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Monetary Authority of Singapore guidelines on environmental risk management for asset managers

Insight 24 August 2021

Monetary Authority of Singapore guidelines on environmental risk management for asset managers

In this briefing note, we unpack some of the key considerations for asset managers to prepare in advance to abide by the guidelines on environmental risk management for asset managers.

On 8 December 2020, the Monetary Authority of Singapore (MAS) issued Guidelines on Environmental Risk Management aimed at asset managers.

The guidelines are intended to drive the transition to a green economy through integrating environmental risk considerations in investment decisions. A transition period of 18 months ending June 2022 is allowed, by which all asset managers are expected to comply.

Who is impacted?

All holders of a capital markets services licence for fund management

Real estate investment trust management

Registered fund management companies

It is important to note that the guidelines apply to managers that have discretionary authority over the investments and mandates they are managing. Additionally, even if a manager delegates the investment management to a sub-manager or advisor, it ultimately retains the overall responsibility for environmental risk management, and must have policies and procedures in place for the monitoring of delegates.

What is environmental risk?

The MAS defines environmental risk as a risk that can financially impact funds/mandates by asset managers through two risks:

  1. Physical risk: impact of weather events and long-term or widespread environmental changes.
  2. Transition risk: adjustment to an environmentally sustainable economy, including changes in public policies, disruptive technological developments, and shifts in consumer and investor preferences.

Who would manage environmental risk?

The MAS list five key areas for asset managers to look into for their compliance with the guidelines:

Boards

  • Approve an environmental risk management framework and policies
  • Set clear roles and responsibilities for the Board
  • Ensure directors have an adequate understanding of environmental risk
  • Ensure senior management has the appropriate expertise to manage environmental risk

Senior management

  • Ensure the development and implementation of an environmental risk management framework, including as well as tools and metrics to monitor exposures to environmental risk
  • Regular review of the effectiveness of the framework and its tools
  • Establish an internal escalation process
  • Allocate adequate resources with expertise to manage environmental risk
  • Timely updates to the Board on environmental risk issues
  • Embed environmental risk considerations when material through, for example, the evaluation of the environmental risk’s impact on an investment’s long-term return potential
  • Environmental risk to be assessed at 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)
  • Use of external and internal research
  • Differences noted between active and passive managers, where the latter would focus more on benchmarking and the former would be more involved at the level of the investee company’s governance and environmental risk framework

Ongoing monitoring

  • Set processes and systems to monitor and manage environmental risks on investments and portfolios on an ongoing basis, where the environmental risk is considered material.
  • Managers will be expected to re-assess risks and make decisions based on the outcome of such risks.

Scenario analysis

  • Asset managers will be expected to develop and document scenario analyses and their assumptions where the environmental risk is considered material.
  • Scenarios range from short to long term time frames and focus on physical and transition risks, with a regular review of assumptions made.
  • Asset managers are also expected to include qualitative assessments, especially if data is limited.

Capacity building

  • Asset managers will be expected to provide capacity and training internally to assess and manage environmental risk.
  • Expectation to actively support, engage, and collaborate with investee companies, notably through proxy voting, on their transition towards more sustainable practices.
  • Mitigants on environmental risks at investee company are the willingness to improve its practices, the relationship with the asset manager and the alignment with the manager’s environmental risk strategy.
  • Managers are also expected to collaborate with their peers, as recommended in the PRI.
  • Real Estate managers should also promote introducing water/waste efficiencies as well as obtaining green building certifications for underlying investments.
  • Clear and meaningful disclosures to existing and potential customers, with metrics being heavily encouraged.
  • The disclosures could be consolidated at group or head office.
  • Disclosures should be made in accordance with international standards, notably the TCFD’s disclosures framework.
  • Disclosures are expected to be reviewed on a regular basis to improve their comprehensiveness to stakeholders.

How can Sanne assist?

Let's talk...

Should you require our expert services and need assistance on the implications of the above, we would be delighted to speak with you to discuss how Sanne can assist. Please contact Xander, Paul or Karlien directly.

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Xander Huang Head of Business Development, Singapore - Singapore
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Paul Séjournant Associate Director, Product Development - United Kingdom
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Karlien De Bruin Global Head of ESG - South Africa
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