Reed Smith Client Alerts

On 25 June 2020, the Monetary Authority of Singapore (MAS) published a set of three consultation papers on proposed Guidelines on Environmental Risk Management (the ERM Guidelines) for banks and finance companies, insurers and asset managers (collectively, FIs).1 The ERM Guidelines, created in collaboration with industry associations,2 form part of the MAS’ Green Finance Action Plan announced in November 2019, the objective being to build resilience to environmental risk in the financial sector and develop green finance solutions and markets, leveraging innovation and technology. To support this overarching initiative, the ERM Guidelines set out detailed metrics at the FI level that are designed to enhance the ability of FIs to address environmental risk and transition to an environmentally sustainable economy.

Autores: Hagen Rooke Peter Zaman David Adelman Lee Ann Dillon Janet Bo Chun Cheung M. Tamara Box Nicholas Rock Claude Brown Johnny Lim (Resource Law LLC)

Background

Singapore’s drive towards environmentally sustainable financial conduct is consistent with international commitments and policy principles that are giving environmental, social and corporate governance (ESG) standards an increasingly prominent role in the financial sector. These include, among others, the Paris Agreement (which obliges its 195 signatories, including Singapore, to reduce the risk and impacts of climate change with an objective of the overall amount of global emissions peaking by 2030 at the latest), the United Nations Principles for Responsible Investment (which have led to an increase in asset owners and professional investors adopting ESG objectives and policy commitments), and the United Nations Sustainable Development Goals (a set of aspirational sustainable objectives, many with targets that have to be achieved by 2030, agreed to by all member states of the United Nations).

The MAS is also working closely with other financial supervisors to strengthen the financial system’s resilience to environmental risk, for example, within the Central Banks and Supervisors Network for Greening the Financial System, the Sustainable Insurance Forum, and the International Organisation of Securities Commissions.

Overview of the ERM Guidelines

The ERM Guidelines set out the MAS’ supervisory expectations for FIs in respect of their governance, risk management, and disclosure of environmental risk. They comprise the following core components:

  • Governance – Boards and senior management of FIs are expected to factor environmental considerations into their strategies, business plans and product offerings, and maintain effective oversight of the management of environmental risk.
  • Risk management – FIs should implement policies and processes to assess, monitor, and manage environmental risk.
  • Disclosure – FIs should disclose their environmental risks on a regular and meaningful basis, with a view to enhancing market discipline by investors.

In this context, environmental risk should be understood not only as the risk of reputational impact on an FI, but also as a factor that has a direct financial bearing on FIs due to environmental interactions with their physical and transition risk channels. In relation to physical risk, the MAS highlights the impact of weather events and long-term or widespread environmental changes, which can impair the collateral value of bank loans and revenue-generating assets, and can lead to significant insurance claims. As concerns transition risk, the MAS considers this to arise from the process of adjustment to an environmentally sustainable economy, including changes in public policies, disruptive technological developments, and shifts in consumer and investor preferences. For example, in the transition to a low-carbon economy, loans and investments in carbon-intensive sectors can be impaired as the profitability of these businesses is impacted. This impact may be aggravated by other environmental factors, such as changes in land use, pollution and loss of biodiversity.

 Alert 20-426 chart image

We set out below a summary overview of the proposed requirements under the ERM Guidelines for banks, asset managers and insurers, respectively. Given that business models and their scale and scope differ across FIs, an FI will be expected to apply the ERM Guidelines in a manner commensurate with the size and nature of its activities and its risk profile.