The Monetary Authority of Singapore (MAS) today issued a set of consultation papers proposing guidelines on transition planning by banks, insurers and asset managers to enable the global transition to a net zero economy.

The Guidelines on Transition Planning (“Guidelines”) set out MAS' supervisory expectations for financial institutions (FIs) to have a sound transition planning process to enable effective climate change mitigation and adaptation measures by their customers and investee companies in the global transition to a net zero economy and the expected physical effects of climate change.

The key expectations that MAS has set out for FIs are as follows:

Engagement, rather than divestment, should be the key lever for FIs to steward their customers and investee companies to transition in an orderly manner. FIs should engage their customers and investee companies on the physical and transition risks they face and work closely with them to implement effective measures to reduce their carbon footprint and to build resilience to climate change. Indiscriminate withdrawal of credit, insurance coverage, or investments by FIs from customers or investee companies deemed to be of higher climate-related risks will deprive those entities with credible transition and adaptation plans of the financing they need to decarbonise.

FIs should take a multi-year approach, beyond the typical financing or investment time horizons, to facilitate a more comprehensive assessment of climate related risks. Given that the time horizons for physical and transition risks to manifest are long and uncertain, FIs need to take a multi-year risk perspective when assessing the sustainability of their business models and portfolios.

A holistic treatment of risks enables better risk discovery. The interactions across risk drivers in the transition towards a net zero economy are complex. As FIs are exposed to climate-related risks through the effects of both transition and physical risks to their portfolios, they should take an integrated approach to climate mitigation and adaptation measures by working closely with their customers and investee companies.

FIs should consider environmental risks beyond climate-related risks in their transition planning. The loss of nature capital and biodiversity must be recognised and addressed as related but distinct environmental risks to be managed.FIs should holistically consider the important inter-dependencies between climate and nature as well as the potential trade-offs such as environmental degradation arising from the pursuit of climate solutions.

Transparency supports accountability and promotes credibility: FIs are expected to disclose meaningful and relevant information to help stakeholders understand how they are responding in the short-, medium- and long-term to material climate-related risks, and the governance and processes for addressing such risks.

The Guidelines build on MAS' existing supervisory guidance ^[0]  to FIs and focuses on FIs' internal strategic planning and risk management processes to prepare for both risks and potential changes in business models associated with the transition. While the underlying risk principles are similar, the Guidelines were developed recognising the different business models and needs of FIs in banking, insurance, and asset management.

Mr Ravi Menon, Managing Director, MAS, said, “Indiscriminate divestment from carbon-intensive activities will not get us to a net-zero world. A large part of the global economy depends on such activities for growth and jobs. Rather, financial institutions must actively support their borrowers, insured parties, and investee companies to progressively decarbonise their activities through credible transition plans. We may have to accept short-term increases in financed, facilitated, or insurance-associated emissions arising from these plans provided these plans support climate positive outcomes consistent with a net-zero pathway. Regulators must support financial institutions in such efforts. This is why MAS is taking the lead in setting clear supervisory expectations on transition planning for our financial institutions.”

The public consultation papers are available on MAS’ website – for banks and finance companies, insurers, and asset managers. MAS invites interested parties to submit their comments on the proposals by 18 December 2023.

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1. ^[1] Examples include: i) MAS' Guidelines on Environmental Risk Management – effective since June 2022 – which set out MAS’ expectations for FIs to build resilience against the impact of environmental risk; ii) MAS' Information Papers in May 2022 sharing our observations on FIs’ progress in addressing environmental risks, including through the consideration and integration of such risks into their risk management processes and business strategies.