Banks, insurers and asset managers should discuss climate-related risks with their customers and investee companies instead of divesting from them. These financial institutions (FIs) should also plan ahead and assess the sustainability of their business, and consider coming risks like loss of natural capital and biodiversity.
These are among the Monetary Authority of Singapore’s (MAS) new transition-related supervisory expectations for FIs, released on Oct 18. The financial regulator says its Guidelines on Transition Planning will enable customers and investee companies of FIs to introduce effective climate change mitigation and adaptation measures.
Indiscriminate divestment from carbon-intensive activities will not get us to a net-zero world, says Ravi Menon, MAS’s 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 decarbonise their activities through credible transition plans.”
FIs may have to accept short-term increases in financed, facilitated or insurance-associated emissions arising from these plans, says Menon, “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 transition planning guidelines follow MAS’s Guidelines on Environmental Risk Management for banks, insurers and asset managers, which came into effect in June 2022.
Engagement, rather than divestment, should be the key lever for FIs to steward their customers and investee companies to transition in an orderly manner, says MAS. In addition, FIs should take a multi-year approach — “beyond the typical financing or investment time horizons” — in order to facilitate a more comprehensive assessment of climate-related risks.
See also: Retiring coal-fired power plants is the 'mother of all transitions': MAS
FIs should also consider environmental risks beyond climate-related risks in their transition planning, says MAS. “The loss of natural capital and biodiversity must be recognised and addressed as related but distinct environmental risks to be managed. FIs should holistically consider the important interdependencies between climate and nature as well as the potential trade-offs.”
Transparency supports accountability and promotes credibility, notes MAS. “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.”
MAS has issued a set of consultation papers proposing the guidelines and welcomes comments on the proposals before Dec 18.
Within transition finance, MAS has championed the early phase-out of coal-fired power plants in the region through several moves since mid-2023.
The financial regulator launched in June its public consultation on the detailed thresholds and criteria for financing the early phase-out of coal-fired power plants under the Singapore-Asia Taxonomy. The consultation closed on July 28.
MAS, together with industry representatives, will incorporate feedback from the public consultation in the taxonomy, which will be launched later this year.
Formerly referred to as the Singapore Taxonomy, the guidelines were expected to be published in June. Instead, MAS decided to seek feedback on the additional criteria from financial institutions.
There are more than 2,000 coal-fired power plants in Asia, which are less than 15 years old on average. They emit about 7.2 gigatons of carbon dioxide (CO2) annually, or about 20% of the world’s annual energy-related CO2 emissions.
In the absence of mandatory managed phase-out requirements, stakeholders of coal-fired power plants have “little motivation” to shorten their existing power purchase agreements, says MAS.
More recently, MAS’s Sustainable Finance Advisory Panel (SFAP) met on Sept 26 to discuss possible financing mechanisms to accelerate the phase-out of coal-fired power plants in Asia and support decarbonisation of the hard-to-abate aviation and maritime transport sectors.
The SFAP also discussed how private capital could be better mobilised to finance the region’s climate adaptation needs.
MAS released a working paper that same day, which proposed that “transition credits” could be sold to incentivise owners of coal-fired power plants to retire their assets early and replace them with renewable energy.
These high-integrity carbon credits could plug an estimated US$70 million ($95.76 million) economic gap arising from retiring a coal-fired power plant with a 1-gigawatt (GW) capacity five years earlier.
