Singapore investors to climate stress test, record engagements under draft green rules

New rules will require Singaporean investors to develop climate scenario analysis capabilities and engage portfolio companies over climate change risks, while debtors lagging on environmental risk management may see their borrowing costs increase.

The Monetary Authority of Singapore (MAS), the island state’s de facto central bank, has published a framework to manage environmental risks, which it expects to be adopted by the financial institutions it regulates. 

The guidelines stipulate that lenders and insurers should consider “mitigating options” for customers who do not adequately manage environmental risk, including pricing in the additional risks, limiting credit or insurance cover, and “re-assessing the customer relationship”.

The draft guidelines introduce enhanced disclosure requirements that would see lenders, insurers and investors report their exposure and policies with regards to sectors with high environmental risks, and develop scenario analysis capabilities to assess organisational resilience to climate change. Disclosures should be made on the basis of the Task Force on Climate related Financial Disclosures recommendations, said MAS.

The guidelines stipulate that lenders and insurers should consider “mitigating options” for customers who do not adequately manage environmental risk, including pricing in the additional risks, limiting credit or insurance cover, and “re-assessing the customer relationship”.

Banks were asked to consider the use of “financing conditions or covenants” to compel debtors to develop and execute a sustainable transition strategy.

However, MAS expects financial institutions to prioritise engagement with companies to support a “transition towards sustainable business practices” and to “maintain proper documentation” of engagement and stewardship activities. Notably, the guidelines do not suggest divestment as an option for investors, unlike for banks and insurers.  

Lastly, financial institutions will be expected to clearly define board and senior management oversight of environmental risks, which, once identified, should be integrated into respective strategies, business planning and products.

The supervisory expectations – which were jointly developed by MAS, regulated institutions and trade bodies – are a key element of MAS’ plans to develop the sustainable investments sector in Singapore. Last year, the supervisor earmarked $2bn of its own portfolio for investing in “environmentally sustainable projects and mitigating climate change risks in Singapore and the region”.

The new rules may have a significant impact for the domestic oil and gas industry, which makes up around 5% of Singapore’s GDP. Despite having no reserves of its own, the country is a global hub for trading, refining and storage of hydrocarbons.

The guidelines can be found here and will be out for public comment until August 7. Regulated financial institutions will have a year’s grace period to integrate the guidelines after they come into effect.