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MAS has now published its Guidelines on Environmental Risk Management – the next step towards its vision of making Singapore a global centre for green finance. While there are no big surprises, some helpful clarifications have been offered. Now it’s down to financial institutions to make sure they are compliant.
Last summer, MAS issued its Consultation on Environmental Risk Management Guidelines, setting out supervisory expectations with respect to governance, risk management and disclosure of environmental risk.
The final guidelines have now been issued. While the contents are largely unchanged from the draft, in its feedback statement MAS has provided some important clarifications.
The Guidelines exist in three versions, for banks, insurance firms and asset managers. Here we’ll concentrate on those for asset managers.
Summarising the MAS Environmental Risk Guidelines for asset managers
Three types of risk that could affect funds or mandates managed by asset managers are considered by the Guidelines. These are physical risk (for example, increasing frequency of extreme weather events), transition risk (for example, changes in public policies or disruptive technology developments during adjustment to a more sustainable economy) and reputational risk (such as poor publicity resulting from investments in a company that causes environmental damage).
The Guidelines focus on five categories of activity: governance and strategy, research and portfolio construction, portfolio risk management, stewardship and disclosure.
- Governance and strategy
Boards and senior management will be expected to incorporate environmental considerations into their strategies, business plans and product offerings, and to maintain effective oversight of the management of environmental risk.
- Research and portfolio construction
Asset managers should consider the possible impact of environmental risk – including both transition and physical risks – on each investment’s return potential at the level of the individual asset and of the portfolio as a whole.
- Portfolio risk management
Managers are expected to put in place policies and processes to assess, monitor and manage environmental risk – both at an enterprise level and with respect to the portfolios they manage.
MAS expects Managers to exercise sound stewardship of investee companies, influencing those companies to transition to sustainable business practices.
Managers are expected to make regular, meaningful disclosures of their environmental risks in order to enhance market discipline; these may include quantitative metrics such as exposures to sectors with higher environmental risk.
Updates and clarifications
To the relief of many, the transition period has been extended from 12 to 18 months, ending June 2022.
- The Guidelines apply to all fund management companies and real estate investment trust managers that have discretionary authority over the funds / mandated under their management. MAS has confirmed that this isn’t limited to funds and mandates with an environmental focus.
- Even the smallest firms are in scope but MAS explains that they can apply the Guidelines in a manner “commensurate with the size and nature of their activities”. For instance, disclosures are likely to be qualitative in nature, at least initially.
Clearly, many will need to make some changes to comply with these Guidelines. For example, if you have not already done so, you’ll need to put in place an environmental risk management framework and supporting policies, both on an enterprise level and with respect to portfolios you manage.
Even though the implementation period has been extended to 18 months, it’s advisable to not leave it to the last minute. Indeed, MAS says that in Q2 of 2021 it will begin engaging with larger FMCs, as well as with major banks and insurers, regarding implementation progress.
If you need help with ensuring compliance with the new Guidelines, please contact get in touch.