Opening Remarks by Ms Ho Hern Shin, Deputy Managing Director (Financial Supervision), Monetary Authority of Singapore, at the Launch of the Public Consultation on MAS’ Guidelines on Transition Planning on 18 October 2023
It is a pleasure to welcome everyone to the launch of a consultation on MAS’ Guidelines on Transition Planning today. I am heartened to see the level of interest in this topic from across the globe and from different parts of the financial ecosystem.
The effects of climate change are clear and present. Record-breaking heatwaves, wildfires and floods are occurring with increasing frequency globally.
- There is great urgency to fulfil our collective net zero commitments.
- Linear trend extrapolation puts us at going beyond 1.5 degrees come September 2034. That is just over a decade away, not very far away at all.
This trend, if not arrested, has significant financial implications for both companies and individuals.
- Business models that are unable to adapt to rising temperatures or meet the needs of the real economy as it seeks to transition towards net zero may become uncompetitive, or worse, unsustainable over the long term.
- Banks with exposures to real estate in low lying regions are exposed to greater flood risk as temperatures rise. This can increase losses.
- This impact to banks could be mitigated through insurance but such risks may become uninsurable.
- Since the beginning of the year, insurers representing more than half of California’s US$12 billion home insurance market have either stopped or placed restrictions on issuing new policies. Regulations have prevented premium rates from rising to keep pace with ballooning costs, including those associated with the increased risks of wildfires and floods. This widened protection gap have left many with uninsured homes, and their mortgage banks carrying related risks.
Financial institutions (FIs) have the motive and means to actively support an orderly transition to net zero.
First, on motive.
- A disorderly transition will result in elevated financial risks, like sudden asset revaluations. It can also increase operational challenges, through business or supply chain interruptions brought about by more extreme weather patterns.
Second, on means to support an orderly transition.
- FIs are in a unique position of trust to engage their customers to shape corporate decisions.
- As lenders and underwriters, banks and insurers can raise customers’ climate risk awareness and work with them to implement robust risk mitigation and adaptation measures as part of their due diligence and underwriting processes.
- As investors, FIs can also shape corporate behavior and climate responsiveness through engagement, proxy voting and sector collaboration.
The time to act is now.
- We cannot afford to wait till all the data is clean and the methodologies are mature. Catalysing change in the real economy takes time.
- FIs must act in unison, across jurisdictions, to avoid the perverse situation where customers seek financial solutions from FIs with lower climate ambitions, where the urgency or incentive to transition is absent. This will slow the pace of change in the real economy, thereby increasing the chances of a disorderly transition.
Encouragingly, some FIs have started to incorporate climate change considerations into their business strategies and risk management processes.
- This allows them to optimise business opportunities and build climate resilience over the longer term.
- We are defining this approach as transition planning in our proposed Guidelines.
As FIs develop and implement transition planning, supervisors can and should signpost the direction of travel and promote greater consistency in practices across FIs. Our Guidelines seek to do just this.
Amongst other things, the Guidelines clarify our expectation that transition planning must involve active customer and investee engagement on the need for them to adopt mitigation and adaptation strategies, including effective measures to reduce their carbon footprint. After all, customers’ elevated climate related exposures will directly and negatively impact the climate resilience of an FI’s balance sheet or portfolio.
We further clarify that –
- Engagement, rather than divestment, should be the key lever through which FIs steward their customers and investee companies’ orderly transition to net zero. Indiscriminate withdrawal of credit, insurance coverage, or investments from customers or investee companies deemed to be more exposed to climate risks would hinder those with credible transition and adaptation plans from securing the financial support they need to make the transition.
- We also recognise in our Guidelines 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. These should not deter FIs from facilitating the needed transition of the real economy. Instead, FIs should provide clear disclosures and explanations to help correct market misperceptions that they have departed from their espoused risk appetites. Fis should also share the risk management steps they are taking to remediate the real variance.
- The guidance further exhorts financial institutions to keep up with the science, collect and analyse relevant data, and build improved capabilities to measure and manage climate and other related risks.
We are communicating our supervisory expectations early through the proposed Guidelines to create clarity and urgency for FIs to allocate the appropriate resources and commence this work in earnest now.
- The Guidelines on Transition Planning are proposed for all three sectors – banks, insurers, and asset managers.
- This will allow us to rally the financial industry around a common standard while taking sector differences into account – an approach which we had adopted for our earlier Guidelines on Environmental Risk Management and which the industry has found helpful.
We look forward to receiving comments on what supervisory guidance can push FIs to be proactive, deliberate and effective in their transition planning, and we look to involve as broad a range of stakeholders as possible in the consultation process.
- We have already benefited greatly from the regulatory discussions internationally, such as the work by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the current discussion on transition planning under the Basel Committee’s Task Force on Climate-Related Financial Risks (TFCR).
- We hope to contribute to the ongoing discourse through this publication.
On this note, I wish you a very fruitful discussion subsequently, and hope that some of these ideas will be promulgated and bear fruit elsewhere, so as to bring us into a more sustainable, less risky future.