Supervisory Issues and Information Circular - Climate Risk for Banking Sector (2021-12-20)

Summary

This is a Supervisory Issues and Information Circular issued by CIMA on 20 December 2021, addressed to the Boards of Directors of all Category 'A' and 'B' banks, setting out CIMA's expectations regarding climate-related financial risk. It explains that banks are exposed to climate risk through both physical risk drivers (economic/financial losses from severe weather and long-term climate shifts) and transition risk drivers (impacts from policy, regulatory, technological and societal shifts as the economy moves to a low-carbon model), drawing on a 2021 Basel Committee report.

Expectations for All Licensees

The circular directs all licensees to develop a plan to integrate climate-related risks into their business strategy, governance and risk management frameworks.

• Governing bodies are called on to understand and incorporate climate risk into overall business strategy and risk appetite.
• Licensees are encouraged to revise risk appetite statements to include climate-related exposure limits.
• CIMA expects clear allocation of roles and responsibilities for managing climate risk across the governing body, sub-committees and senior management.
• Licensees are expected to build climate risk assessment capability within their existing risk management frameworks, including materiality thresholds and monitoring approaches.

ICAAP Reporting Requirement

A more concrete requirement applies to licensees that submit Internal Capital Adequacy Assessment Process (ICAAP) reports to CIMA: they must incorporate climate-related risks into their ICAAP reports starting with the 2021 ICAAP submission.

• Business strategy
• Risk appetite
• Governance
• Internal controls
• Risk identification/measurement
• Materiality assessment
• Monitoring/reporting

CIMA notes that its supervisory approach to climate risk is still developing and that further reviews and guidance may follow.

Key obligations

• Licensees required to submit ICAAP reports to CIMA must incorporate climate-related risks into their ICAAP reports commencing with the ICAAP reports for 2021, covering business strategy, risk appetite, governance, internal controls, risk management integration, risk identification/measurement, materiality assessment, and monitoring/reporting.
• All licensees should design a plan to incorporate climate-related risks into their business activities and strategy.
• Each licensee's governing body should initiate measures to understand, assess and incorporate climate-related financial risks within the licensee's overall business strategy and risk appetite, and document how climate risk is monitored and managed.
• Licensees should integrate climate risk into their existing risk management framework, including setting definitions and thresholds for materiality and establishing approaches for identifying, measuring, monitoring and managing climate-related risks.

Applies to

Category 'A' banks, Category 'B' banks

Deadlines

• commencing with the ICAAP reports for 2021: Licensees required to submit ICAAP reports to CIMA must begin incorporating climate-related risks into those reports starting with the 2021 ICAAP submission.