Hong Kong: How to avoid a “Double Blind Max Risk” path

By Dharisha Mirando 23 November, 2022

Without revised adaptation plans 43,000 more residential, commercial & industrial buildings will be at risk from rising seas. CWR's Mirando deep dives

Scientists are warning of signs of “growing cryosphere collapse”; no wonder the IPCC warned that 2-3m of SLR “cannot be ruled out” by 2100, yet HKSAR adapting for only ~0.5m of SLR
Even at lower levels risks are high for HK – HKMA stress test for at most ~0.5m of SLR showed that around a third of Hong Kong banks’ property loan books are vulnerable
HKMA can help ensure HK is resilient against rising seas and take advantage of HK’s strengths, but must give up on naïve optimism and collaborate with government to ensure “low-regret” adaptation plans

Last year the Hong Kong Monetary Authority (HKMA) ran a pilot climate stress test and the results showed that around a third of Hong Kong banks’ property loan books are vulnerable to climate risks, especially floods and typhoons.

The HKMA stress test was carried out for the worst-case scenario by 2050 of at most ~0.5m of sea level rise (SLR). However, since then various sets of “worst-case” SLR projections have been published. The IPCC released its report last year warning that 2-3m of SLR cannot be ruled out by 2100. This “low-regret” scenario is classified as “low confidence” because there are “deep uncertainties” in ice sheet dynamics, but as these uncertainties could bring high impacts, the IPCC included the highest of these sets in its Summary for Policymakers. This underscores the importance of the “cannot be ruled out” range for adaptation planning today.

HKSAR laggard adaptation policies could jeopardise HK banks

The next time the HKMA runs this stress test the numbers should be bumped up to “low-regret” levels of SLR. But the bigger problem is that the HK government is defending the SAR to only ~0.5m of SLR by 2100, which is way off the IPCC numbers and even the HKMA SLR numbers of 0.5m by 2050.

HK govt is only defending the SAR to ~0.5m of SLR by 2100, which is way off the IPCC numbers…

Hong Kong’s SLR adaptation levels for 2100 are set to the low-medium emissions scenario. Yet, the UN now claims that there is no credible pathway to 1.5°C in place today, and we are currently heading for 2.7°C by 2100. So, the HKSAR must revise its 2100 adaptation plan to be in line with the science.

Hong Kong is working towards net zero by 2050 but that doesn’t mean the rest of the world is – just look at discussions at COP27 and you’ll see that it isn’t. So the government must change its adaptation plans for a “low-regret” scenario instead of an optimistic scenario, since we’re well past that on a highway to climate hell.

…43,000 more residential, commercial & industrial buildings will be at risk if our adaptation plan isn’t revised

If not, savings and livelihoods could be at risk – analyses in the “HK Double Blind Maximum Risk Case Study” in the new CWR report showed that 43,000 more residential, commercial and industrial buildings would be at risk in Hong Kong at IPCC’s “low-regret” 2-3m SLR scenario compared to the 0.5m the HK government is adapting for.

Let’s be clear, 2-3m of SLR by 2100 is not guaranteed, and is “low confidence” but our current direction of travel isn’t imbuing any optimism in us – the new State of the Cryosphere 2022 report makes some bold statements:

“Far too much human suffering occurred in 2022 due to rapid loss of ice in the cryosphere, Earth’s snow and ice regions, from human-caused global warming”

“Our global ice stores are receding at rates unthinkable just a decade ago, whether held in ice sheets, land glaciers, permafrost or sea ice.”

“The impending loss of Arctic summer sea ice is not the only sign of growing cryosphere collapse. This year also saw March rains on East Antarctica, with temperatures 40°C above normal; a spike in Greenland surface melt for the first time ever in September; loss of over 5% of glacier ice in the Alps over a single summer; and the first documented rise in methane release due to global warming from a permafrost monitoring site.”

Clearly, we are well into a risk zone. So, do we have a laissez-faire approach to our cryosphere and rising seas because it is “out of sight, out of mind”? This might also explain why the cryosphere tent at COP27 is not typically well attended even though all coastal cities are at risk from the cryosphere. Instead, we continue on a path of irrational exuberance as we continue to ignore the true extent of physical climate risks.

This is where the HKMA comes in – give up on the naïve optimism and lead the way

HSBC, Stan Chart, Bank of East Asia and BOC-HK loan books together have 34% domestic skew & 77% skew to sectors vulnerable to coastal threats…

Hong Kong has to act because it is currently on a Double Blind Maximum Risk” path as the banking sector and the government are not acting to properly assess and/or adapt for SLR risks even though there is much at stake. For example, for the four HK banks analysed by CWR (HSBC, Standard Chartered, Bank of East Asia, and Bank of China–HK), loan books had a 34% domestic skew and 77% was skewed to sectors vulnerable to coastal threats. This is just loan book skew – HSBC for example, derives over 90% of its profits from Hong Kong, which shows that risks could be higher.

HKMA can help banks & HK to be resilient, but stress tests must improve

Hong Kong’s SFC is pushing funds to assess physical risks that stem from progressive, longer-term shifts in the climate patterns, which would of course include SLR, and the HKMA can also play a major role to ensure banks are resilient to these risks. First, HKMA and the banks must “see” the risks and to do that their stress tests must improve and be in line with scientists’ warnings – see our new report for in-depth recommendations.

Once the risks become clear it will also become obvious that the sector must collaborate with the government to ensure it has adaptation plans in place for a “low-regret” scenario because given domestic skew levels, banks are only as safe as the entire city is and each bank can’t protect Hong Kong alone.

This is a chicken and egg scenario because if the government does not act HKMA may be forced to increase bank capital adequacy ratios, which will not be good for Hong Kong’s economy. So, HKMA and banks must collaborate with the government to draw up a new vision for Hong Kong’s future to ensure it adapts and thrives.

However, with the backing of the banking sector, HK can be resilient against rising seas & lead the APAC region to do the same

Hong Kong is well placed to get on with it – with the backing of the banking sector it can take advantage of some of its strengths, whether it is its know-how on getting back to normal following major typhoons, or the city’s expertise at constructing impressive infrastructure along its precarious coastlines. All of this can be used to ensure Hong Kong is resilient against rising seas and can also help the APAC region which is also coastal and will need to do this.

But we first need to stop arguing about SLR and start taking scientists’ warnings seriously.

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Dharisha Mirando
Author: Dharisha Mirando
Dharisha Mirando hails from the finance industry and joined CWR as she believes that climate and water factors are downplayed by the sector despite being significant investment risks. To tackle this, her ambition is to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks into their due diligence and portfolio management. This could in turn lead to innovative Green Finance instruments becoming more prevalent. She has already made strong headway as the lead author of a recently published report with Manulife Asset Management and the Asia Investor Group on Climate change, which highlights the imminent threats to Asian asset owners' portfolios from climate and water risks. Dharisha has also undertaken a number of speaking engagements on these pressing issues at investor and insurance conferences. Prior to joining CWR, Dharisha worked for a long-only public equities fund. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio.
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