The guidelines set out MAS’ supervisory expectations for banks, insurers and asset managers in their governance, risk management, and disclosure of environmental risk.
MAS (Monetary Authority of Singapore) has proposed new guidelines on environmental risk management for banks, insurers and asset managers in three separate consultation papers.
The proposed guidelines are part of MAS’ Green Finance Action Plan to become a leading global centre for green finance, announced last November during the Singapore Fintech Festival.
The guidelines aim to enhance FIs’ resilience to environmental risk, and strengthen the financial sector’s role in supporting the transition to an environmentally sustainable economy in Singapore and the rest of the region.
Governance – Boards and senior management of FIs are expected to incorporate environmental considerations into their strategies, business plans, and product offerings, and maintain effective oversight of the management of environmental risk.
The proposed responsibilities of senior management include developing an environmental risk management framework and policies, regularly reviewing their effectiveness, and allocating adequate resources to manage environmental risk.
Where environmental risk is deemed material, the FI should designate a senior management member or a committee for additional oversight of such risk, to promote clarity in accountability and ensure that such issues are reviewed at a sufficiently senior level.
Risk Management – FIs should put in place policies and processes to assess, monitor, and manage environmental risk, to ensure that exposures beyond their risk appetite can be promptly recognised and addressed.
For banks, this includes the development of tools and metrics to monitor and assess exposures to environmental risk, and capabilities in scenario analysis and stress testing to assess the impacts of such risk on an FI’s risk profile and business strategies. Banks should assess each customer’s environmental risk as part of the assessment process for credit facilities or capital markets transactions.
For insurers, the tools and metrics to be developed should be used to monitor and assess its underwriting exposures to environmental risk, including to identify which geographies and industry sectors present higher risk. All insurance underwriting should include an assessment of each customer’s environmental risk.
For asset managers, appropriate tools and metrics should likewise be used to identify sectors with higher environmental risk. In addition, sector-specific guidance should be developed to help investment personnel understand the risks. In portfolio construction, asset managers should measure and manage material environmental risk factors that are present in a portfolio on an aggregate basis. Asset managers should also develop capabilities in scenario analysis to evaluate portfolio resilience and valuation under different environmental risk scenarios.
FIs should engage customers (or investee companies, in the case of asset managers) that pose higher risk, help them improve their environmental risk profiles, and support their transition towards sustainable business practices over time. This engagement should be documented.
For banks, the guidelines propose a range of mitigating options to handle customers that do not manage their environmental risk adequately, including reflecting the higher risk in premium loan pricing, applying loan exposure limits, and re-assessing customer relationships.
Disclosure – FIs should make regular and meaningful disclosure of their approach to managing environmental risks and the potential impact of material environmental risk, so as to facilitate market discipline and more efficient capital allocation over time.
Such disclosures should take reference from international reporting frameworks, such as those set by the Financial Stability Board’s Task-Force on Climate-related Financial Disclosures (TCFD), the Global Reporting Initiative, Sustainability Accounting Standards Board, or Climate Disclosure Standards Board.
MAS proposes to provide a transition period of 12 months after the final guidelines are issued, given that some FIs may face initial implementation challenges, including in relation to the availability of data and expertise for environmental risk management.
Interested parties are invited to submit comments on the proposed guidelines by 7 August 2020.