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MAS Environmental Risk Management (Asset Managers) – Transition Planning

The MAS Transition Planning Guidelines (TPG) complement the existing Environmental Risk Management Guidelines issued by MAS by providing more detailed and forward-looking expectations, particularly in relation to climate-related risks and transition planning.

  • MAS requires asset managers to identify and manage climate -related risk and these risks include:
    • Transition risks (e.g., regulatory changes, carbon pricing, technological disruption)
    • Physical risks (e.g., floods, rising temperatures, extreme weather events)
  • These risks may impact portfolio valuations and traditional financial risks such as credit and market risk.
  • Transition planning refers to the internal processes and strategic actions taken to prepare for such risk and future changes in the economy. The ultimate aim is to ensure that the asset managers can assess and manage these risks across different time horizons.
  • Applicability & Responsibility:
  • This guideline applies to asset managers who have discretionary authority over investment decisions and require companies to integrate climate-related considerations into governance, investment processes, portfolio management, and risk frameworks.
  • A key emphasis is on adopting a forward-looking approach, including the use of tools such as scenario analysis to assess portfolio resilience under different future conditions.
  • Compared to the earlier Environmental Risk Management Guidelines, the key enhancements are:
    • Shift from general risk management to structured transition planning
    • Strong emphasis on forward-looking assessment (scenario-based approach)
    • More detailed expectations on portfolio-level risk assessment
    • Requirement to use metrics, data, and monitoring frameworks
    • Greater focus on engagement with investee companies rather than divestment
  • Governance:
  • The Board must:
    • Ensure that the climate risks are fully integrated into strategic decision-making and risk frameworks.

Key governance expectations from the Fund managers include:

  • Establishing a formal governance structure to oversee climate risk assumptions and dependencies.
  • Ensuring effective communication across departments, as climate risk affect multiple areas of the asset manager.
  • Aligning remuneration and incentives with climate-related objectives.
  • Transition planning should be:
    • Regularly reviewed, refined, and updated to reflect new risks and industry developments.
  • Portfolio Management:
    1. Integration into Investment Decisions
  • Asset managers must incorporate climate risks into:
    • Portfolio construction
    • Investment strategy
  • Consider:
    • Sector-specific risks
    • Company-level exposure and transition readiness
  • External drivers refer to regulatory, technological, and market developments that may impact the future performance and risk profile of investments.
    1. Risk Assessment Approach
  • Firms should use forward-looking tools, such as scenario analysis, to identify potential risks.
  • Risk assessments should:
    • Cover multiple scenarios and time horizons (short, medium, long term)
    • Include key drivers such as:
      • Policy and regulatory changes
      • Physical climate hazards
    • Use recognised external scenarios developed by Network for Greening the Financial System (NGFS), Intergovernmental Panel on Climate Change (IPCC) or the International Energy Agency (IEA) and supplement them with internal scenarios tailored to investment strategies.
      1. Data & Metrics
    • Asset managers should use metrics to monitor climate risk exposure across portfolios.

Key expectations:

  • Clearly define scope and coverage of metrics
  • Recognise data limitations
  • Monitor metrics over a multi-year horizon
  • Regularly review and update metrics
  • Where proxy data is used:
    • Firms must document assumptions, methodologies, and limitations, and understand its impact on decisions.
  1. Internal Capabilities
  • Firms must ensure staff have:
    • Adequate knowledge and skills to assess climate risks.
  • Climate risk considerations should be:
    • Embedded into governance and decision-making processes.
  • Develop and maintain systems to collect, analyse, and share climate-related data for risk tracking and decision-making.
  • Continuously improve data quality, sources, and processes, with flexibility for future enhancements.
  • Brief Engagement & Stewardship Expectations:
  1. Role of Engagement
  • Active engagement with investee companies helps:
    • Improve their risk management
    • Reduce overall portfolio exposure to climate risks
  1. Engagement Framework
  • Asset managers should develop an engagement and stewardship plan.
  • The plan should:
    • Define clear objectives
    • Outline intended outcomes and engagement approach.
  • Asset managers should train their staff and give them clear tools and guidance so they can properly engage companies on climate risks.
  • Available tools include:
    • Proxy voting
    • Shareholder resolutions
    • Collaborative industry engagement

Conclusion:

The guideline requires asset managers to systematically integrate climate risk into governance, investment decisions, and stewardship practices using a forward-looking, risk-based, and continuously improving approach.

From a compliance standpoint, implementation would primarily involve enhancing existing processes, as outlined below by senior management as per their operations:

  1. Risk Management Framework and Investment process:

(Company has to review their business operations and identify if there are any environment risk in relation to their operations.)

  • Update risk/compliance manual to include:
    • Climate-related risks (physical & transition)
    • Risk identification approach (sector/geography-based)
    • Requirement for forward-looking assessment (scenario analysis)
  • Define roles and responsibilities (Risk / Investment Committee/ Senior Management)
  • Establish monitoring and escalation processes for material exposures
  • Ensure climate risk is documented as part of investment decision-making
  • A simple internal tracker (e.g. Excel) is sufficient initially to assess the risk- (Risk matrix)
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