Guidelines call for increased engagement with stakeholders, stress testing and risk disclosures.
The Monetary Authority of Singapore (MAS) has released its final guidelines on environmental risk management for asset managers and insurers, following consultation papers issued earlier this year.
Insurers and asset managers will need to increase their level of engagement with stakeholders and investors to identify existing levels of environmental risk in portfolios and investee companies, as well as mapping out how future environmental factors could alter performance.
MAS expects the management and disclosure of environmental risk “to mature as the methodologies for assessing, monitoring and reporting such risk evolves”.
The new framework follows MAS’s Green Finance Action Plan, which was launched late last year. In a keynote speech in October, MAS Managing Director Ravi Menon revealed the regulator would incorporate climate-related scenarios into its annual stress tests for the financial industry within the next two years.
MAS emphasised both insurers and asset managers’ disclosures should “be in accordance with well-regarded international reporting frameworks, such as recommendations by the Financial Stability Board’s (FSB) Taskforce on Climate-related Financial Disclosures (TCFD)”.
Recommendations for asset managers
Under the new guidelines, asset managers will need to “enhance the resilience of their customers’ assets” in the face of environmental risk, MAS said.
As well as implementing “robust” environmental risk management policies and processes, the report emphasised the importance of asset managers proactively channelling capital through their green investment activities, to help reduce the possibility of a “too little, too late scenario” in which long-term physical costs may be exacerbated. This would also mitigate reputational risk for asset managers.
“Asset managers should embed relevant environmental risk considerations in their research and portfolio construction processes if they have assessed them to be material,” the document continued.
Environmental risk considerations include clients’ investment horizons and macroeconomic conditions, such as central bank policy, sector trends and geopolitical risks.
Managers should “also evaluate the potential impact of relevant environmental risk on an investment’s return profile,” MAS said.
Where ESG-focused data is limited, asset managers should employ qualitative assessments and engage directly with clients and investee companies in order to adopt practices and frameworks of disclosure “that best identify the risks and opportunities most relevant”.
Recommendations for insurers
Insurers should look to mitigate reputational risk by contributing to sustainable activities and reducing coverage to customers that carry on business activities which have a negative impact on the environment, according to the new guidelines for the insurance sector.
“Insurers can also contribute to global collective action by engaging with stakeholders such as customers, regulators, rating agencies, academia and civil society, to promote mutual understanding on environmental issues across sectors and geographies,” MAS continued.
The guideline pointed to the four main areas of environmental risk insurers need to be aware of: market (exposure to declining valuations and increased investment volatility); operational (disruptions to business continuity); insurance (increase in frequency and cost of claims); and liquidity (damages to physical property incurring “significant costs”).
MAS calls for insurers to encourage companies in which they invest to better provide “relevant corporate environment-related disclosures” in order to foster a greater awareness of environment risk and to encourage more sustainable and responsible behaviours in investee companies.
“The insurer should consider collaborative engagement with other investors for efficiency, enhanced influence and legitimacy when engaging investee companies, and to build knowledge and skills,” MAS said.
MAS, Singapore’s central bank and integrated financial regulator, also published recommendations for the banking sector.