Monetary Authority of Singapore Issues Guidelines on Environmental Risk Management for Asset Managers

Scope of Environmental Risk

The board and senior management should:

• identify environmental risks and opportunities over the short and long term and evaluate the actual and potential impact of these risks and opportunities on the Asset Manager’s strategies, business plans and products, including taking into consideration responses to the objectives set out under international agreements and national policies;
• set the tone and articulate the Asset Manager’s approach on environmental risk management for the different asset classes it invests in and investment strategies that it employs;
• maintain effective oversight of the Asset Manager’s environmental risk management and disclosure and also oversee the integration of environment risk into the Asset Manager’s investment risk management framework; and
• designate a senior management member or a committee to oversee environmental risk, to ensure that such issues are reviewed at a sufficiently senior level, where environmental risk is deemed material to the assets managed.

Asset Managers should have in place a clear allocation of responsibilities for management of environmental risk in accordance with the three lines of defence model, (i.e. business line staff as the first line of defence, risk management and compliance functions as the second line of defence and the internal audit function as the third line of defence). The Response clarifies that for smaller Asset Managers which do not have the relevant function(s) and where the three lines of defence are not practicable, MAS will hold the CEO and directors accountable.

Asset Managers should:

• embed relevant environmental risk considerations in their research and portfolio construction processes if they have assessed them to be material;
• consider both transition and physical risks on an individual asset and/or portfolio level and take reference from international standards and frameworks;
• apply risk criteria to identify sectors with higher environmental risk and develop sector-specific guidance to aid their investment personnel in understanding the environmental issues pertinent to such sectors;
• be mindful of internal aggregate limits that their customers have set for specific sectors or types of activities; and
• for portfolio construction, include measurement and management of the various environmental risk factors that are present in a portfolio on an aggregate basis, where material.

The Response clarifies that for smaller Asset Managers, to address the issue of cost, one possibility is for them to initially rely on publicly available instead of proprietary information or paid databases to conduct their research on investee companies and identify sectors which are more affected by environmental risk.

Asset Managers should:

Ongoing Monitoring

• 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, and escalate material environmental risk exposures and exceptions to ensure appropriate and timely actions are taken to address the risk;

Scenario Analysis

• where environmental risk is material in the investment portfolios, develop capabilities in scenario analysis (including keeping abreast of good practices) to assess its impact on the portfolios, including the portfolios’ resilience to financial losses under a range of outcomes;
• include short and long-term environmental scenarios (using conservative and regularly reviewed assumptions) into its scenario analysis of portfolios for risk management purposes, where relevant, and incorporate forward-looking information in such scenarios;
• where data may be limited, consider qualitative assessments and engage investee companies to adopt practices and framework of disclosure that best identify the risks and opportunities most relevant to their businesses;
• use the results of their scenario analysis when reviewing the environmental risk profile of their managed portfolios, as well as their environmental risk management policies and practices;
• maintain proper documentation of the key features of the scenario analysis, including the choice of scenarios, reasonableness of assumptions, assessment of results, considerations on the need to take actions, and actions taken to address the risk;

The Response clarifies that smaller Asset Managers can consider performing scenario analysis at an individual investment level, focusing on sectors which are more affected by environmental risk, using a more qualitative approach before progressing to conducting scenario analysis at a portfolio level and adopting a more quantitative approach.

The Response also clarifies that Asset Managers are not required to disclose results of their scenario analysis to investors.

Capacity Building

• equip their staff, including through capacity building and training, with adequate expertise to assess, manage and monitor environmental risk in a rigorous, timely and efficient manner; and
• regularly review capacity building programs to incorporate emerging issues relating to environmental risk management.

Asset managers are expected to exercise sound stewardship to help shape the corporate behaviour of investee companies positively through engagement, proxy voting and sector collaboration.

Asset Managers should:

• establish a process to prioritize issues and companies for engagement that is consistent with the interests of their customers and aligned with the Asset Manager’s investment objective and strategy;
• maintain proper documentation to support their engagement efforts, and report on their stewardship initiatives; and
• consider collaborative engagements with other Asset Managers/investors for efficiency, enhanced influence and legitimacy when engaging investee companies, and to build knowledge and skills.

The Response clarifies that Asset Managers have the flexibility to adopt the most appropriate stewardship approach(es), taking into consideration the significance and nature of their relationship with the investee company.

The Response also states that smaller Asset Managers can consider working with like-minded investors to engage investee companies to address common environmental risk concerns and work towards more sustainable business practices over time and/or exercise proxy voting for investee companies that the Asset Managers have substantial exposure to and where the environmental risk is material.

Asset Managers should:

• disclose their approach to managing environmental risk in a manner that is clear and meaningful to their stakeholders, including existing and potential customers;
• ensure that disclosure is in accordance with well-regarded international reporting frameworks, such as recommendations by the Financial Stability Board’s Task-Force on Climate-related Financial Disclosures, to guide their environmental risk disclosure; and
• review their disclosures regularly to improve their comprehensiveness, clarity and relevance, taking into account generally accepted measurement practices and methodologies.

The Response clarifies that for smaller Asset Managers, disclosures can be more qualitative in nature as a start and more quantitative metrics and targets can be included, where relevant, over time.

The Response also clarifies that MAS accepts disclosure via annual reports, sustainability reports, investor reports and/or websites and that Asset Managers should evaluate the various means of disclosure and adopt an approach, as well as the frequency, that best enables them to provide clear, meaningful and timely information to their investors, customers and other stakeholders.