On 8 December 2020, the Monetary Authority of Singapore (MAS) published its Guidelines on Environmental Risk Management (Guidelines) targeted at asset managers.
The Guidelines intend to strengthen the resilience of funds to environmental risk to support Singapore’s transition to an environmentally sustainable economy.
All holders of a capital markets service (CMS) license in Singapore for:
- Fund management (LFMC)
- Real estate investment trust (REIT)
- Registered fund management companies in Singapore (RFMC)
*The Guidelines DO NOT apply to asset managers that do not have discretionary authority over the investments and mandates they are managing.
*In situations where asset managers delegate the investment management to sub-managers or advisors, asset managers will still retain overall responsibility for environmental risk management. Thus, processes and procedures must be set (by asset managers) to ensure proper supervision of delegates.
Asset managers are expected to implement these guidelines (whether immediately or in phases) after the 18-month transition period, which ends in June 2022.
The MAS defines environmental risk as “risk that arises from the potential adverse impact of the changes in the environment on economic activities and human well-being.”
Environmental issues of concern:
- Climate Change
- Loss of biodiversity
- Changes in land use
These environmental issues of concern call for urgent collective actions to address environmental risk. Thus, the Guidelines define environmental risks as beyond just climate change.
The Guidelines state that environmental risks can impact funds and mandates through three risk channels:
- Physical risk: impact of weather events and long-term or widespread environmental changes
- Transition risk: a process of adjustment to an environmentally sustainable economy, including changes in public policies, disruptive technological developments, and shifts in consumer and investor preferences
- Reputational risk can arise when asset managers invest in companies that carry out business activities that have a negative impact on the environment
1. GOVERNANCE AND STRATEGY
- The Board is responsible to approve an environmental risk framework and policies
- Senior Management is responsbile for developing and implementing the environmental risk management framework
- Set clear role and responsibilities for the Board and Senior Management
- Ensure adequate understanding, expertise, and resources to manage environmental risk
2. RESEARCH AND PORTFOLIO CONSTRUCTION
- Embed environmental risk considerations in their reserch and portfolio construction processes
- Environmental risk to be assessed at an individual asset and portfolio levels, through the use of international frameworks such as the Global Reporting Initiative (GRI) or the Task-Force on Climate-related Financial Disclosure (TFCD)
- Mindful of internal aggregate limits that their clients have set for specific sectors or types of activities
- Use of external and internal research
3. PORTFOLIO RISK MANAGEMENT
- Ongoing monitoring: put in place processes and systems to monitor, assess, and manage the potential and actual impact of environmental risk on individual investmens and portfolios on an ongoing basis; constantly re-assess the risk posed
- Scenario analysis: develop and document scenario analysis under a variety of different environmental scenearios with a focus on physical and transition risks and long-term mindset
- Capacity building: provide capacity and training internally to assess, manage, and monitor environmental risk
- Expected to help shape the corporate behavior of investee companies positively through engagement, proxy voting, and sector collaboration
- Balance between clients' interests and with the asset manager's investment objectives and strategy to mitigate the investment's exposure to environmental risk
- Collaborate with other asset managers
- Clear and meaningul disclosures to stakeholders that disclose the potential impact of material environemental risk
- Disclosures may be consolidated at the group or head office level
- Be in accordance with international reporting frameworks (E.g. "TCFD")
- Regularly review disclosures to improve comprehensiveness