Greenwashing poses a “real and present danger” to industry efforts to advance sustainability considerations in their investment processes.
The Monetary Authority of Singapore (MAS) is planning to impose new supervisory expectations on ESG funds to help mitigate the risk of greenwashing.
According to MAS executive director Tan Keng Heng, the expectations will include ESG-specific requirements on fund naming, prospectus disclosures and periodic reporting disclosures.
“As I commend the industry for advancing sustainability considerations in your investment processes, let me caution that greenwashing poses a real and present danger to our collective efforts to date and ambitions in the long run,” Tan said, delivering a keynote speech at IMAS’ 8th Regulatory Forum on 28 January.
“There is no room for complacency as further progress will be difficult without investor trust and market credibility. This has to be earned through concrete actions by asset managers.”
Besides the fund-level expectations, MAS expects fund managers to “walk the talk” at the firm level, and ensure their sustainability commitments reflect actual capabilities and practices on the ground, Tan said.
“Managers of ESG funds in particular should consider implementing mechanisms to monitor compliance with stated ESG investment objectives, including exposure limits for the funds sold.”
The proposed requirements have already been under consultation with the industry, Tan said.
In addition, MAS will be sharing detailed more good practices in greater detail in an upcoming information paper on environmental risk management (EnRM) in the coming months, to help fund managers deepen their EnRM capabilities ahead of implementation of the new EnRM Guidelines in June this year.
Tan said Singapore fund managers have made “tangible progress” in their EnRM practices, including by developing internal risk assessment methodologies to quantitatively rate the environmental risks posed by investee companies.
They have also increasingly been incorporating EnRM-related KPIs in their senior management remuneration structures, conducting scenario analysis to enhance portfolio resilience to environmental risks, and applying the results to prioritise engagement with investee companies.
The new information paper will set out expectations for fund managers to have clear quantitative targets to shape and steer strategy and business plan, more consistent application of investee ESG risk assessments across the entire investment portfolio, and greater client engagement in the portfolio risk management process.
MAS also intends to impose requirements for asset managers to make climate-related financial disclosures, which will be aligned with the standards being developed by the IFRS Foundation’s International Sustainability Standards Board (ISSB).
While the requirements are still subject to public consultation, Tan said MAS is currently considering applying the requirements to larger discretionary asset managers, in order to balance the benefits of such disclosures against the associated compliance costs.
Tan also discussed expectations for fund managers to recognise and mitigate the attendant risks associated with the use of new technologies in their investment, risk management and compliance processes – including cyber and data security risks.
Specifically, he said fund managers should mitigate the risk of misuse of AI and data analytics by adopting the Fairness, Ethics, Accountability and Transparency (FEAT) Principles, issued in 2018 to promote the responsible use of such technologies.
Tan stressed the importance of “good governance and strong oversight” from the board of directors and senior management for fund managers to respond to risk in a fast-changing environment and do what is in the best interests of investors, beyond what is legally required.
To fully harness technological innovation in providing greater value to investors and maintain confidence in the industry, Tan said fund managers need to “get the fundamentals of technology risk management right”.
This includes “putting in place appropriate governance structures and processes, effective technology risk practices, secure IT systems, and effective management of customer data,” as highlighted in MAS’ Technology Risk Management Guidelines, revised last year.
With regard to the guidelines, Tan highlighted the need for the board of directors and senior management to possess adequate knowledge to understand and manage technology risks, particularly when fund managers are seeking to leverage emerging technologies.
“Cyber resilience is the shared responsibility of everyone, not just the board, senior management or IT specialists,” he added, pointing to MAS’ Notice on Cyber Hygiene, issued in 2019 to raise cyber security standards and help fund managers to implement best practices.
Finally, Tan called on fund managers to continue to ensure they are managing liquidity risks and meeting redemption requests in a fair, orderly and transparent manner. This is especially important during times of market stress, he said.
In a liquidity risk management and valuation thematic inspection commerced last year, MAS found that fund managers have generally put in place appropriate liquidity risk management framework and practices relative to their fund risk and investor profiles.
This has included implementation of liquidity risk management tools as well as supplemental measures, such as obtaining direct feedback from portfolio managers and traders on actual observed trading volume and transaction costs, in case liquidity risk models have not fully captured actual market conditions during periods of heightened market stress.
MAS intends to share more specific findings with the industry in due course, including areas for improvement and guidance on methodologies for validating liquidity risk models and the parameters used for liquidity risk monitoring and stress testing.