MAS consults on proposed guidelines for financial institutions on transition planning for a net zero economy

27 October 2023

On 18 October 2023, the Monetary Authority of Singapore (“MAS”) published a set of consultation papers proposing guidelines on transition planning by asset managers, banks and insurers to enable the global transition to a net zero economy. The consultation closes on 18 December 2023.

The proposed Guidelines on Transition Planning (“Proposed Guidelines”) aim to facilitate the transitional planning processes of financial institutions (“FIs”) as they build climate resilience and enable robust climate mitigation and adaptation measures by their customers and investee companies.

MAS has previously set out supervisory expectations in relation to environmental risk in the Guidelines on Environmental Risk Management. The Proposed Guidelines are intended to supplement these with additional granularity in relation to FIs’ transition planning processes. They focus on FIs’ internal strategic planning and risk management processes to prepare for both risks and potential changes in business models associated with the transition.

Engagement rather than divestment

The Proposed Guidelines clarify that engagement, rather than divestment, should be the key lever for FIs to steward their customers and investee companies to transition to net zero in an orderly manner. FIs should engage their customers and investee companies on the physical and transition risks they face and work closely with them to implement effective measures to reduce their carbon footprint and to build resilience to climate change.

Indiscriminate withdrawal of credit, insurance coverage or investments by FIs from customers or investee companies deemed to be more exposed to climate-related risks will hinder entities with credible transition and adaptation plans from securing the financial support they need to make the transition.

Managing misalignments between targets and actual trajectories

The Proposed Guidelines state that where there is a misalignment between the targets set and the actual trajectories, FIs should have a structured process in place to explain the variance. FIs should be able to attribute causation to specific factors and consider the need to implement additional measures to achieve their stated targets and commitments. If the misalignment is assessed to be fundamental and not temporary, the FI should review the continued relevance of its targets.

Adopting a multi-year approach when assessing sustainability

FIs should take a multi-year approach, beyond the typical financing or investment time horizons, to facilitate a more comprehensive assessment of climate-related risks. Given that the time horizons for physical and transition risks to manifest are long and uncertain, FIs need to take a multi-year risk perspective when assessing the sustainability of their business models and portfolios. This implies the use and continual refinement of forward-looking risk management tools such as scenario analysis. FIs should also seek to improve data availability and understanding thereof, including the need to contextualise metrics for better risk assessment. FIs are also encouraged to consider the setting of decarbonisation targets that are supportive of the global transition to a low carbon economy.

Holistic treatment of risks

A holistic treatment of risks enables better risk discovery. The interactions across risk drivers in the transition towards a net zero economy are complex. As FIs are exposed to climate-related risks through the effects of both transition and physical risks to their portfolios, they should take an integrated approach to climate mitigation and adaptation measures by working closely with their customers and investee companies.

Consideration of environmental risks beyond climate-related risks

Given the inter-dependencies between climate and nature, MAS states that environmental risk beyond climate-related risks should be proactively and holistically considered as part of FIs’ transition planning process. While FIs have been prioritising climate-related risks, for which methodologies are more advanced (albeit still developing), it is increasingly recognised that climate and nature are closely connected. It is also possible that there can be trade-offs in terms of environmental degradation arising from the pursuit of climate solutions.

Transparency

FIs are expected to disclose meaningful and relevant information to enable stakeholders to understand how they are responding over the short, medium and long term to the material climate-related risks, and the governance around processes for addressing such risks. Appropriate and sufficient levels of transparency will support the understanding of FIs’ risk management strategies and risk profiles, as well as accountability for any public commitments made by them.

Reference materials 

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

More