Mitigating actions
•We continue to deepen our understanding of the drivers of
climate risk as well as manage our exposure. We have
established a dedicated Climate Risk Oversight Forum for
overseeing our approach and providing support in managing
climate risk.
•Our climate risk programme continues to accelerate the
development of our climate risk management capabilities
across four key pillars – governance and risk appetite, risk
management, stress testing and scenario analysis, and
disclosures. We are also enhancing our approach to
greenwashing risk.
•In December 2021, the Group published our Thermal Coal
Phase-Out Policy committing to phase out the financing of
coal-fired power and thermal coal mining in EU/OECD markets
by end 2030, and globally by end 2040. The policy helps us
chart the path to net zero and is a component of our approach
towards managing the climate risk of our lending portfolio.
•We have started to incorporate the outcomes and insights from
the Bank of England’s Climate Biennial Exploratory Scenario
and HKMA Climate Risk Stress Test into climate risk
management.
•We are undertaking training and adding additional roles with
specialist skills to manage climate-related risks.
•We have delivered climate risk training to our legal entity
boards and wider target audiences.
•With the help of external stakeholders, we continued to review
and improve our approach to human rights issues, following
the UN Guiding Principles on Business and Human Rights.
•In 2021, the Group joined several industry working groups
dedicated to helping us assess and manage nature-related
risks, such as the Taskforce on Nature-Related Financial
Disclosure (‘TNFD’). The Group's asset management business
also published its biodiversity policy to publicly explain how our
analysts address nature-related issues.
•We continue to engage with our customers, investors and
regulators proactively on the management of ESG risks. The
Group also engages with initiatives, including the Climate
Financial Risk Forum, Equator Principles, Taskforce on Climate-
related Financial Disclosures and CDP (formerly the Carbon
Disclosure Project) to drive best practice for climate risk
management.
Ibor transition
(Unaudited)
Interbank offered rates (‘Ibors’) have historically been used
extensively to set interest rates on different types of financial
transactions and for valuation purposes, risk measurement and
performance benchmarking.
Following the UK’s Financial Conduct Authority (‘FCA’)
announcement in July 2017 that it would no longer continue to
persuade or require panel banks to submit rates for the London
interbank offered rate (‘Libor’) after 2021, we have been actively
working to transition legacy contracts from Ibors and meet client
needs for products linked to new near risk-free replacement rates
('RFRs') or alternative reference rates. In March 2021, in
accordance with the 2017 FCA announcement, ICE Benchmark
Administration Limited (‘IBA’) announced that it would cease
publication of 26 of the 35 main Libor currency interest rate
benchmark settings from the end of 2021, but that the most
widely used US dollar Libor settings would cease from 30 June
2023. As a result, our focus during 2021 was on the transition of
legacy contracts referencing the Euro Overnight Index average
(‘Eonia’) and the Libor settings that demised from the end of 2021.
During 2021, we continued the development of IT and RFR
product capabilities, implemented supporting operational
processes, and engaged with our clients to discuss options for the
transition of their legacy contracts. The successful implementation
of new processes and controls, as well as the transition of
contracts away from Ibors, reduced the heightened financial and
non-financial risks to which we were exposed. However, while all
but exceptional new Libor contract issuance ceased during 2021,
and from the end of 2021 for US dollar, we remain exposed to
risks, including from a small population of so-called ‘tough legacy’
contracts, which reference Ibors that demised from the end of
2021, and have not been able to be transitioned to a new rate or
do not have clear fallback language in place, and from legacy
contracts that reference US dollar Libor and other regional rates
demising at later dates ('demising regional rates'), which are
expected to demise from June 2023.
Financial risks have been largely mitigated as a result of the
implementation of model and pricing changes. However,
differences in US dollar Libor and its replacement RFR, Secured
Overnight Funding Rate (‘SOFR’), create a basis risk in the trading
book and banking book due to the asymmetric adoption of SOFR
across assets, liabilities and products that we need to actively
manage through appropriate financial hedging. Such basis risk is
also created for other demising regional rates. Additionally, the
comparatively limited use of SOFR in financial markets to date
could result in insufficient liquidity to transition legacy US dollar
contracts during 2022. This could potentially delay transition of
some US dollar contracts into 2023, compressing the amount of
time for transition, which could lead to heightened operational and
conduct related risks as a result.
Additional non-financial risks, including financial reporting risks
relating to potential mis-statements due to the complexity in
applying accounting reliefs relating to amendments of legacy
contracts and legal risk continue to exist.
These risks are present in different degrees across our product
offering.
Transition legacy contracts
During 2021, we either successfully transitioned or confirmed
appropriate fallback for over 99% of legacy Ibor contracts in
sterling, Swiss franc, euro and Japanese yen Libor interest rates,
as well as Eonia, with only a very small proportion of ‘tough
legacy’ contracts remaining. Our approach to transition ‘tough
legacy’ and US dollar Libor and other demising regional rates
legacy contracts will differ by product and business area, but will
be based on the lessons learned from the successful transition of
contracts during 2021. We will continue to communicate with our
clients and investors in a structured manner and be client led in
the timing and nature of the transition.
For derivatives, all of our sterling, Swiss franc, euro and Japanese
yen Libor interest rate exposure at year-end has rates determined
by fallback mechanisms, or had no further such rate fixings post
year end. We anticipate our US dollar Libor and demising regional
rates exposures will continue to reduce through 2022 as a result of
contract maturities, active transition and the cessation of new US
dollar Libor issuance and that of demising regional rates. We will
continue to look to actively reduce our US dollar and demising
regional rates exposures by transitioning trades ahead of the
demise date of 30 June 2023, by working with our clients to
determine their needs and alternative approaches. Additionally, we
are working with market participants, including clearing houses, to
ensure we are able to transition contracts as the US dollar Libor
and demising regional rates cessation dates approach.
For our loan book, over 90% of our reported exposure at the end
of 2021 relates to sterling, Swiss franc, euro and Japanese yen
Libor interest rate contracts that required no further client
negotiation. The remaining exposure relates to a small number of
‘tough legacy’ contracts where discussions with our clients and
other market participants, for syndicated transactions, have
continued in early 2022, and this has led to further transitions
being completed. Contracts that are unable to transition prior to
their first interest payment date in 2022 are expected to use an
alternative rate determined by the contractual language and
governing law. For the remaining demising Ibors, notably US
dollar Libor and demising regional rates, we have implemented
new products and processes and updated our systems in
readiness for transition. Global Banking, Commercial Banking and
Global Private Banking have begun to engage with clients who