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A Climate-Resilient Financial Sector

MAS is working with financial institutions to strengthen the sector’s climate resilience through robust risk management and disclosure practices. 

Risk Management

Overview

Environmental and climate-related financial risks have already begun to crystallise in recent years. If not well managed, they could affect the balance sheets of financial institutions (FIs), potentially contributing to financial stability risks at the system level. 

MAS is committed to bolstering the financial sector’s resilience to environmental risks. To this end, MAS has conducted thematic reviews and published information papers on FIs’ environmental risk management practices, and encouraged the development of climate risk assessment capabilities through the Industry-Wide Stress Test. 

Greenwashing can occur at the firm level and product level. From the market conduct angle, MAS recognises that greenwashing is a significant risk arising from the overstatement or lack of clarity about a firm’s sustainability commitments, or lack of alignment between the product’s sustainability-related name and its investment objective. 

To mitigate risk of greenwashing, MAS has promoted the adoption of globally consistent, comparable and reliable sustainability disclosures by working with international and domestic organisations. 

Supervisory Engagements

Information Papers on Environmental Risk Management for Banks, Insurers and Asset Managers

Risks from climate change and environmental degradation can translate into financial and non-financial risks to FIs. It is crucial for FIs to build resilience to these risks by integrating environmental risk into their business strategies and risk management frameworks. To do this well, FIs would need to have effective board and senior management oversight of environmental risks, and robust risk management policies and processes to assess, mitigate and monitor their risk exposures. 

MAS set out its supervisory expectations around effective governance, robust risk management and meaningful disclosure of environmental-related risks through issuance of the Guidelines on Environmental Risk Management to FIs (ENRM Guidelines) in December 2020.

Ahead of the ENRM Guidelines effective date in June 2022, MAS conducted thematic reviews of FIs’ environmental risk management practices in 2021 to take stock of implementation progress. MAS engaged selected banks, insurers, and asset managers through surveys and dialogue sessions with the FIs. While progress has been made overall, the surveyed FIs were at differing levels of sophistication.

In May 2022, to accelerate FIs’ adoption of the ENRM Guidelines and uplift industry standards, MAS published information papers on the environmental risk practices of banks, insurers, and asset managers. The papers provide an overview of the progress made by selected FIs in implementing the ENRM Guidelines. The papers also highlight emerging and/or good practices by FIs and identify areas where further work is needed.
 
Work is ongoing to address the implementation challenges that FIs have highlighted, such as:
  • To provide a baseline to guide FIs’ client-level risk assessment on environmental risks, MAS collaborated with the Green Finance Industry Taskforce (GFIT) and Association of Banks in Singapore (ABS) to develop a standardised Environmental Risk Questionnaire for FIs to obtain common key risk data from clients in a way that is comparable across clients and fit-for-purpose to facilitate financing decisions. This also helps to establish a best practice for banks in Singapore to engage their clients in assessment and mitigation of their environmental risks. There are plans to develop subsequent and more advanced versions of the questionnaire, as well as to digitalise the process in future.
  • To deepen knowledge and strengthen the capabilities of FIs, GFIT launched a series of capacity building workshops and e-learning modules from May 2021 to April 2022 for FIs and corporates. 
  • To address the financial sector’s sustainability data needs, MAS launched Project Greenprint, a series of initiatives that aims to harness technology and data to enable the greening of the financial sector. Further details on Project Greenprint are within the section “A Vibrant Sustainable Finance Ecosystem”. 
Industry-Wide Stress Test

There is growing awareness of the risk that climate change poses to the financial system, with many central banks and regulators seeking to better understand the nature of this risk and assess its implications for financial stability.

In the 2018 Industry-Wide Stress Test, MAS subjected insurers to a scenario featuring extreme flooding, and they had to consider the impact of higher claims on their balance sheets arising from damage to insured properties.

MAS also undertook further work to deepen our understanding of climate risks, as presented in MAS’ Special Features on climate change in the 2020 and 2021 Financial Stability Reviews. These special features set out MAS’ multi-year iterative approach for climate stress testing and climate-related modelling, climate risk transmission channels to financial stability and potential second-order effects, and preliminary estimates of the transition risk exposure of Singapore’s banking and insurance sectors.

Building on earlier efforts, MAS will incorporate a range of long-term climate scenarios as part of the 2022 Industry-Wide Stress Test exercise. The exercise will raise awareness of the potential economic and financial implications of climate risks, and facilitate learning for both MAS and financial institutions as we collectively develop capabilities in this area.

For the 2022 Industry-Wide Stress Test exercise, the long-term climate scenarios will take reference from scenarios developed by the Network for Greening the Financial System (NGFS). MAS has also incorporated feedback from financial institutions in our earlier engagements. These scenarios will include pathways featuring an orderly transition, a disorderly transition, and no additional policy action, to capture a range of physical and transition risks that could arise due to climate change.

Findings from the exercise will be published in MAS’ Financial Stability Review 2022.

Sustainability disclosures

A robust sustainability reporting regime is the foundation upon which we measure progress. It will help stakeholders to allocate capital efficiently towards climate change mitigation and adaptation, thereby enhancing the financial sector’s resilience. MAS continues to advance our vision of globally consistent, comparable and reliable sustainability disclosures by working with both international and domestic organisations. MAS supports the alignment of disclosures with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and recognised international standards such as the upcoming International Sustainability Standards Board (ISSB) standards. 

Since June 2021, there have been significant developments in this area. Specifically, along with the set-up of the ISSB by the International Financial Reporting Standards (IFRS) Foundation, the IFRS Technical Readiness Working Group (TRWG) published the Climate-Related Disclosures Prototype in November 2021. The ISSB issued exposure drafts for its general requirements and climate disclosure standards for consultation on 31 March 2022, and targets to finalise its standards by end 2022.

The ISSB standards – which build on the TCFD recommendations, among others, – is expected to form the global baseline reporting standards for sustainability. MAS co-led a Technical Expert Group (TEG) under the International Organization of Securities Commissions (IOSCO) Sustainable Finance Task Force (STF) to provide recommendations to the IFRS Foundation, with a view towards potentially endorsing future ISSB standards for use by IOSCO member jurisdictions. MAS actively participates in the Technical Review Coordination Group (TRC) which continues the TEG’s work, and leads the review of climate disclosure standards. The TRC is reviewing the exposure draft disclosure standards published by the ISSB on 31 March 2022 to assess if they meet IOSCO’s expectations for endorsement. The TRC will provide comments on the draft as the ISSB looks to finalise its disclosure standards by end 2022. 

MAS also worked on three IOSCO STF reports published in 2021 on sustainability-related issuer disclosures, improving sustainability-related practices of asset managers, and understanding the increasingly important role of ESG ratings and data providers. The reports include recommendations for regulators and policymakers to supervise and improve policies, practices, disclosures, as well as address risks of greenwashing.

Mandatory Disclosures for Listed Companies

MAS worked with Singapore Exchange (SGX) to finalise its roadmap on mandatory climate-related financial disclosures, consistent with recommendations of the TCFD. Issued on 15 December 2021, the new listing rules require all SGX-listed entities to provide climate reporting on a ‘comply or explain’ basis for financial years starting on or after 1 January 2022. Climate reporting will subsequently be mandatory for certain issuers in a phased approach, with issuers in industries identified by the TCFD as most affected by climate change progressively subject to mandatory climate reporting from the financial year 2023. By 2025, mandatory climate reporting will cover 60% of SGX-listed entities by number, and 78% by total market capitalisation. 

Other key enhancements to SGX’s sustainability reporting regime include requiring issuers to minimally subject their sustainability reporting process to an internal audit review, and for directors to undergo a one-time training on sustainability. SGX has also indicated its intention to align its sustainability reporting requirements with the finalised ISSB standards. Collectively, these enhanced requirements contribute to the push towards consistent, comparable and reliable sustainability disclosures.

 

 

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