Guidelines for Financial Institution Transition Plans
Monetary Authority of Singapore (MAS) releases guidelines for financial institution transition plans, aimed at providing support for asset management companies, banks, and insurance companies to establish transition plans.
The Monetary Authority of Singapore believes that the guidelines are a supplement to existing environmental risk management guidelines, and financial institutions need to incorporate climate related risks into their strategies, risk appetite, and business planning.
Related Post: Monetary Authority of Singapore Releases Guidance on Net Zero Transition for Asset Managers
Background of Guidelines for Financial Institution Transition Plans
Financial institutions need to assess and manage the physical and transition risks brought about by climate change, which will affect traditional risk types such as credit risk, market risk, and underwriting risk. Transition plans can help financial institutions understand the impact of climate change and adjust their business models, governance, and risk management practices. In addition to managing their own climate risks, financial institutions also need to actively communicate with investees and clients to reduce the risk of stranded assets.
The transition plan of financial institutions depends on the development of the transition path in the local jurisdiction. Based on considering the existing jurisdictional transition roadmap, encourage investees and clients to take risk management actions. Asset management companies can elaborate on transition plans in investment management agreements, while insurance companies and banks can communicate with clients when providing credit, underwriting, and investment activities.
Introduction to Guidelines for Financial Institution Transition Plans
The guide for the transition plan of financial institutions can be divided into three parts, namely governance and strategy, risk management, and engagement.
Governance and Strategy
When formulating business strategies, the board of directors and senior management should consider the impacts of climate change and ensure that risk appetite, frameworks, and policies can address these risks. These measures include:
- Establish robust governance processes, understand key climate related assumptions, dependencies, and risks.
- Emphasize the necessity of addressing climate risks and establish cross departmental response processes.
- Adjust performance measurements, compensation policies, and incentive structures to address climate risks.
- Regularly review the effectiveness of climate governance and strategies, incorporating them into industry development and practice.
Risk Management
Financial institutions should adopt differentiated approaches for high climate risk industries in their transition plans, considering the characteristics of different investees and clients. For example, asset management companies investing in carbon intensive industries may face higher transition risks if the investee is unable to adjust its business model in a timely manner. Financial institutions can use forward-looking tools such as scenario analysis and stress testing in their transition planning process to identify and quantify climate risks. These scenarios can refer to international institutions such as the Network for Greening the Financial System (NGFS) and the International Energy Agency (IEA) or be developed and designed by financial institutions themselves.
Financial institutions can choose data indicators to measure their risk exposure and determine whether it is consistent with climate governance and strategies. Financial institutions need to define the scope of these indicators, classify and analyze climate risks, and monitor changes in indicators. For example, after setting short-term, medium-term, and long-term decarbonization goals, financial institutions can disclose the financing emissions of their investment portfolios and assess the climate risks they face from industry, geographically, and other perspectives.
Engagement
Financial institutions should establish processes to communicate climate risks and response measures with investees or clients, encouraging them to proactively manage these risks to reduce the exposure of their investment portfolios to climate risks. Financial institutions also need to ensure that their employees have the knowledge and ability to communicate effectively and adjust the frequency and intensity of communication according to the level of climate risk.
Reference:
MAS Sets Supervisory Expectations on Financial Institutions for Transition Planning
