The Monetary Authority of Singapore (“MAS”) recently released new guidelines for financial institutions (‘FI”), including asset managers, to enhance FIs management of their environmental risks. On 25th June 2020, MAS issued a consultation paper to introduce the guidelines on environmental risk management to enhance FIs resilience to and management of environmental risks. The response to the said consultation was released on 8th December 2020.
The environmental risk management guidelines would be applicable to all asset managers that have discretionary authority over the investments of the funds/mandates that they are managing. Fund managers who do not have discretionary authority over the funds/mandates they manager are not required to meet the environmental risk management guidelines requirements.
The environmental risk management guidelines clarifies that the guidelines are not just limited to funds/mandates that have an environmental focus and that the guidelines are also applicable to funds/mandates with passive strategies.
Asset managers are required to adhere to the environmental risk management guidelines in a way that that commensurate with the size and nature of their activities. Global asset managers, may adapt to their group’s environmental risk management framework and policies if they meet the principles set out in the environmental risk management guidelines issued by MAS.
Governance and Strategy
Board and senior management are required to identify key environmental risks and opportunities over short and long term and evaluate the actual and potential impact of these risks and opportunities on the asset manager’s strategies and business plans. Policies should be put in place to monitor exposures to environmental risk, including resilience of the funds/mandates and set the tone and approach on environmental risk management for different asset classes asset managers invest in and investment strategies that it employs.
Senior managers are responsible for maintaining effective oversight of the environmental risk management and disclosures and ensure adequate integration of environmental risk to the overall risk management framework. It is also part of their responsibilities to ensure adequate escalation process are put in place to address material environmental exposures and ensure timely action are taken place.
Asset managers are required to maintain clear allocation of responsibilities for management of environmental risk. Business line as the first line of defence that considers environmental risk as part of investment process, risk management and compliance function as second line of defence that monitor’s the implementation of the risk management policies and internal audit function as third line of defence.
Research and Portfolio Construction
Asset managers should ensure environmental risks in their research and portfolio construction process and apply sufficient risk criteria to identify sectors with higher environmental risks. For sectors with higher environmental risk, asset managers should develop sector-specific guidance to aid its investment personnel in understanding the environmental issues pertinent to such sectors. For equity investments, asset managers could consider environmental impact risk factors that would affect long term success of the issuer. For fixed income investments, asset managers could consider a variety of key environmental indicators from the issuers as well as external environmental data providers to achieve impartial and holistic view of the environmental risks. For direct real estate projects, asset managers consider a variety of operational indicators (in areas such as GHG emissions, energy management, waste and water management), as well as the possible impact from climate change and extreme weather events. For investments in REITS, additional assessment could be given to the governance and strategy of the REIT manager in monitoring and evaluating the environmental risks of the assets within the trust.
Portfolio Risk Management
As part of portfolio risk management, asset managers should put in place adequate monitoring process to address environmental risks on individual investments and portfolios on an ongoing basis. Where environmental risk is material, asset managers should, amongst other things, include scenario analysis of portfolios for risk management purposes, review potential action that needs to be taken and adopt practices of disclosures.
Asset managers are encouraged to equip staff with adequate training to assess, manage and monitor environmental risks in a timely manner.
As part of environmental risk management guidelines, asset managers are expected to exercise sound stewardship to help shape the corporate behaviour of investee companies through engagement, proxy voting and sector collaboration. Asset managers are encouraged to establish process to prioritize issue and companies for engagement that is consistent with interests of customers and asset manager’s objectives and strategy, maintain documentation to support stewardship participation, and consider collaborative engagements with other asset managers
As part of environmental risk management guidelines, asset managers are required to disclosure manner in which they intend to approach environmental risks in clear and precise manner to stakeholders, including existing and potential customers, ensure disclosures are in accordance to international reporting framworks and review disclosures regularly.
MAS has clarified that as part of its supervisory approach, they will consider how asset managers have incorporated environmental risk in their investment activities. Asset managers are required to implement the environmental risk management guidelines in a risk proportionate manner in accordance to their size, nature of business and funds/mandates managed.
Asset managers have a transition period of 12 months from issuance of environmental risk management guidelines to assess and implement as required.
How can Argus Assist?
We, at Argus Global, are a team of consultants who specialize in regulatory compliance for financial institutions. We assist to do the following:
- Draft and incorporate environmental risk management policies and procedures into Compliance Manual and Risk Management Framework
- Conduct gap analysis on existing policies against environmental risk management guidelines and provide recommendation for improvements.
- Provide regulatory advice on key steps to take to address and implement the environmental risk management guidelines
Please reach out to us for an initial discussion at firstname.lastname@example.org.
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