The Monetary Authority of Singapore (MAS) says engagement, rather than divestment, should be the key lever for financial institutions (FIs) to steward their customers and investee companies to transition to net zero in an orderly manner.

The city-state’s financial overseer has issued a set of consultation papers proposing guidelines on transition planning by banks, insurers and asset managers to support their progress in moving to a net-zero economy.

The proposed Guidelines on Transition Planning set out regulatory expectations for FIs to have a sound transition planning process. These guidelines, the MAS argues, will enable effective climate-change mitigation and adaptation measures by the FIs’ customers and investee companies in the global transition to a net-zero economy and the potential physical effects of climate change.

“Indiscriminate divestment from carbon-intensive activities will not get us to a net-zero world,” says Ravi Menon, the MAS’ managing director. “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 decarbonize 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 the MAS is taking the lead in setting clear supervisory expectations on transition planning for our FIs.”

Guarding against biodiversity loss

Among the proposals, the MAS suggests that FIs should engage with 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 decarbonize.

Banks, insurers and asset managers, the MAS notes, should also take a multi-year approach, beyond the typical financing or investment time horizons, to facilitate a more comprehensive assessment of climate related risks.

With growing awareness in Asia on the importance of biodiversity, the regulator wants FIs to 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.

FIs, it suggests, should consider environmental risks beyond climate-related ones in their transition planning. The loss of nature capital and biodiversity, the MAS stresses, must be recognized and addressed as related but distinct environmental risks to be managed.