Risk Management
Overview
MAS sets clear supervisory expectations on environmental risk management to help set the pace for financial institutions to uplift their practices to assess, monitor and mitigate their exposures to environmental risk.
MAS will continue to engage financial institutions to bolster their resilience to environmental risks. MAS expects financial institutions to consider the downstream impact of their efforts on the financial system and the broader transition to a sustainable economy. For example, indiscriminate credit withdrawal by banks from sectors deemed to be of higher climate-related risks would impact companies with credible transition plans, increasing the risk of stranded assets and a disorderly transition.
Industry-Wide Stress Test ('IWST') 2022
Climate scenario analysis remains an important forward-looking tool for central banks, supervisors and financial institutions to assess the potential implications of climate change on the financial system. Collective efforts across jurisdictions have been ongoing to deepen scenario analysis capabilities amid growing recognition of its role in assessing financial stability risks arising from climate change.
In 2022, MAS concluded the IWST climate scenario analysis exercise for key banks and insurers. This forms part of MAS’ ongoing multi-year iterative approach to achieve its dual objectives: (i) assessing the impact of climate risks on our financial system, and (ii) ensuring that financial institutions strengthen their climate risk assessment capabilities.
The exercise featured scenarios that captured a range of physical and transition risks that could arise due to climate change, including additional overlays by MAS to incorporate a severe flooding event in the ASEAN-5 economies. The results of this exercise were published in the Financial Stability Review 2022.
Building on the insights from the exercise, MAS will step up its supervisory engagement with the industry to ensure that they remain proactive in strengthening their internal climate scenario analysis capabilities by addressing methodological and data gaps, in preparation for future exercises. In particular, MAS will engage FIs on their plans to enhance their physical risk modelling methodologies and plug data gaps on their counterparties’ greenhouse gas emissions, asset geolocations and transition plans. MAS will also recommend good industry practices for climate scenario analysis in its supervisory guidance on transition planning.