MAS issues guidelines on environmental risk management for banks, insurers and asset managers: Allen & Gledhill

16 December 2020

On 8 December 2020, the Monetary Authority of Singapore (“MAS”) issued three Guidelines on Environmental Risk Management for financial institutions (“FIs”) (collectively, “Guidelines”):

Guidelines on Environmental Risk Management (Banks) (“Guidelines for Banks”)
Guidelines on Environmental Risk Management (Insurers) (“Guidelines for Insurers”)
Guidelines on Environmental Risk Management (Asset Managers) (“Guidelines for Asset Managers”)

The Guidelines aim to enhance the banking and insurance sectors’ resilience to and management of environmental risk by setting out sound risk management practice, as well as to enhance the resilience of funds (including real estate investment trusts (“REITs”)) and segregated mandates (“funds/mandates”) that are managed by asset managers by setting out sound environmental risk management practices that asset managers can adopt.

In conjunction with the issue of the Guidelines, MAS issued three sets of Response to feedback received on the consultation papers issued on 25 June 2020 (“consultation papers”). MAS states that it had carefully considered the feedback received and has incorporated them as appropriate.

Set out below is an overview of how the Guidelines apply to FIs and their activities, as well as the expected implementation approach.

Applicability to FIs and their activities

The Guidelines apply to FIs and their activities as follows:

Banks: The Guidelines for Banks apply to all banks, merchant banks and finance companies in Singapore. It applies to banks extending credit to corporate customers, underwriting capital market transactions, and other activities that expose banks to material environmental risk, as well as on a group basis for locally-incorporated banks. Banks that are branches or subsidiaries of global groups may take guidance from their group’s environmental risk management frameworks that meet the guidelines’ expectations. Banks with material investment activities that they have discretionary authority over should refer to the Guidelines for Asset Managers for sound practices on the management of environmental risk with respect to investments. Banks are expected to apply the guidelines to both existing and new credit facilities and capital market transactions.
Insurers: The Guidelines for Insurers apply to all insurers, including insurers carrying on business in Singapore under a foreign insurer scheme established under Part IIA of the Insurance Act. It applies to insurers’ underwriting and investment activities, and other activities that expose insurers to material environmental risk, as well as on a group basis for locally-incorporated insurers. Insurers that are branches or subsidiaries of global groups may take guidance from their group’s environmental risk management frameworks that meet the guidelines’ expectations. Insurers are expected to apply the guidelines to both existing and new businesses.

Where investments are concerned, insurers should put in place appropriate processes and systems to monitor, assess and manage the potential and actual impact of environmental risk on individual investments and portfolios on an ongoing basis, where material. Insurers should consider engaging with companies individually and asset managers, as appropriate, to help shape the corporate behaviour of investee companies positively through engagement, proxy voting and sector collaboration, including by supporting investee companies’ efforts to transition towards more sustainable business practices, while maintaining risk management standards.

Insurers with investment activities should also refer to the Guidelines for Asset Managers for sound practices on the management of environmental risk with respect to investments.

Asset managers: The Guidelines for Asset Managers apply to all holders of a capital markets services licence for fund management (LFMC) and REIT management, and to fund management companies registered (RFMC) under the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations. Asset managers which are part of global groups may take guidance from or leverage their group’s environmental risk management governance structure, framework and policies that are determined by asset managers to meet the principles set out in the guidelines.

The Guidelines for Asset Managers would generally be applicable to asset managers that have discretionary authority over the investments of the funds/mandates that they are managing, and would not apply to asset managers that do not have discretionary authority over the investments of the funds/mandates. The guidelines are also applicable to banks with material investment activities that they have discretionary authority over.

Asset managers should convey their expectations on environmental risk management to sub-managers and advisors that investment management has been delegated to as asset managers retain overall responsibility for environment risk management. Further, asset managers should put in place appropriate processes and procedures to assess and monitor the sub-managers’ or advisors’ compliance with expectations set.

Implementation approach

In the consultation papers, MAS proposed to provide a transition period of 12 months after the Guidelines are issued. In the responses, MAS stated it will extend the transition period from 12 months to 18 months, recognising that FIs may face initial challenges in implementing the Guidelines, and that the approaches to managing and disclosing environmental risk are expected to mature as the methodologies for assessing, monitoring and reporting such risk evolve.

MAS states that FIs should strive to implement the Guidelines as soon as possible, and demonstrate evidence of implementation progress over the transition period. Further, MAS will start engaging FIs on their implementation progress from Q2 2021.

In particular, banks and insurers should strive to make their first disclosure as soon as practicable after the applicable Guidelines have been issued and within the transition period. The first disclosures should be made in the bank’s or insurer’s next annual report/sustainability report following the end of the 18-month transition period and on its website immediately after the 18-month transition period.

Asset managers should strive to implement the applicable Guidelines as soon as possible, and in phases where practicable, e.g. asset managers could start with establishing governance structures and accountability.

The Guidelines state that the FIs should implement the Guidelines in a way that is commensurate with the size and nature of their activities as well as their risk profile, including the investment focus and strategy of the funds/mandates of asset managers. In particular, the Guidelines for Asset Managers do not prohibit or restrict asset managers from complying with applicable laws and discharging their fiduciary duties and other legal obligations to their customers.

Reference materials

The following materials are available from the MAS website www.mas.gov.sg: