
those methods. Moreover, current methodologies responses align with the challenges voiced by the
w e re d e e m e d i n a p p ro p r i a t e t o m o d e l t h e interviewees related to regulatory fragmentation and
characteristics of climate risk, such as its nonlinearity development gaps across jurisdictions.
and uncertainty.
3.5. FUTURE PLANS: INCREASING
The quality issues associated with climate-related data
(i.e., reliability and transparency, complexity, and
INTEREST IN ADVANCING
comparability) were also regarded as key challenges, CLIMATE RISK MEASUREMENT
as suggested by approximately 40% of the survey
participants. Climate-related data were often With the varying incentives and challenges in the
regarded as unreliable because of a lack of consistency path of climate risk measurement, there are some
in definitions and standards, along with insufficient encouraging signs of the industry’s appetite for
Chapter 3
disclosures of data collection or integration processes. progress. Of the survey respondents, 76% planned
These challenges also contributed to the problem of to allocate similar or more resources to climate risk
non-comparability when data were obtained from measurement in the next 12 months compared with
different geographical areas and industries or with the last 12 months, as indicated by 91% of the
disparate estimation methods. In addition, the respondents that were measuring climate risk and
complexity of climate-related data posed challenges 60% of those that were not. The allocation plans
for financial institutions, given that such data should demonstrated a split across financial institutions in
reflect the characteristics of climate risk and require different sectors and of different sizes. The
extensive work to be processed. One method that respondents that planned to invest similar or more
financial institutions can consider is to establish a resources included 84% of banks, 71% of insurers,
robust data management framework that provides and 74% of asset managers. The banks’ more
high-level guidance to help improve the quality of proactive approach may be related to recent policy
climate-related data, which was discussed in our developments and stakeholder demand.
Chapter 2.
The identification of climate-related risk and a lack There are encouraging signs of
of expertise were considered two additional major the industry’s interest in
challenges, although they were identified by advancing their climate risk
relatively fewer survey respondents. Financial measurement efforts, with 76%
institutions encountered challenges in determining
the relevance and materiality of climate risk to their
of the survey respondents
business and quantifying their exposure to climate planning to allocate similar or
risk. The question of how to integrate climate risk more resources in the next 12
into the existing risk management framework months.
presented another challenge. Financial institutions
also stated that there was a lack of talent with cross-
disciplinary backgrounds because of a lack of In the near future, we can expect noticeable
professional qualifications and training programmes. advances in climate risk measurement. Our survey

results show that 80% of the survey respondents simply leveraged their headquarters’ work and
who were not measuring climate risk planned to do resources when measuring climate risk. In addition,
so in the future, with 45% intending to measure in some respondents, mainly institutions with a large
the next two years, 30% in the next two to three amount of assets under management, planned to
years, and the rest in more than three years. recruit new employees with relevant expertise in
climate risk. The relatively lower percentage of
The survey respondents were asked about their respondents considering this option may be related
climate risk measurement strategies for the next 12 to the current talent and knowledge gaps in the local
months. Aligning with policy developments was the market.
most widely adopted strategy, suggested by
approximately 60% of the survey participants (Figure A majority of financial institutions are now measuring
3.8). Resourcing also appeared to be among the top climate risk, and many more are making plans to do
considerations, with both upskilling the current so. However, significant challenges remain in
workforce and leveraging third-party resources financial institutions’ climate risk measurement,
selected by approximately 40% of the surveyed which mainly focus on the data and methodologies.
financial institutions. Given that work related to Because of the unique nature of their business,
climate risk requires multi-disciplinary knowledge, insurers, especially P&C insurers, have established
both upskilling the existing workforce and leveraging experience in measuring the impacts of climate risk,
the expertise of third parties can serve as effective especially natural hazards. In the next chapter, we
Chapter 3
solutions. Following instructions from headquarters perform a deep dive into insurers’ experience in
was another approach, which one-third of the measuring climate risk and explore its potential
respondents intended to try, as many institutions insights for banks and asset managers.
Figure 3.8: Strategies for climate risk measurement in the next 12 months
Align with policy developments 59%
Enhance the skills of the current workforce 41%
Leverage third-party resources 40%
Follow instructions from headquarters 33%
Maintain current policies and procedures 23%
Recruit new employees with relevant expertise 12%
No specific plan at the current stage 11%
Other 2%
Chapter 4
Leveraging Insurers’ Experience
Practices and key insights
HIGHLIGHTS:
• Because of the unique nature of the insurance industry, climate risk can have
concrete and all-encompassing impacts on insurers’ business and operations
by influencing both the asset and liability sides of their balance sheets.
• Insurers have established experience in climate risk measurement, which

provides insights for other sectors of the financial services industry. They include
enhancing the understanding of climate risk, broadening climate risk coverage,
improving data management, strengthening the application of advanced
methodologies, and facilitating the good usage of measurement outputs.
• Insurers routinely adopt natural catastrophe models to assess how natural

catastrophes affect their underwriting business. These models are likely to
become powerful tools for banks and asset managers in climate risk measurement.
Chapter 4: Leveraging Insurers’ Experience
One of the key barriers that hinders financial implementing measurement methodologies, and
institutions from measuring climate risk is the lack make good use of measurement outputs for business
of relevant knowledge, expertise, and resources, development.
such as the selection and usage of climate-related
data and methodologies. Because of the unique Long-term experience
business nature of underwriting, insurers have long-
standing experience in climate risk measurement, The Climate Risk Measurement Survey asked financial
especially related to natural catastrophes. This institutions when they began to measure climate risk.
observation is supported by the evidence from our The survey results indicate that insurers had long-term
survey and interviews, which illustrates the advanced experience with climate risk measurement, with more
expertise of insurers in climate risk measurement in than half of insurers (57%) beginning more than two
diverse aspects. Leveraging the extensive experience years ago, as opposed to a smaller portion of banks
of the insurance sector can be conducive to and asset managers (20%) (Figure 4.1). Some insurers
enhancing the climate risk measurement of other mentioned that they already embed climate risk in
sectors of the financial services industry. To this end, their overall risk management framework and
this chapter discusses the experience of insurers in perform data collection, processing, and model
climate risk measurement, introduces the models estimation for climate risk measurement on a regular
that are routinely adopted by insurers, and explores basis.
insights for other sectors of the financial services
industry. Considering that a majority of financial institutions
accelerated their pace of climate risk measurement
4.1. THE INSURANCE SECTOR AND within the past two years amidst developments in
policies and investor preferences, insurers may have
CLIMATE RISK MEASUREMENT had additional motivations to begin climate risk
measurement earlier than other institutions. The
Insurers have been measuring climate risk longer than
insurers in the survey and interviews believed that
other sectors of the financial services industry and
climate change might have crucial impacts on their
Chapter 4
have accumulated considerable experience in this
strategic planning and risk management. This belief
field. They monitor a wide range of risks, utilise broad
is largely attributable to the unique business nature
sources of data, possess advanced expertise in
of insurers in providing insurance products and
Figure 4.1: Financial institutions’ experience with climate risk measurement
Within the past 2 years 43% 80%
More than 2 years ago 57% 20%
Insurers Banks and asset managers
Source: HKIMR staff compilation based on the Climate Risk Measurement Survey.
services related to climate change, particularly natural Figure 4.2: Sources of physical risk that are
catastrophes, which were highlighted by many of the covered by financial institutions
interviewees. There are some estimates that the total Asset
Insurers Banks
economic losses caused by natural catastrophes have managers
surged in the past few decades, as climate change
Increasing temperatures
have intensified and the percentage of insured losses
to total losses has more than doubled.69 This suggests
Rising sea levels
the fundamental role played by the insurance industry
in reducing the negative impacts of climate change Extreme precipitation and
on other entities and implies that climate change can flooding
pose significant threats to insurers’ business and
Tropical cyclones
operations.
Wildfires
Risk coverage
In general, insurers monitor a broader range of Droughts
physical risk than banks and asset managers. More

than half of insurers considered the physical hazards Landslides
with the highest frequency or intensity both globally Heat waves and cold
and in Hong Kong, including tropical cyclones, rising snaps
temperatures, extreme precipitation and flooding,
Note: A darker color indicates that it is selected by a higher percentage of
rising sea levels, wildfires, and landslides (Figure 4.2). the survey respondents.
These sources of risk are the most likely to be insured Source: HKIMR staff compilation based on the Climate Risk Measurement
against through certain insurance products. Survey.
Figure 4.3: Impacts of physical risk on financial risks viewed by financial institutions
Chapter 4
Reputation risk
100%
Credit risk Legal risk
50%
Market risk 0% Strategic risk
Liquidity risk Operational risk
Underwriting risk
Insurers Banks and asset managers
69
See, for example, the estimate based on the data collected from Swiss Re’s Sigma Explorer, at https://www.sigma-explorer.com/index.html.

Climate risk affects both the asset and liability sides paying higher-than-expected insurance claims, which
of insurers’ balance sheets. On the asset side, climate mainly impact the liability side of insurers’ balance
risk may result in the devaluation of assets held by sheets.
insurers, similar to its impacts on banks and asset
managers. On the liability side, the degradation of It is notable that operational risk was considered to
climate conditions may lead to unexpectedly high influence financial risks by a higher ratio of banks
insurance claim pay-outs. Surveyed insurers were and asset managers than insures, driven mainly by
more likely than other financial institutions to perceive banks. This is likely related to the discrepancy of
that physical risk can have comprehensive effects on business nature across sectors, as banks appear to
their business and operations (Figure 4.3). They rely more on physical operations than asset managers
identified market risk, underwriting risk, and credit and insurers and thus are more vulnerable to physical
risk as the top three financial risks affected by physical hazards.
risk.70 Market risk refers to the uncertainty associated
with investment losses caused by unfavourable price Physical risk is usually considered more relevant to
changes, and credit risk refers to the uncertainty P&C insurers that provide insurance against adverse
arising from borrowers’ inability to repay loans. Both events than to other types of insurers. However, our
of these risks affect the asset side of insurers’ balance survey results show that life and health insurers also
sheets. Underwriting risk refers to the uncertainty of examined the effects of climate change on human
Figure 4.4: Data categories used for measuring physical risk
68%
Attributes of physical assets 83%
58%
Characteristics of climate and weather events 83%
Chapter 4
66%
Damage and losses induced by physical hazards
67%
39%
Insurance costs and claims related to physical hazards 67%
34%
Vulnerability and mitigation/adaptation measures adopted 67%
32%
Ability to recover from physical hazards
33%
32%
Value chain exposures 33%
8%
Other 17%
Banks and asset managers Insurers
70
AGCB-HKIMR (2022) provides a detailed discussion of how climate risk translates into different sources of financial risks.
health and the resulting impacts on their business across the three sectors (public and private data
and operations. For instance, the top climate-related providers along with internal proprietary data),
factors that were regarded as relevant to human insurers on average adopted more varying sources of
health included extreme heat-related illnesses and data than banks and asset managers. Three important
severe weather events, as suggested by 62% and implications emerge from the interview findings. First,
46% of life and health insurers, respectively. As it is occasionally necessary to integrate data from
indicated by the interviewees, research in this field different sources. For example, to convert addresses
is still at an early stage, and further study is needed into latitude and longitude coordinates, an insurer
to better understand how climate change impacts used both public data from Google Maps and private
human morbidity, mortality, and longevity.71 data from Google’s geocoding services. Second, it is
now common to use advanced techniques to assist
Climate-related data in the data-collection procedure. As a concrete
example, one insurer applied artificial intelligence
In general, insurers use broader categories of data algorithms to collect data on electricity and water
than other institutions to measure climate risk. Five usage, along with building materials of specific
out of the seven physical risk data categories were properties. Furthermore, given that the quality of
covered by more than half of the surveyed insurers, measurement outputs depends on the quality of data
compared with three for banks and asset managers inputs, several insurers have put in place stringent
(Figure 4.4). Notably, more than 80% of insurers data quality assurance processes, such as a clear
adopted the data categories of the attributes of delineation of responsibilities and strict rules that
physical assets and characteristics of climate and penalise internal teams failing to deliver high-quality
weather events, which are fundamental inputs into data. Several insurers also used third-party validations.
advanced modelling techniques for climate risk
measurement, such as scenario-based methodologies. Measurement methodologies and usage of
outputs
In addition, the diversity of data granularity levels –
i.e., the country, sector, region, firm, facility, and The insurance sector is leading the financial services
Chapter 4
portfolio levels – used by surveyed insurers is among industry in the application of sophisticated modelling
the highest in the financial services industry. Data techniques in climate risk measurement. Compared
with adequate levels of granularity are essential for with banks (67%) and asset managers (52%), a
producing high-quality measurement outputs. An higher portion of insurers (86%) have adopted
insurer shared in the interview that an advanced scenario-based methodologies in their measurement
system is used in its institution to produce highly for risk management and business development.
accurate data of a building’s location and its
exposure to certain physical hazards. These results Insurers use the outputs of climate risk measurement
indicate that insurers are striving to increase the for various purposes, including screening out
quality of climate risk measurement to better support carbon-intensive projects, determining appropriate
their business and operations. reinsurance strategies, and adjusting existing
policies. For example, 30% of insurers have modified
Insurers utilise more diverse sources of climate-related their actuarial techniques or built new actuarial
data than banks and asset managers. Although the models to factor climate risk into their product
most commonly used data sources were the same design.
71
USAID (2022) provides an overview of the impacts of human health and the health sector. Under the climate-related disclosure framework that will be
set out by the ISSB (IFRS, 2022), health insurers may be required to disclose the effect of climate change on human health.

Insurers have also designed new products to protect 4.2. INSIGHTS FOR OTHER SECTORS
policyholders against the economic losses associated
with climate risk. For example, many insurers have OF THE FINANCIAL SERVICES
rolled out parametric insurance products in line with INDUSTRY
increased market demand. Parametric insurance
products insure policyholders against the occurrence Insurers’ experience in climate risk measurement
of specific events by paying a set amount based on provides insights for other sectors of the financial
the magnitude of the events, such as rainfall amount services industry, namely enhancing the understanding
or wind speed. They are suitable for covering the of climate risk, broadening climate risk coverage,
potential losses arising from natural catastrophes improving data management, strengthening the
with low frequency but high intensity. Parametric application of advanced methodologies, and
insurance has a faster pay-out and higher flexibility facilitating the good usage of measurement outputs
than traditional insurance.72 One insurer mentioned (Figure 4.5). These insights can be helpful in facilitating
that it provided property and casualty coverage with the climate risk measurement of the banking and
pay-out in the form of carbon offsets in the event asset management sectors.
of additional emissions. These new insurance
products are crucial for improving the resilience of Enhancing the understanding of climate risk
the economy and society to climate change.
I n s u re r s ’ e x p e r i e n c e d e m o n s t r a t e s t h a t a
Notably, insurers continuously highlighted comprehensive understanding of climate risk is
catastrophe models (Cat models)73 in the survey and crucial to measuring and managing its impacts on
interviews, as they have been widely adopted in the their business and operations. Some of the
insurance sector to measure the risk of natural interviewed insurers reported that a good
catastrophes and the associated impacts on business understanding of climate risk at a sufficiently senior
and operations. Climate risk can be incorporated level of management can provide a basis for efficient
into the Cat models to reflect the evolution of measurement at the micro level. It is also regarded
climate change uncertainties and the associated by insurers as key to forming an institutional culture
Chapter 4
economic losses. As recommended by leading that considers climate risk in its strategic planning
research institutes, international organisations, and along with how business and operations should be
financial regulators, 74 the banking and asset adjusted accordingly. As climate change continues
management sectors can also use Cat models to to intensify, other sectors of the financial services
improve their climate risk measurement. These industry need to increase their understanding of
models may become powerful tools as climate climate risk, devote more resources to climate risk
change continues to increase the frequency and measurement, and potentially adopt structural
intensity of certain catastrophes.75 Box 4.1 provides changes to achieve the institution’s targets.
an overview of Cat models and explains how non-
insurers can apply Cat models to their climate risk
measurement.76
72
Sengupta and Kousky (2020).
73
Cat models refer to a class of probability-based computerised models mainly used by insurers and re-insurers to estimate the damage to physical assets
caused by natural catastrophes, along with the accompanying financial costs.
74
See, for example, GA (2018), ClimateWise (2019), and PRA (2019).
75
Please refer to IPCC (2021) for the latest scientific evidence on the impacts of climate change on the frequency and intensity of extreme weather events.
76
Interested readers can find more information about Cat models from Mitchell-Wallace et al. (2017), who provide a textbook treatment of natural
catastrophe modelling.
Figure 4.5: Insights for banks and asset managers regarding climate risk measurement
Enhancing the understanding of climate risk
Broadening climate risk coverage
Improving data management
Strengthening the application of advanced methodologies
Facilitating the good usage of measurement outputs
Broadening climate risk coverage Our interviews suggest that some insurers have
Chapter 4
applied advanced techniques such as machine

The surveyed insurers had taken into account broad learning for data collection and processing and have
categories of climate risk for risk management and established stringent data quality assurance
business development. With the materialisation of processes. In addition, some insurers have built their
climate change, other sectors of the financial services taxonomy or rating systems to facilitate business
industry will benefit from expanding their coverage analysis to determine their exposure to climate risk.
of climate risk that can significantly impact their Other sectors of the financial services industry can
business and operations. As reflected in insurers’ learn from this experience to alleviate the challenges
practice, embedding climate risk into the existing in data availability and reliability.
risk management framework can ensure that all
critical climate risks are being monitored by the Strengthening the application of advanced
institutions. This arrangement can also help banks methodologies
and asset managers to keep abreast of their
vulnerability to climate risk. The insurance sector leads the financial services
industry in applying sophisticated modelling
Improving data management techniques in climate risk measurement, especially
the use of Cat models for assessing the impacts of
Insurers use multiple categories of climate-related climate risk on their physical assets. The models can
data from a wide range of sources, with qualified be modified to incorporate both physical and
talent in place that understands how to use the data. transition risks, with the potential to be converted

into a regulatory framework. These techniques and they are used in strategic planning and decision-
methodologies may be applicable to other financial making. Similar measurement outputs can be
institutions for climate risk measurement, with cross- produced by financial institutions in other sectors to
sectoral collaboration and training between insurers facilitate their cost-benefit analysis of investment
and non-insurers being a possible route. See Box 4.1 projects, the design of climate-compatible products
for more details. and services, and client and investor education.
Facilitating the good usage of measurement

outputs Insurers’ established experience
in climate risk measurement
One important takeaway from our survey and offers some insights for other
interviews is that climate risk measurement enables
insurers to convert climate risk factors into financial
sectors of the financial services
factors, such as financial losses or company solvency. industry.
Our results should be cautiously interpreted before
Chapter 4
Box 4.1: Applying natural catastrophe models to climate risk measurement
– How do Cat models work?
Cat models refer to a class of probability-based computerised models mainly used by insurers and re-
insurers to estimate the damage to physical assets caused by natural catastrophes, along with the
accompanying financial costs. Most Cat models are designed to examine the effect of a specific
catastrophe, such as a tropical cyclone or coastal flooding, on a particular region. Cat models consist of
four basic modules: hazard, exposure, vulnerability, and financial (Figure 4.6).
Figure 4.6: Composition of Cat models
Hazard Exposure Vulnerability Financial
Source: GA (2018).
• The hazard module reflects the frequency and intensity of catastrophes in a region based on historical
observations and recent research findings. For example, it may specify the wind speed for possible
storm tracks, along with the probability that such storms may occur within a given period.
• The exposure module describes the attributes of physical assets that are exposed to catastrophes. For
example, it may contain information about the locations, built years, and construction materials of
real properties.
Chapter 4
• The vulnerability module uses the information from the hazard and exposure modules to derive damage
curves. These curves depict the relationship between the intensity of catastrophes and its estimated
damage to the physical assets. For example, it may show that when the wind speed of a storm is 50
meters per second (m/s), its damage to insured properties is equivalent to 2% of their replacement
cost (i.e., the cost to completely rebuild). When the wind speed reaches 60 m/s, the damage increases
to 4% of the replacement cost.
• Finally, the financial module uses damage curves and the financial structure of insurance contracts to
calculate the financial losses that insurers must bear. For example, this module may show that the
property damage caused by a storm with peak wind speeds reaching 50 m/s will cause an insurer to
pay US$1 million to cover its policyholders’ claims.
The above procedure is often repeated (at least) thousands of times to account for the substantial
uncertainty inherent in the modelling process, such as when, where, how often, and to what extent
catastrophes may occur. Consequently, the model produces a distribution of likely financial losses and
related statistics, such as annual average loss (AAL), which is the average event losses in a year, and the
exceedance probability (EP) curve, which depicts the probability that the event losses in a year exceed a
given threshold.

– How to incorporate climate risk into Cat models?
Cat models are traditionally used to measure losses under existing climate conditions. There are two main
approaches to incorporating climate risk into Cat models that are relevant to the uncertainties about
future climate change and the associated economic transformation (Figure 4.7).77
The first approach is to adjust model specifications. Climate change will likely increase the frequency and
intensity of some catastrophes, which can be reflected in Cat models by updating the characteristics of
catastrophes in the hazard module. For example, one interviewed insurer stated that its Cat models are
modified regularly, with assumptions about the frequency and severity of natural catastrophe events
changing over time.
In addition, institutions can update the exposure module to incorporate socioeconomic developments
that may occur during the transition to a low-carbon economy, such as the change in the attributes of
physical assets and their resilience to catastrophes. Moreover, the vulnerability module can be updated
to account for the adaptation or mitigation measures for tackling climate change. These measures may
reduce the amount of damage caused by catastrophes, changing the relationship between the intensity
of catastrophes and their estimated damage.
To nest Cat models in scenario analysis and stress testing, the hazard, exposure, and vulnerability modules
of Cat models can be updated according to the assumptions made about specific climate scenarios.78
The second approach is to scale up the resulting financial costs by a pre-calculated constant number, which
reflects the overall impacts of climate risk while leaving the model specifications untouched. If there are
multiple physical assets in an insurance portfolio, one can multiply the financial cost of each asset by a
different constant, reflecting the possibly uneven effects of climate change on assets with varying attributes.
Chapter 4
Figure 4.7: Two approaches to incorporating climate risk into Cat models
Approach 1: Adjust model specifications
Adjust to reflect Adjust to reflect policy, Adjust to reflect No change

changes in characteristics technology, and adaptation and
of catastrophes socio-economic changes mitigation measures
Approach 2: Adjust model outputs

No change No change No change Scale up financial losses

by a constant factor
Sources: PRA (2018) and HKIMR staff compilation.
77
The subsequent discussion is based on Lloyd’s (2014) and PRA (2019).
78
One obvious challenge is how to map scenario assumptions that are usually made on a global scale to changes in Cat models, which are mainly used
for assessing catastrophes in a specific region. Some preliminary considerations can be found in GA (2018).
The first approach is more scientifically robust but more resource-intensive. The second approach is easier
to implement but may lead to less robust outcomes. Regardless of the approach chosen, the results will
not be reliable if the underlying assumptions are flawed.
– How can other sectors of the financial services industry and regulators use Cat models?
Because extreme weather events are expected to intensify over time with climate change, Cat models
will become an increasingly important tool to help non-insurers better assess the impacts of climate risk
on their business and operations. Financial regulators can also use Cat models to enhance their surveillance
and supervision related to climate risk. Our survey results imply that small fractions of banks (5.6%) and
asset managers (9.7%) in Hong Kong already use Cat models for climate risk measurement. Several
research institutes and policy initiatives also shared practical guidelines and best practices for the use of
Cat models by banks and asset managers.79
Because the first three modules of the Cat models are not related to insurers’ underwriting arrangements,
non-insurers may directly apply these three modules to their climate risk measurement with only minor
modifications. For example, they need to input the information in the exposure module about the physical
assets that they hold or in which they invest. Additionally, they can update their model specifications
based on their assumptions about a climate scenario.
For the financial module, non-insurers can utilise the model to calculate the distribution of monetary
losses of their physical assets caused by catastrophes and then feed the outputs of Cat models into other
models to obtain their required metrics (Figure 4.8). For instance, asset managers can feed the outputs
into asset pricing models to calculate the reduction in asset prices and the associated market risk measures,
such as value-at-risk and expected shortfalls. Similarly, banks can incorporate the outputs into credit risk
models to obtain measures such as the probability of default and loss given default on the physical assets
Chapter 4
that they hold as collaterals.
Figure 4.8: Using the outputs of Cat models to derive market- and credit-risk measures
Market risk measures

Asset pricing
models Value at risk (VaR),
Outputs of expected shortfall (ES)
Cat models
Distribution of loss,
exceedance Credit risk measures
probability curves
Credit risk
models Probability of default (PD),
loss given default (LGD)
Sources: HKIMR staff compilation.
79
See, for example, AIGCC (2021), ClimateWise (2018), NGFS (2020), and UNEPFI (2019, 2020, 2022).

Chapter 5
Enhancing Climate Risk Measurement in
Hong Kong
A few thoughts for future developments
HIGHLIGHTS:
• Facilitating convergence towards a common taxonomy, standards, and
methodologies was consistently cited as a key strategy by financial institutions
across the three sectors, indicating the industry’s appeal for a clearer and more
consistent guidance.
• The survey participants’ overall high level of engagement suggests that the
industry is acting proactively with respect to climate risk measurement and
needs the support and efforts of various parties, including governments,
regulators, and industry bodies.
• Coordinated efforts between financial regulators and market participants are

important. In fact, financial regulators can play a critical role in promoting a
common taxonomy and mandatory climate risk disclosures. The public and
market participants should deepen the awareness and knowledge of climate
risk. Additional considerations include strengthening local and international
collaboration, and improving the availability and quality of climate-related
data and methodologies. It is also important to facilitate talent development,
capacity building, and knowledge sharing.
Chapter 5: Enhancing Climate Risk Measurement in Hong Kong
5.1. MARKET VIEWS ON HOW TO measurement framework, asset managers were

inclined to suggest the implementation of consistent
FACILITATE CLIMATE RISK and mandatory requirements related to climate risk
MEASUREMENT disclosures to facilitate their portfolio management.
With respect to the various challenges in climate risk

measurement, the survey participants were asked to Encouraging convergence
rate approaches that might be conducive to facilitating towards common taxonomy,
climate risk measurement in Hong Kong. Encouraging
standards, and methodologies
convergence towards common taxonomy, standards,
and methodologies was consistently cited as a key
was consistently cited as a key
strategy by financial institutions across the three strategy by financial
sectors, indicating the industry’s appeal for a clearer institutions across the three
and more consistent guidance (Figure 5.1). Most of the sectors, indicating the industry’s
banks underscored strategies aimed at fostering talent appeal for a clearer and more
with knowledge and expertise relevant to climate risk consistent guidance.
and improving climate-related data granularity,
coverage, and quality, whereas the insurers and asset
managers highlighted collaboration across borders,
The overall high level of engagement of the surveyed
sectors, and agencies. Compared with insurers, who
financial institutions suggests that the industry is
advocated collecting industry feedback on a potential
Figure 5.1: Market views on facilitating climate risk measurement: Top three suggestions
Encourage common Encourage common Encourage common

taxonomy, standards, and taxonomy, standards, and taxonomy, standards, and
methodologies methodologies methodologies
Foster talent with Strengthen

relevant knowledge and international and local Implement mandatory
expertise collaboration climate risk disclosures
Chapter 5
Improve data Collect industry Strengthen

granularity, coverage, feedback on potential international and
and quality framework local collaboration
Banks Insurers Asset managers

being proactive with respect to climate risk discussion on how to advance climate risk
measurement and needs the support and effort of measurement in Hong Kong’s financial services
various parties, including governments, regulators, industry.
and industry bodies.
5.2.1. Deepen awareness and knowledge
among the public and financial
5.2. CONSIDERATIONS FOR institutions
FURTHER ADVANCING CLIMATE
RISK MEASUREMENT IN HONG The overall level of public awareness and knowledge
of climate change is still limited, although it has
KONG increased with the Paris Agreement and the carbon
neutrality goals announced by many countries, along
Taking into account the insights of the survey and
with the apparent change in climate patterns, such
interview participants, along with recent developments
as the extreme worldwide heat waves during the
aimed at facilitating climate risk measurement
summer of 2022. The interviewees agreed that more
internationally and in Hong Kong, we propose the
work needs to be done to educate people to view
following calls for coordinated efforts between
climate risk holistically and to understand the various
regulators and market participants (Figure 5.2). We
impacts of climate risk. Raising awareness and
hope that these considerations will contribute to the
knowledge of the effects of climate change will
Figure 5.2: Considerations for advancing climate risk measurement in Hong Kong
Deepen awareness and knowledge among the

Knowledge
public and financial institutions
Encourage a common and consistent taxonomy and

Taxonomy
standards
Disclosures Promote mandatory climate risk disclosures
Strengthen collaboration across borders, agencies, Chapter 5

Collaboration and sectors
Improve the availability and quality of

Resources climate-related data and methodologies
Facilitate talent development, capacity building,

Capacity and knowledge sharing
Source: HKIMR staff compilation based on the Climate Risk Measurement Survey..
facilitate both behavioural change and societal towards the standardisation of green and sustainable
support for transitioning to a green, low-emission, finance globally. There has been some progress in
and climate-resilient economy. For example, as the improving the comparability and interoperability of
public becomes more aware of climate change, taxonomies across jurisdictions. For example, the
demand for products and services with a lower International Platform on Sustainable Finance (IPSF) 81
volume of GHG emissions will increase on the published the updated Common Ground Taxonomy
consumer front and investments in projects and (CGT) 82 in 2022, which proposes areas of commonality
companies that are more environmentally friendly will between the taxonomies of mainland China and the
be more favoured on the investor front. EU. The CGT is helpful in lowering transaction costs
and facilitating smoother cross-boundary and
More education on climate risk is also essential for international green capital flows by avoiding
financial institutions, which play a unique role in unnecessary duplication of verifications and reducing
both making a direct contribution to emissions market segmentation. In Hong Kong, following the
reductions through their business and operations publication of the CGT, the CASG is working towards
and assisting their clients in achieving low-carbon proposing the structure and core elements of the local
transitions. The interviewees regarded a good green classification framework for consultation.
understanding of climate risk at the management
level of financial institutions as important. Financial Promoting convergence towards a common and
institutions can leverage their analyses and points of consistent set of global sustainability disclosure
view to understand how climate risk impacts their standards is another top priority. A comprehensive
business models. Some of the interviewees stated global baseline for climate disclosure standards can
that climate risk should not be regarded as a self- provide market participants with clear regulatory
contained risk but as an integrated risk that should expectations and improve the transparency,
be fully understood by front-line teams to help their comparability, and reliability of corporate disclosures.
customers understand the impacts of climate risk on It can also provide investors with information about
the businesses. companies’ sustainability-related risks and opportunities
to help them make informed decisions. Some progress
5.2.2. Encourage a common and consistent has also been made in this area. The ISSB in March
taxonomy and standards 2022 launched a consultation on its first two proposed
standards – one on climate-related disclosures and one
A precise and consistent taxonomy is urgently needed on general sustainability-related disclosures. The
to promote market integrity and international proposed standards, when finalised, would form a
consistency according to the survey respondents. Until comprehensive global baseline of sustainability-related
now, many governments, regulators, and international disclosures designed to meet the information needs of
initiatives have issued guidelines for green and
Chapter 5
investors in assessing companies’ sustainability-related

sustainable economic activities.80 However, multiple risks and opportunities.83 The SFC and the HKEX are
definitions, criteria, and standards of taxonomies may engaged in a close collaboration with stakeholders to
give rise to market fragmentation, inconsistencies, evaluate the potential implementation of this standard
and challenges to accessing information and moving for Hong Kong listed companies.
80
For example, both mainland China and the EU have issued a green taxonomy to define environmentally friendly economic activities.
81
The IPSF is a multilateral forum that aims to enable the exchange of practices and increase international cooperation on sustainable finance-related
matters.
82
In July 2020, the EU and China initiated a Working Group on taxonomies. Its objectives are to perform a comprehensive assessment of the existing
taxonomies for environmentally sustainable activities, including identifying the commonalities and differences in their approaches and outcomes. The
CGT was published by the WG in November 2021 and updated in June 2022.
83
https://www.ifrs.org/projects/work-plan/climate-related-disclosures/.

Climate Value-at-Risk.87 The former is less dependent

A precise and consistent on the model and may be regarded as more reliable
taxonomy on green and and comparable across institutions.
sustainable economic activities, There has been global momentum towards climate-
and a common and consistent set related disclosures. For instance, in 2017, the TCFD
of global sustainability disclosure published its final report, setting out recommendations
standards are needed by market for helping businesses disclose climate-related
participants. financial information; those recommendations have
been endorsed or adopted by many companies and
re g u l a t o r s w o r l d w i d e . R e g u l a t o r s i n m a n y
5.2.3. Promote mandatory climate risk jurisdictions, including the US, UK, New Zealand,
disclosures Japan, Hong Kong, and the EU, are all moving ahead
in climate-related disclosures. More work still needs
First, the survey and interview participants support to be done, and further progress is foreseeable. In
the wide adoption of international disclosure Hong Kong, the CASG announced plans in July 2021
standards and the imposition of mandatory climate on making progress towards mandating climate-
risk disclosures for both financial and non-financial related disclosures aligned with the TCFD framework
corporations. A mandatory disclosure requirement by 2025 across relevant sectors.
w i l l b e c o n d u c i v e t o re d u c i n g t h e r i s k o f
‘greenwashing‘84 and improving the availability and 5.2.4. Strengthen collaboration across
quality of climate-related data. Second, it is borders, agencies, and sectors
important to encourage SMEs to disclose more data
and information on carbon emissions and climate Collaboration with international organisations and
risk. For example, some of the interviewees suggested governments and regulators in other jurisdictions to
providing a premium discount to SMEs that are establish consistent green and sustainable taxonomies
willing to disclose climate-related data and can also be helpful. According to the survey and
information, given that most SMEs need to purchase interview findings, market participants with cross-
insurance for their loans obtained from the SME boundary and international business and operations
Financing Guarantee Scheme.85 Enhancing climate are challenged by the lack of consistency across
risk disclosures and reporting high-emission sectors jurisdictions in their regulatory guidance and
and firms were also important to some of the frameworks, data definitions, and taxonomy.
interviewees. Furthermore, some of the market Improved consistency across borders can strengthen
participants encouraged the industry to disclose and the efforts and efficiency of financial institutions in
climate risk measurement, especially those engaged
Chapter 5
use more objective indicators, such as the carbon
footprint, 86 instead of indirect metrics such as in cross-boundary and international business and
operations.
84
Greenwashing is the process of conveying a false impression or providing misleading information about the environmental soundness of a company’s
products.
85
The SME Financing Guarantee Scheme was launched in January 2011 by The Hong Kong Mortgage Corporation Limited. It aims to help local SMEs
and non-listed enterprises to obtain financing from participating lenders for meeting their business needs so as to enhance their productivity and
competitiveness in the rapidly changing business environment.
86
A carbon footprint is the total greenhouse gas (GHG) emissions caused by an individual, event, organisation, service, place, or product, expressed in
terms of the carbon dioxide equivalent.
87
Climate Value-at-Risk (Climate VaR) is designed to provide a forward-looking and return-based valuation assessment to measure climate-related risks
and opportunities in an investment portfolio.
Collective efforts between local governments, 5.2.5. Improve the availability and quality
regulators, and industry bodies are also crucial. First, of climate-related data and
because financial institutions in Hong Kong are not methodologies
yet evolved enough to deal with climate risk on their
own, the survey and interview participants expect Strategies need to be implemented to improve
the regulatory requirements to be implemented climate-related data availability and quality. Our
progressively and in stages on a reasonable timeline. survey results show that climate-related data
Clear climate policies from the governments are availability and quality issues are among the top
integral to providing guidance to market participants. challenges to the market participants in the area of
Second, insurers’ long-standing experience in climate climate risk measurement. Climate disclosure
risk measurement can be leveraged by banks and standards and mandatory disclosure requirements
asset managers to improve climate risk measurement, can enhance both the availability and the quality of
such as by enhancing relevant knowledge, data climate-related data. In fact, the SFC is reviewing
management, and applications of sophisticated fund managers’ use of ESG ratings and data product
models. Third, a gap analysis of industry best providers, beginning with a fact-finding exercise to
practices in climate risk measurement to learn about understand the business operating model of these
the existing gaps and pain points in the financial ESG service providers as well as current market
services industry is critical for understanding the practices of fund managers when selecting and
efforts that are required from governments, engaging with these providers. This will help the SFC
regulators, and industry players. prepare any guidance for the asset management
industry on using ESG service providers.88
Market participants expect that A central data repository needs to be established to

provide financial institutions with easy access to
the regulatory requirements to climate-related data, as highlighted by some market
be implemented progressively participants. Indeed, in June 2022, the Centre for
and in stages on a reasonable Green and Sustainable Finance (GSF Centre)
timeline. announced the launch of the GSF Data Source
Repository, which contains various government data
sources relevant to the assessment of physical risk
in Hong Kong. It also announced plans to create a
free and publicly accessible GHG emissions estimation
tool with clearly disclosed methodologies that
companies can use as an alternative source of
information. Increasing the knowledge and
Chapter 5
awareness of the GSF Data Source Repository among

financial institutions would be helpful.
88
For more details, please refer to the website here: https://www.sfc.hk/-/media/EN/files/COM/Speech/AIMA-APAC-Annual-Forum-2022---Eng_20220906.
pdf

5.2.6. Facilitate talent development,

Increasing the knowledge and capacity building, and knowledge
sharing
awareness of climate-related
data, including the GSF Data Financial institutions will benefit from a large pool
Source Repository, among of talent with multi-disciplinary backgrounds, as the
financial institutions would be lack of expertise in climate risk analysis is one of their
helpful. major challenges. Regulators and the industry can
provide training or certification programmes that
provide incumbent staff and students with relevant
expertise and knowledge. Public bodies and industry
Financial institutions also require standardisation of
associations may consider offering subsidies for
the methodologies in climate risk measurement,
relevant courses and examinations to create a
based on which they can establish a climate risk
friendly environment, as some interviewees
management framework and policies to assess their
highlighted. There has been some progress on this
climate risk exposure on an ongoing basis and
in Hong Kong. For example, in the 2022-23 budget
address their climate risk in the risk management
speech, measures were introduced to enrich local
framework. For example, although many regulators’
talent pool, comprising the provision of training to
guidelines provide suggestions for climate risk
talent, the enhancement of skills, knowledge, and
scenario analyses, they do not specify which
creativity of manpower resources, and the attraction
scenarios and assumptions financial institutions
of talent from overseas.90 Similar measures were also
should adopt.89 The lack of standardisation requires
announced in the Chief Executive’s 2022 policy
financial institutions to expend additional efforts
address.91 In addition, the GSF Centre has launched
differentiating and selecting among various types of
the GSF Training Information Repository92 to facilitate
methodologies. Standardisation and instructions
easy access to information about international and
from regulators for climate-related models will also
local GSF training and qualifications, and the GSF
increase the reliability of the outputs and enable a
Internship Opportunities Repository93 serves as an
comparison of the outputs across financial
information platform for university students who are
institutions.
looking for opportunities to gain GSF-related work
experience and applied knowledge to prepare for a
future career in the field.
Chapter 5
89
HKMA (2021), MAS (2020).
90
For more detail about the 2022-23 budget speech, please refer to the following website: https://www.budget.gov.hk/2022/eng/pdf/e_budget_
speech_2022-23.pdf
91
For more detail about the 2022-23 budget speech, please refer to the following website: https://www.policyaddress.gov.hk/2022/public/pdf/policy/
policy-full_en.pdf
92
For more detail, please refer to the following website: https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/green-and-sustainable-
finance/gsf-training-information-repository/.
93
For more detail, please refer to the following website: https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/green-and-sustainable-
finance/gsf-internship-opportunities/.
Leveraging the expertise of external experts, such as Sharing best practices with use cases in the industry
professionals in academia or consulting firms, also is an additional way to enhance the capacity of
appears to be a good solution. Considering that financial institutions in the area of climate risk
some work on climate risk analysis is highly measurement. Because it has not been long since
demanding and requires professional skills, the financial services industry began to measure
collaboration or consultation with external experts climate risk, there is confusion among financial
may be more direct and cost-effective for certain institutions about how to appropriately address
financial institutions. The outputs can be more climate risk. The best practices with use cases shared
concise if firm-specific characteristics are incorporated by regulators or industry players can serve as
into the analysis process through good communication concrete examples that financial institutions can
between financial institutions and external experts. follow in locating data sources and developing
Some interviewees stated that they had collaborated models.
with universities to provide their staff with online
courses on climate risk.
Chapter 5

Conclusion
Hong Kong’s financial services industry is the application of advanced methodologies,

positively engaged in climate risk measurement and facilitating the good usage of measurement
and demonstrates an increasing interest in outputs. Because of their unique business nature,
further progress. 53% of the surveyed financial insurers have extensive experience in climate risk
institutions were measuring climate risk, and 80% measurement, especially measurements related to
of those who were not measuring planned to do so natural catastrophes. Natural catastrophe models
in the future. The key drivers of climate risk are routinely adopted by insurers and can become
measurement cited by market participants included powerful tools for banks and asset managers to
policy developments and compliance, industry trends improve climate risk measurement.
and stakeholder demand, reputation improvement,
strategic imperatives, and overall risk management. Significant challenges interfere with financial
There are encouraging signs of the financial services institutions’ climate risk measurement , focusing
industry’s interest in making progress, with 76% of on data availability, data quality issues
the survey respondents planning to allocate similar (reliability and transparency, comparability, and
or more resources to climate risk measurement in complexity), and the lack of standardised and
the next 12 months. consistent measurement methodologies.
Although various sources of data can be utilised,
Most financial institutions consider the some climate-related data are simply either
measurement of both physical and transition unavailable or of limited coverage, granularity,
risks to be relevant to their business and reliability, and transparency. There is also a lack of
operations, with approximately 77% of the standardisation for measurement methodologies,
survey respondents measuring both risks. leading to invalid and incomparable outputs. Efforts
Overall, transition risk was measured by more to improve the availability and quality of climate-
financial institutions than physical risk because of related data and methodologies are urgently needed.
their role in pledging to meet net zero commitments A data management framework and a model-risk
in their operations and assisting their clients in management framework can be helpful in effectively
achieving low-carbon transitions, in addition to some managing the associated data and model risks.
financial institutions’ limited awareness, knowledge,
and resources to measure the impacts of physical Coordinated efforts between financial regulators
risk. With the intensification of climate change and and market participants can help further advance
developments in policies, technology, and investor climate risk measurement in Hong Kong’s
appetites, it is important for financial institutions to financial services industry. Considerations include
consider all types of climate risk that may have deepening awareness and knowledge of climate risk,
material impacts on their business and operations. which serves as the foundation for further progress.
Financial regulators play a critical role in promoting a
The established experience of insurers in common taxonomy and mandatory climate risk
climate risk measurement provides insights for disclosures. Clear climate policies are integral to
other sectors of the financial services industry, providing guidance to market participants. It is also
such as enhancing the understanding of climate important to strengthen local and international
risk, broadening climate risk coverage, cooperation, and facilitate talent development,
improving data management, strengthening capacity building, and knowledge sharing.
Appendix A:
Survey Background
The findings in this report are based on a survey entitled Climate risk measurement: Existing experience and
data issues in Hong Kong’s financial industry, conducted from July to August 2022 in collaboration with KPMG
Advisory (Hong Kong) Limited. The survey aimed to obtain qualitative and quantitative information from market
participants to gather insights into current practices and challenges regarding climate risk measurement in
Hong Kong’s financial services industry.
Overall, 106 institutions participated in the survey, including 31 banks, 21 insurers, and 54 asset managers
(Figure A.1). Of these participants, six banks, four insurers, and ten asset managers provide pension-related
services. The surveyed insurers enrolled cover multiple insurance lines, with 62% of them offering property and
casualty insurance (without medical) and approximately 45% providing life, medical, and re-insurance.
Figure A.1: Number of participants in the Figure A.2: Distribution of global

survey headquarters of the survey participants
3%
7% Hong Kong
31 Mainland China
Banks 14%
Other Asia Pacific
Insurers jurisdictions
54 Asset managers 55%
14% Europe
21 North America
7% Other
Source: HKIMR staff calculations based on the Climate Risk Measurement Source: HKIMR staff calculations based on the Climate Risk Measurement
Survey. Survey.
The second chart present the breakdowns of the survey respondents by the locations of their global headquarters
(Figure A.2). The respondents are diverse in terms of the locations of their global headquarters, with 55%
located in Hong Kong, 14% in Europe and other Asia-Pacific jurisdictions, 7% in Mainland China and North
America, and the rest elsewhere.
In addition, 14 interviews were conducted with 13 organisations to gain more detailed insights, including 5
interviews with banks, 6 with insurers, and 3 with asset managers.
Appendix

Appendix B:
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Appendix
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United Nations Environment Programme Finance Initiative/UNEPFI (2020). ‘Charting a new climate:
State-of-the-art tools and data for banks to assess credit risks and opportunities from physical climate change
impacts.’ September.
United Nations Environment Programme Finance Initiative/UNEPFI (2022). ‘The climate risk tool landscape:
2022 supplement.’ March.
United States Agency for International Development/USAID (2022). ‘Climate change impacts on human
health and the health sector.’ March.
Appendix
ABOUT THE HONG KONG ACADEMY OF FINANCE
(AOF)
The AoF is set up with full collaboration amongst the HKMA,
the Securities and Futures Commission, the Insurance
Authority and the Mandatory Provident Fund Schemes
Authority. By bringing together the strengths of the industry,
the regulatory community, professional bodies and the
academia, it aims to serve as (i) a centre of excellence for
developing financial leadership; and (ii) a repository of
knowledge in monetary and financial research, including
applied research.
ABOUT THE HONG KONG INSTITUTE FOR MONETARY

AND FINANCIAL RESEARCH (HKIMR)
The HKIMR is the research arm of the AoF. Its main remit is
to conduct research in the fields of monetary policy, banking
and finance that are of strategic importance to Hong Kong
and the Asia region. The Applied Research studies undertaken
by the HKIMR are on topics that are highly relevant to the
financial industry and regulators in Hong Kong, and they aim
to provide insights on the long-term development strategy
and direction of Hong Kong’s financial industry.
CONTACT US
Email: [email protected]
Tel: +852 2878 1706
Website: https://www.aof.org.hk/research/HKIMR
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Climate Risk Measurement

The existing landscape and developments in Hong Kong’s

Hong Kong Institute for Monetary and Financial Research

Chapter 1 Climate Risk Measurement: The International Experience 7

Chapter 2 Data and Model-risk Management 18

Chapter 3 Climate Risk Measurement in Hong Kong’s Financial Services 25

Chapter 4 Leveraging Insurers’ Experience 36

Chapter 5 Enhancing Climate Risk Measurement in Hong Kong 47

Appendix A: Survey Background 56

This report reviews the motivations and challenges

2 Climate Risk Measurement

We are grateful for our collaboration with KPMG

4 Climate Risk Measurement

Taking into account the insights of market

6 Climate Risk Measurement

• The prevalent challenges in climate risk measurement confronting financial

• Additional challenges have been identified by financial institutions engaged

1.1. HOW IMPORTANT IS IT TO institutions to navigate, enhance, and even benefit

carbon emissions requires carbon-intensive firms to

8 Climate Risk Measurement

Mitigate negative impacts Collaborate with

Sources: HKIMR staff compilation.

regulators and meeting the expectations of

Lack of expertise Comparability of

Source: HKIMR staff compilation.

10 Climate Risk Measurement

Figure 1.3: Challenges associated with data availability

Limited data coverage

Insufficient level of disaggregation

Lack of forward-looking data

Low accessibility to data sources

Shortage of specific data items

Source: HKIMR staff compilation.

Figure 1.4: Major barriers to data reliability

Reliance on historical information

Underdeveloped data verification process

Conflicting data definitions

Intransparent data construction

Ambiguous data interpretation

Source: HKIMR staff compilation.

12 Climate Risk Measurement

Due to the lack of mandatory and homogeneous

Figure 1.5: Key issues related to data comparability

Difficulty in determining the greenness of a firm

Constructed using different methods

Obtained from different sources

Lacking common definitions or unique identifiers

Lacking a relevant benchmark

Source: HKIMR staff compilation.

14 Climate Risk Measurement

Figure 1.6: Top challenges relevant to data complexity

Inability to capture the distinct nature of climate risk

Challenging to integrate data from disparate sources

Complexity embedded in rules governing data processing

Source: HKIMR staff compilation.

1.2.5. Lack of standardised and consistent

Challenges related to climate risk measurement may

Lack of criterion to select tools / methods