MAS Finalises Environmental Risk Management Guidelines for Banks

MAS has extended the transition period from 12 months to 18 months, and says it will start engaging key banks on their implementation progress from Q2 2021. 

MAS (Monetary Authority of Singapore) has issued its final guidelines on environmental risk management for banks, asset managers and insurers.

The final guidelines follow the release of three separate consultation papers in June, which were aimed at enhancing FIs’ resilience to and management of environmental risk.

The consultation papers had set out sound practices in relation to FIs’ governance, risk management and disclosure of environmental risk, co-created with the industry as part of MAS’ Green Finance Action Plan, announced last November during the Singapore Fintech Festival.

The release of the final guidelines was announced at this year’s Fintech Festival by MAS managing director Ravi Menon.

This article focuses on the environmental risk management guidelines for banks

In its consultation paper, MAS proposed to apply the guidelines to all banks, merchant banks and finance companies in relation to the extension of credit to corporate customers, underwriting for capital market transactions, and other activities that expose the bank to material environmental risk.

In its response to feedback, MAS says it recognises that methodologies for assessing, monitoring and reporting environmental risk factors beyond climate change are less developed at present, and expects banks’ risk management approaches to mature as methodologies and international frameworks evolve.

MAS also clarifies that banks have the flexibility to calibrate their risk management approach according to the risk posed and that banks should apply the guidelines in a manner that is commensurate with their size, nature of activities and risk profile.

For locally-incorporated banks, the guidelines apply on a group basis. For a locally-incorporated subsidiaries of a foreign bank, they apply and to all operations in Singapore as well as downstream operations at subsidiaries and branches in Singapore and overseas.

For banks with limited resources and capacity, MAS says it does not expect such firms to ramp up their environmental risk management capabilities immediately. Instead, smaller firms can take measured steps to uplift their environmental risk management capabilities.

Banks have the flexibility in determining the approach for addressing environmental risk in their risk appetite framework, including establishing specific or broader risk appetite statements.

In response to feedback, the final guidelines have been amended to make explicit the role of the three lines of defence, where:

  • In the first line of defence, business line staff should assess environmental risk before accepting new businesses and in the ongoing management of business relationships, particularly for sectors with higher environmental risk
  • In the second line of defence, the risk management function should monitor the business line’s implementation of the bank’s environmental risk management policies and challenge practices and decisions, while the compliance function should ensure adherence to applicable rules and regulations
  • In the third line of defence, the internal audit function should consider the robustness of the bank’s risk management framework in managing environmental risk as part of its independent review

The consultation proposed that banks engage each customer that poses higher environmental risk to improve their risk profile and support their transition towards sustainable business practices. Banks should also develop tools and metrics to monitor and assess exposures to environmental risk, including through scenario analysis and stress testing.

MAS has clarified that banks may calibrate the scope and extent of their assessment based on factors including the sector, customer’s operations, and nature and size of the transaction, and that the calibration approach should be documented appropriately.

“It is expected that a bank’s capacity to perform such assessments will mature over time, taking into consideration the availability of information from both internal and third-party sources,” the response paper says.

For banks that face challenges influencing customers to improve their environmental risk profiles, MAS highlights a range of options available to mitigate risk, including by reflecting the cost of the additional risk in loan pricing, applying limits on loan exposures, and re-assessing customer relationships.

They can also establish environmental performance targets for customers and incentivise them to attain the targets in a “progressive manner” through the use of financial instruments such as sustainability-linked loans, MAS says.

With regard to scenario analysis and stress testing, MAS says it will provide additional guidance to banks on relevant scenarios and risk factors, including through industry-wide stress tests in future, and also accord flexibility for banks to determine the scenarios, risk factors and stress testing frequency that are most appropriate for them in their individual assessments.

To support banks’ efforts in stress testing, MAS will within the next two years incorporate climate-related scenarios in its annual industry-wide stress tests for the financial industry, providing some standard assumptions that they can reference.

Offering clarification on the proposal that banks disclose their approach to managing environmental risk at least annually, MAS says disclosure via annual reports, sustainability reports or via their websites are appropriate, provided that banks take reference from international reporting frameworks such as the TCFD recommendations.

In response to market feedback, MAS has extended the transition period for the final guidelines from 12 months to 18 months. It will start engaging key banks on their implementation progress from Q2 2021.

MAS also says it is working with the financial sector to assess the potential of a taxonomy for Singapore-based FIs, which could cover both green and transition activities, and could also be applied to these FIs’ regional and global operations.

The final guidelines on environmental risk management for banks are available here.

Asset managers & Insurers

The final guidelines on environmental risk management for asset managers are available here. The response to consultative feedback is available here.

The final guidelines on environmental risk management for insurers are available here. The response to consultative feedback is available here.

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