On December 8, 2020, the Monetary Authority of Singapore (MAS) published the Guidelines on Environmental Risk Management for Asset Managers. These guidelines are aimed at improving the management of environmental risks by fund management companies and real estate investment trust (REIT) managers, in line with the expectations of the MAS.
The primary objective of the guidelines is to enhance the resilience of funds (including REITs) and segregated mandates (hereinafter collectively referred to as funds / mandates) managed by asset managers by setting out sound environmental risk management practices for asset managers.
The guidelines are applicable to
- All holders of a capital markets services license for fund management (LFMC) and REIT management
- Fund management companies registered (RFMC) under paragraph 5(a)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations (Rg.10) [SF(LCB)R].
Both these categories essentially fall under the bracket of asset managers.
Asset managers face several risks such as
- Environmental risks: These include physical risks (from weather events and widespread, long-term environmental changes) and transition risks (related to adjusting to an environmentally sustainable economy with the requisite changes in public policy, technology, and consumer and investor preferences).
- Reputational risks: These come from investing in companies engaged in business activities that impact the environment negatively. The resultant poor perception of asset managers could affect their chances of growing or maintaining their assets under management.
Source: 2020 Guidelines on Environmental Risk Management (Asset Managers) – MAS
Environmental risks stem from the possible impact of environmental changes on economic activity and the well-being of people. These changes could include land use changes, pollution, and loss of biodiversity. The guidelines address environmental risks across five pillars.
- Governance and strategy: The guidelines clarify that the board of directors (Board) and senior management are required to identify environmental risks and opportunities over the short and long term, and to evaluate the actual and potential impact of these risks and opportunities on the asset manager’s strategies, business plans, and products. They must maintain effective oversight of the asset manager’s environmental risk management and disclosure. They should also oversee the integration of environmental risks into the asset manager’s investment risk management framework.
As per the guidelines, the Board, or a committee delegated by it, is responsible for
- Approving an environmental risk management framework and policies to assess and manage the environmental risks of managed assets
- Setting clear roles and responsibilities of the Board and senior management
- Ensuring that directors have an adequate understanding of environmental risks
As per the guidelines, the senior management is responsible for
- Ensuring the development and implementation of an environmental risk management framework and policies, as well as tools and metrics to monitor exposures to environmental risk
- Regularly reviewing the effectiveness of the frameworks, policies, tools, and metrics, as well as making appropriate revisions
- Establishing an internal escalation process for effective environmental risk management
- Allocating adequate resources with appropriate expertise
- Research and portfolio construction: Asset managers should embed relevant environmental risk considerations in their research and portfolio construction processes if they have assessed them to be material. They must
- 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 investment personnel in understanding the pertinent environmental issues
- Consider the materiality of environmental risks with respect to different asset classes (such as public equity, fixed income, and real estate/infrastructure)
- Be mindful of internal aggregate limits set by customers for specific sectors or types of activities
- Consider the investment objective and strategy (active versus passive) of the managed fund / mandate
- Construct portfolios by measuring and managing the aggregated effect of various environmental risks in a portfolio
- Portfolio risk management: Asset managers should have appropriate processes and systems to monitor, assess, and manage the potential and actual impact of environmental risks on individual investments and portfolios on an ongoing basis.
- Ongoing monitoring: Asset managers must monitor and escalate any material environmental risk exposures and exceptions in accordance with their internal escalation process to ensure appropriate and timely actions.
- Scenario analysis: They must include the relevant short- and long-term environmental scenarios (using conservative and regularly reviewed assumptions) into their portfolio analyses process for risk management purposes. They must use the results of the analyses while reviewing the environmental risk profile of their managed portfolios, and environmental risk management policies and practices.
- Capacity building: Asset managers must equip their staff, through capacity building and training, with adequate expertise to assess, manage, and monitor environmental risks in a rigorous, timely, and efficient manner.
- Stewardship: Asset managers are expected to shape the corporate behavior of investee companies through engagement and disclose their environmental risk management approach to stakeholders.
- Asset managers can influence the corporate behavior of investee companies positively through engagement, proxy voting, and sector collaboration.
- They can establish a process to prioritize issues and companies for engagement, aligned with the interests of their customers and investment objective and strategy.
- Asset managers should maintain proper documentation to support their engagement efforts, and report on their stewardship initiatives.
- Their disclosure should be in accordance with well-regarded international reporting frameworks, such as recommendations by TCFD.
- Asset managers should review their disclosures regularly.
- Disclosure: Asset managers should disclose their approach to managing environmental risk in a manner that is clear and meaningful to their stakeholders. Their disclosure should be in accordance with well-regarded international reporting frameworks, such as TCFD. The TCFD recommendations provide a useful framework for the disclosure of climate-related risks.
- Governance – The Board’s oversight and management’s role in assessing and managing climate-related risks and opportunities
- Strategy – The actual and potential impact of climate-related risks and opportunities on the asset managers’ businesses, relevant products, and investment strategies
- Risk management – How asset managers identify, assess, and manage climate-related risks
- Metrics and targets – Calculations that enable asset managers to assess and manage relevant climate-related risks and opportunities
The MAS had initially proposed a 12-month transition period for implementing the guidelines. However, in its consultation responses, it recognized that asset managers may face multiple challenges in implementation. Accordingly, the timeline was extended to 18 months, and asset managers were permitted to implement the guidelines in phases but were expected to demonstrate evidence of their implementation progress over the transition period.
Climate change is a critical aspect of operations that asset managers can hardly afford to ignore, and the MAS guidelines seek to guide them on sound practices to boost their resilience to the associated environmental risks. If you want to set off on a path to sustainable asset management functions, reach out to us to discuss how we can support you.