If you don’t invest in RISK MANAGEMENT, it doesn’t matter what business you’re in, it’s a risky business.

GARY David COHN (2011)

Environmental Risk Management Singapore addresses risks from the adverse impact of environmental changes caused by human economic activities. Specifically, it can take the form of any source of harm or danger in the environment, ranging from climate change and pollution to loss of biodiversity and depletion of natural resources. As a result, Environmental Risk Management (ENRM) is an increasingly important consideration for fund management companies. As investors become more aware of the environmental impact of their investments, fund management companies need to take steps to identify, assess and manage environmental risks.

The Task Force on Climate-related Financial Disclosures (“TCFD”) classifies environmental risks as physical risks and transition risks. Physical risks arise from the physical impacts of climate change, while transition risks arise from the shift to a lower-carbon economy. Although not all environmental risks are climate-related, climate change is widely regarded as the most significant environmental risk. Steadily rising temperatures and alarming global projections point to the potential for irreversible damage.

The industry has become accustomed to the term “ESG.” It refers to investment prioritising favourable environmental, social and governance factors or outcomes. Investors have developed an increasing awareness of environmental risk. As a result, they look to ESG investing, recognising that environmental and social factors affect organisational financial performance, and vice versa.  Inevitably, environmental factors have become a key consideration for investors looking to make more sustainable decisions. Accordingly, governments and policymakers are driving the transition to a more sustainable economy by creating and implementing green policies. This has spurred fund managers to comply with environmental policies and meet growing demand for sustainable investment opportunities.

What Are the Types of Environmental Risks?

Environmental risks can take many forms. These include physical risks such as natural disasters and climate change, regulatory risks from changing environmental regulations, and reputational risks from poor environmental practices. These risks can significantly affect investment values. Furthermore, failure to manage them effectively can result in significant financial losses. Environmental risk has the potential to financially impact funds/mandates managed by asset managers through physical, transition and reputational risk.

Physical risk arises from the impact of weather events and long-term or widespread environmental changes. For instance, more frequent and severe extreme weather events can impair company asset values or disrupt supply chains. This affects operations, profitability and potentially viability. Water risk (e.g. water scarcity, pollution and droughts) may increase the operating cost of companies in water-intensive sectors. Investments into these companies can therefore be impaired.

Transition risk arises from the adjustment to a sustainable economy. This includes changes in public policies, disruptive technology, and shifts in consumer and investor preferences. For instance, the transition to a low-carbon economy can impair the profitability of companies in carbon-intensive businesses. Punitive actions against companies that pollute the environment can materially affect valuations in these sectors and result in stranded assets. Asset managers’ portfolios may also face volatility and downside risk where market or consumer demand shifts disrupt business models.

Reputational risk arises when asset managers invest in companies whose activities negatively impact the environment. Negative perception of asset managers’ business practices can adversely affect their ability to maintain or grow their assets under management.

Environmental Risk Management Singapore: Key Requirements for Fund Managers

MAS expects Fund Management Companies to implement the ENRM guidelines in a manner commensurate with their size and activities. This includes the investment focus and strategy of their funds and mandates. To manage environmental risks, fund management companies need to develop a comprehensive environmental risk management strategy. This strategy should include the following key steps:

1. Identify and assess environmental risks: The first step is to identify all potential environmental risks that could affect the fund’s investments. Fund management companies can do this by conducting a thorough risk assessment covering the physical, regulatory and reputational risks of each investment.
2. Develop an environmental risk management plan: Once the fund management company identifies the environmental risks, it should develop a plan outlining the strategies and actions to mitigate those risks. The company should regularly review and update this plan to ensure it remains effective.
3. Implement environmental risk management measures: The next step is to implement the environmental risk management measures outlined in the plan. This could involve investing in companies with strong environmental practices, avoiding high-risk industries, or engaging with companies to encourage more sustainable practices.
4. Monitor and report on environmental risks: Singapore fund management companies should monitor and report on environmental risks. This ensures the plan remains effective and helps identify new or emerging risks.

We’re UNDEFEATED in regulation.

Les miles

MAS Environmental Risk Management Singapore Expectations

The ENRM Guidelines spells out MAS’ expectations for Singapore fund management companies to integrate environmental considerations into its business in the following main areas: https://www.mas.gov.sg/publications/monographs-or-information-paper/2022/information-papers-on-environmental-risk-management

1. Governance and Strategy
2. Research and Portfolio Construction
3. Portfolio Risk Management
4. Stewardship and Disclosure

1. Governance and strategy

The regulatory expectation: The ENRM Guidelines expects Singapore fund management companies to put in place a governance structure and strategy. This should facilitate the integration of environmental risks into their risk management framework. Fund management companies should identify, address and monitor material environmental risks commensurate with their nature, scale and complexity. 

How this can be done: 

• Allocating clear roles and responsibilities for environmental risk – the Board of Directors and Senior Management should have an effective oversight of the fund management company’s environmental risk management and disclosure. 
• Ensuring that the company’s management has adequate expertise and resources to deal with environmental risk management. 
• Developing and implementing an environmental risk management framework, policies and processes – this may include the use of tools and metrics to monitor the fund management company’s exposure to environmental risk. 
• Articulating strategies that deliberately consider the management of environmental risks in the fund management company’s own operations and the funds/mandates managed – this may include the use of clear quantitative metrics and interim targets. 

Larger fund management companies may establish comprehensive governance structures with dedicated individuals or functions supporting the Board’s oversight of environmental risk. Smaller fund management companies would find it more suitable to integrate environmental risk roles within existing structures to optimise resources. 

2. Research and Portfolio Construction

The regulatory expectation: MAS expects fund management companies to embed material environmental risk considerations in their research and portfolio construction processes. Fund management companies should also actively track and manage environmental risk factors across each fund or mandate in aggregate. 

How this can be done: 

• Fund management companies should identify and assess environmental risk at the asset and/or portfolio level while considering both physical and transition risks across asset classes. 
• Fund management companies should identify sectors with higher environmental risk using established risk criteria (e.g. GHG emissions and linkages to unsustainable energy practices, deforestation and pollution). 
• Fund management companies should define their approach to high-risk sectors, taking into account internationally recognised sustainability standards and frameworks (e.g. the Global Reporting Initiative, CDP’s Global Disclosure System, Sustainability Accounting Standards Board (“SASB”) ESG Report Framework and TCFD’s Framework).
• Being mindful of internal aggregate limits that customers have set for specific sectors or types of activities.

Fund management companies should obtain the necessary environmental data through reliable sources for use in their environmental risk assessment. Additionally, fund management companies may develop a methodology for proprietary risk ratings or seek to use the ratings of a ratings provider in identifying high-risk sectors. The framework adopted for assessing environmental risk should be relevant to the fund management company’s business and investment strategy. 

3. Portfolio Risk Management

TThe regulatory expectation: MAS expects fund management companies to monitor, assess and manage the impacts of environmental risk on individual investments and portfolios on an ongoing basis. 

How this can be done: 

• Fund management companies should conduct ongoing monitoring of the portfolio’s environmental risk, including processes for re-assessment of risk and escalation of material environmental risk exposures.
• Fund management companies should develop scenario analysis capabilities as a tool to assess the impact of environmental risks on portfolios.
• Fund management companies should conduct capacity building programmes to equip staff with adequate expertise to assess, manage and monitor environmental risk. 

Environmental risk-related data should be periodically reviewed and risk ratings should be kept up to date. Roles for environmental risk monitoring may be allocated to compliance teams to track compliance with the fund management company’s environmental commitments. Fund management companies should also be aware of and monitor any risk of greenwashing. 

4. Stewardship and Disclosure

The regulatory expectation: MAS expects fund management companies to shape the corporate behaviour of investee companies through engagement and to disclose their environmental risk management approaches to stakeholders. 

How this can be done: 

• Engagement, proxy voting and sector collaboration to support the transition to more sustainable policies and practices over time.
• Management should determine the appropriate stewardship approach for the Fund Management Company to adopt.
• Fund Management Companies should refer to international reporting frameworks like the TCFD Recommendations when preparing disclosures. 

Fund management companies should clearly communicate their approach to stewardship in supporting the transition of investee companies towards more sustainable policies and practice. Fund management companies can achieve this through various engagement methods with selected investee companies, taking into account their exposure to environmental risks. Additionally, fund management companies should closely monitor the form and frequency of disclosures, ensuring compliance with internationally recognised reporting frameworks such as the TCFD’s recommendations. Furthermore, they should assess and review disclosures annually to incorporate updates and improvements. 

How can Curia Regis assist you?

Our experienced team can provide a comprehensive overview of the key areas for fund management focus. We do this by ensuring adequate and efficient integration of environmental risks into your risk management framework. We strive to comprehend your business thoroughly and assist you in creating a customized strategy for handling environmental risk..

In Summary

Effective environmental risk management requires a collaborative approach among all stakeholders, including investors, fund managers, and investee companies. As a result, investors increasingly expect fund management companies to account for environmental risks in their investment decisions. Consequently, failing to do so can result in reputational damage and loss of clients.

All things considered; effective environmental risk management is essential consideration for fund management companies in today’s market. By identifying and managing environmental risks, fund management companies are able to protect the interests of their clients. In addition, to also ensure that their investments are sustainable over the long term. By being proactive towards ENRM, fund management companies can become responsible market players committed to sustainable investing practices.

Risk comes from not knowing what you’re doing.

“The Three Essential Warren Buffett Quotes To Live By” by James Berman,2014″