Consultation Paper on Proposed Guidelines on Transition Planning for Asset Managers

The Monetary Authority of Singapore (MAS) has launched a consultation on proposed new Guidelines on Transition Planning for asset management firms. The guidelines follow the publication of Guidelines on Environmental Risk Management for Asset Managers in 2020 (EventID 8940) to set out MAS‘ expectations as regards transition planning and embedding such planning within asset management firms to ensure and support the transition to a low carbon economy. MAS thereby proposes to define „transition planning“ as „the internal strategic planning and risk management processes undertaken to prepare for both risks and potential changes in business models associated with the transition“. Overall, the proposed guidelines are expected to supplement the guidance of 2020 by providing more granular information as to MAS‘ expectations with respect to transition planning.
The new guidelines would apply to all asset management firms, including – as quoted:
a. all holders of a capital markets services licence for fund management;
b. all holders of a capital markets services licence for real estate investment trust management; and
c. fund management companies registered under paragraph 5(a)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations.
The proposed guidance would consist of five key elements:
– Overall guidance as far as transition planning is concerned;
– The inclusion of transition planning in a firm’s governance and strategy;
– The inclusion of transition planning in portfolio management;
– The inclusion of transition planning in stewardship principles and activities; and
– The disclosure of transition plans and planning efforts.
Each element is briefly described below:
(1) Overall guidance as far as transition planning is concerned: This section would set out some general issues asset managers shall consider in their transition planning. Specifically, asset managers should develop and implement comprehensive transition plans that address climate-related risks and consider broader environmental risks. In this context, it is important, so MAS, that asset managers adopt a multi-year perspective for the sustainability of their portfolios and business models. Their strategic choices, especially regarding decarbonization, will impact their portfolios and long-term business viability. In cases where climate risk is considered significant in portfolios, asset managers should initiate discussions with the companies they invest in. These conversations should focus on encouraging these companies to implement strategies for both reducing carbon emissions and adapting to climate change overall. Furthermore, asset managers should communicate these plans transparently to stakeholders and retain responsibility for adequate risk management as far as ESG risks are concerned. Finally, asset managers should prioritize customers‘ interests and preferences in their investment decisions, including interest relating to low emission investments.
(2) The inclusion of transition planning in a firm’s governance and strategy: The governance and strategy of asset managers should consider how current and future changes and challenges in the operating environment will affect their risk profiles (both on firm and portfolio level). Therefore, the Board and senior management should actively integrate climate-related strategies into their operations, including
– the set-up of robust governance processes to make informed decisions relating to climate change, such as those involving business strategies, targets, scope, risk framework, and implementation timelines. These decisions should be based on a solid understanding of critical assumptions, dependencies, and remaining risks as far as ESG risks are concerned.
– the establishment of a clear commitment from top leadership regarding the necessity of addressing climate-related risks. This commitment should be evident when making decisions about business strategies, investment choices, portfolio construction, and risk management.
– the creation of transparent channels of communication and escalation across different departments to address climate change risks that span across multiple functions.
– the (re)assessment of internal strategies and plans to align with any climate-related strategies and commitments communicated to the public.
– the establishment of mechanisms for executing business strategies and aligning internal behaviors to tackle climate-related risks. This can be accomplished through the creation of adequate policies related to recruitment, performance evaluation, remuneration, and incentive structures.
(3) The inclusion of transition planning in portfolio management: This is the most crucial part of the proposed new guidelines. In it, MAS notes that asset managers should
– potential adverse impacts related to climate change, including transition risks and physical risks, and align their strategies with global decarbonization pathways to avoid stranded asset risk and climate tipping points.
– take a sector-specific approach, considering the level of climate-related risks for different industries and the readiness of investee companies to address climate change.
– evaluate investee companies based on their exposure to short, medium, and long-term climate-related risks, the adequacy of their mitigation actions, or potential novel risks resulting from climate change.
– use forward-looking tools like scenario analysis to assess climate-related risks and incorporate the results into their risk management processes.
– develop climate risk modeling frameworks for different asset classes. Asset managers should thereby consider a wide set of climate and economic risk factors and identify any possible data gaps in climate change-related risk assessments. In this context, asset managers are also reminded to develop an adequate data strategy to collect and utilize environmental-related data. As the quality of such data is expected to improve over time, asset managers should stay agile and flexible in embedding relevant climate-related data in their investment and risk management frameworks.
– should set metrics and targets to track progress towards decarbonization goals, supplementing point-in-time emissions data with additional information as necessary. Furthermore, decarbonization targets should be based on science-based pathways and reference scenarios and include short, medium, and long-term goals. Any misalignments between actual decarbonization targets and these goals should be addressed and additional measures should be taken wherever needed. In (investment) cases, where the setting of decarbonization goals is difficult, asset managers should document their approach to setting such targets.
Finally, MAS notes that asset managers should periodically review their risk metrics and targets to ensure they are still fit for purpose.
(4) The inclusion of transition planning in stewardship principles and activities: As asset managers play a key role in promoting sustainability in investee companies, they are expected to develop an engagement and stewardship plan that outlines objectives, approaches, and staff training to effectively engage with investee companies. The plans should thereby take into account the vulnerability to climate risks of investee companies, the size of investments, and investee companies‘ willingness and ability to mitigate these risks. When assessing investee companies‘ plans to manage climate-related risks, asset managers should consider various factors, including stranded asset risks, physical hazards, an investee firm’s governance, and the presence of relevant metrics and targets. In same context, asset managers should aim to support investee companies in developing or enhancing their own plans to address climate-related risks rather than divesting indiscriminately. However, if investee companies are not implementing adequate risk mitigation and adaptation strategies, they should be placed on enhanced monitoring to ensure that asset managers can react promptly, if so needed. It is also advisable to establish an escalation procedures in this context with announced consequences for investee companies that do not respond to any engagement efforts of asset managers.
As far as the engagement approaches are concerned, asset managers may engage in bilateral communication, address their concerns via proxy voting, or file shareholder resolutions to promote their climate-related goals and targets.
(5) The disclosure of transition plans and planning efforts: As far as disclosures of transition plans and efforts are concerned, MAS would expect asset managers to
– provide meaningful and relevant information to stakeholders about how they are addressing climate-related risks in their portfolios over the short, medium, and long term. These disclosures should follow international reporting standards such as the ISSB standards. Asset managers should also communicate their risk management strategies, particularly for sectors with high emissions intensity, and explain their reasons for investing in such sectors.
– clearly communicate their risk management strategies to mitigate reputational and greenwashing risks. They should also disclose their engagement strategies with various stakeholders, including shareholders, rating agencies, regulators, governments, and NGOs.
– consider disclosing climate-related considerations at the product level, showing how their overall climate-risk strategy is implemented in individual products. Sustainability and transition-related products should be appropriately labeled and accompanied by suitable climate-related disclosures.
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Please note: as the summary only outlines the key points of the proposed new guidelines, please refer to the original legal document for more detailed, comprehensive information.