The Monetary Authority of Singapore (MAS) has issued the “Guidelines on Environmental Risk Management (Asset Managers) – Transition Planning” to set out supervisory expectations for asset managers in managing climate-related risks. These guidelines, referred to as the TPG, build on previous expectations to incorporate environmental considerations into business strategies. Transition planning is defined as the internal risk management and strategic processes an entity undertakes to prepare for climate-related risks and shifts in business models, resulting in a documented transition plan.

Introduction

The TPG aim to ensure asset managers implement sound internal processes that adequately address climate-related risks and facilitate risk management by investee companies, thereby supporting broader financial stability. MAS recognises that climate-related risks, encompassing both physical and transition factors, can impact traditional risk types like credit and market risk across managed portfolios. For instance, if investee companies fail to generate sufficient cashflows due to climate change effects, it could lead to significant downward revaluations of portfolios. Asset managers are expected to understand these implications and adapt their business models, governance, and risk management practices accordingly. These guidelines apply to asset managers with discretionary authority, including those holding capital markets services licences for fund management and real estate investment trust management. Where management is delegated to sub-managers, the primary manager retains overall responsibility and must monitor alignment with these expectations.

Governance and strategy

The Board of Directors and senior management are responsible for ensuring that business strategies consider how current and future changes in the operating environment arising from climate change impact risk profiles. Senior management should actively embed climate-related strategies within operations by establishing robust governance processes and a clear tone from the top. Key steps include creating clear lines of communication and escalation across functions and ensuring that internal strategies align with any publicly communicated climate commitments. Furthermore, mechanisms like performance measurement and remuneration structures should be established to align internal behaviour with climate-related risk management. Transition planning is viewed as an iterative process that requires regular refinement to incorporate industry developments and emerging best practices.

Portfolio management

In developing product offerings and investment strategies, asset managers should consider the potential impact of climate-related risks, such as stranded asset risk and transition risks in carbon-intensive sectors. A differentiated approach is recommended for sectors posing higher risks, using global, regional, or jurisdictional sectoral pathways to inform decisions. Asset managers should factor in the specific circumstances of each investee company, including their jurisdictional environment, readiness to manage transition risks, and the adequacy of risk management within their supply chains.

Forward-looking tools, such as scenario analysis, are encouraged for risk discovery and quantification. Asset managers should develop modelling frameworks for different asset classes and time horizons, referencing leading industry practices from organisations such as the Network for Greening the Financial System (NGFS), the Intergovernmental Panel on Climate Change (IPCC), or the International Energy Agency (IEA). To address data gaps, asset managers should utilise metrics to track portfolio risk exposures, identifying the scope, coverage, and limitations of the chosen data. While proxy data may be used, its sources and methodologies must be documented, and efforts to obtain primary data should continue. Staff should be equipped with adequate expertise through capacity building and training, supported by a robust data strategy and IT infrastructure that ensures data accessibility across functions.

Engagement and stewardship

Active engagement and stewardship are vital for facilitating risk management by investee companies and mitigating portfolio exposure to climate risks. Asset managers should develop an engagement and stewardship plan with clear objectives and equip staff with toolkits for consistent application. These toolkits should cover various approaches, including bilateral engagement, proxy voting, and collaborative initiatives. MAS emphasises that asset managers should not indiscriminately divest from investee companies exposed to higher risks, as this could lead to stranded assets and a disorderly transition. Instead, a risk-proportionate approach should be taken to collect sufficient climate-related data, such as self-assessed impacts, commitments, and existing measures to address physical and transition risks, to inform investment and risk decisions.