MAS proposes transition planning guidelines for financial institutions amid global net-zero push
Janice Lim
INSTEAD of withdrawing credit from their customers in high-emitting sectors, banks should engage with them on how they can transition their business models to be low-carbon emitting and deal with the physical impacts of climate change.
This is because companies with credible climate transition and adaptation plans may be hindered from securing the financing they need to decarbonise, which could eventually impede the transition of the economy as a whole.
This is one of various guidelines the Monetary Authority of Singapore (MAS) has proposed on how banks can implement sound transition planning processes, as they build climate resilience for themselves and their customers against a global push for economies to transition to net-zero.
These proposed guidelines for banks are open for public consultation from Wednesday (Oct 18). MAS has also issued two other similar consultation papers for asset managers and insurers.
The consultation papers also proposed that financial institutions (FIs) should not view short-term increases in their portfolio’s financed emissions negatively.
Instead, their investments or loans to finance the transition activities of high-emitting companies should be viewed against potential longer-term improvement in their customers or investee companies’ climate risk profiles.
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Speaking at the launch of the consultation papers on Wednesday, Ho Hern Shin, deputy managing director for financial supervision at MAS, said that supporting transitioning customers or investee companies may result in higher interim carbon emissions.
“From time to time, a real gap may also arise between planned and actual emission when targets are missed. This should not deter financial institutions from facilitating the needed transition of the real economy. Instead, financial institutions should provide clear disclosures and explanations to help correct market misperceptions that they have departed from their espoused risk appetites,” she explained.
Other proposed guidelines include how FIs can take a multi-year approach for a more comprehensive assessment of a company’s climate-related risks, as well as a more integrated approach towards risk assessment, as the risk drivers of a net-zero transition are complex.
An integrated approach also means taking into account environmental risks such as the loss of nature capital and biodiversity.
To improve the transparency and credibility of their transition planning processes, FIs also should communicate how they have implemented their strategies and risk management processes to various stakeholders, whether through sustainability reports or general purpose financial reports.
In the consultation paper, MAS proposed to provide a transition period of 12 months after the guidelines are issued, so that FIs can assess and implement them where appropriate. They should also implement the final guidelines in a way that is commensurate with the size, nature and risk profile of their activities. The transition planning processes are also not set in stone, and MAS expects FIs to adapt their processes along with changes in best practices.
MAS managing director Ravi Menon said that indiscriminate divestment from carbon-intensive activities will not lead to a net-zero world.
“Rather, financial institutions must actively support their borrowers, insured parties, and investee companies to progressively decarbonise their activities through credible transition plans,” he noted.
“We may have to accept short-term increases in financed, facilitated, or insurance-associated emissions arising from these plans, provided these plans support climate-positive outcomes consistent with a net-zero pathway.”
The public consultation ends on Dec 18.
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