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MAS proposes guidelines for financial institutions to manage environmental risk
BUSINESSES which do not manage their environmental risk adequately could find themselves facing higher borrowing costs or limits on their loans down the road, if the proposed guidelines released by the Monetary Authority of Singapore (MAS) on Thursday are accepted and implemented.
Boards and senior management of financial institutions are also expected to incorporate environmental considerations into their strategies, business plans and product offerings, and to maintain effective oversight of the management of environmental risk, said MAS.
These guidelines are part of a set of three consultation papers issued by the authority on environmental risk management for banks, insurers and asset managers in efforts to shape Singapore into a global centre for green finance.
MAS said the guidelines aim to enhance financial institutions’ (FIs) resilience to environmental risk, and to strengthen the financial sector’s role in supporting the transition to an environmentally sustainable economy in Singapore and the region.
These guidelines, co-created with FIs and industry associations, set out MAS’ supervisory expectations for banks, insurers and asset managers in their governance, risk management and disclosure of environmental risk.
In its guidelines for banks, the responsibilities of the board include approving an environmental risk management framework and policies, and setting clear roles and responsibilities of the board and senior management.
MAS also proposed that the board ensure that environmental risk, where material, is addressed in the bank’s risk-appetite framework, so that environmental risk exposures beyond the bank’s risk appetite can be promptly recognised and addressed.
Senior management will be responsible for developing an environmental risk-management framework and policies, regularly reviewing their effectiveness, and allocating adequate resources to manage environmental risk.
Where environmental risk is deemed material to a bank, the bank should designate a member of senior management or a committee to oversee environmental risk, said MAS in the consultation paper.
“This would promote clarity in accountability over environmental risk management, to ensure that such issues are reviewed at a sufficiently senior level.”
Banks should develop a risk-management framework, and put in place “robust policies and processes” to manage both the financial and reputational impact of environmental risk. In this regard, the bank should identify, assess, mitigate and monitor material environmental risk at both a customer and portfolio level, said MAS.
At the customer level, MAS proposed that banks undertake an environmental risk assessment of each customer as part of its assessment process for credit facilities or capital markets transactions, particularly for sectors with higher environmental risk.
For transactions with higher environmental risk, MAS proposed that the bank undertake enhanced due diligence, and escalate to an internal committee or appointed individual for approval where applicable. Such processes are intended to bring about a greater level of scrutiny and accountability on such transactions. The bank should also engage each customer that poses higher risk, to improve its environmental risk profile, and support its transition towards sustainable business practices, said MAS.
In the case of customers who fail to manage their environmental risk adequately, the guidelines proposed a range of "mitigating options" for banks; these include reflecting the cost of the additional risk in the loan pricing, applying limits on the loan exposure, and re-assessing the customer relationship.
At the portfolio level, MAS proposed that banks develop tools and metrics to monitor and assess their exposures to environmental risk. Such tools would enhance the bank’s capacity to measure the impact of environmental risk on its business, and take appropriate mitigating measures to manage significant risk in its portfolio, said MAS.
MAS also proposed that banks disclose - at least annually - their approach to managing environmental risk and the potential impact of material environmental risk on the bank. The latter includes quantitative metrics such as exposures to sectors with higher environmental risk. A bank’s disclosure may be consolidated at the group or head-office level.
Banks should take reference from international reporting frameworks, including the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, to guide their environmental risk disclosures, said MAS.
Ong Chong Tee, MAS deputy managing director, said: “Even as FIs, regulators and policy-makers grapple with Covid-19 and its impact, it is crucial to keep our focus on environmental issues as they pose clear challenges for our economies and financial systems.”
The public consultation papers are available on MAS’ website. Interested parties are invited to submit their comments on the proposed guidelines by Aug 7, 2020.