Compliance Briefing — December 8, 2020
In December 2020 the Monetary Authority of Singapore issued binding environmental risk management guidelines for banks, emphasising board accountability, risk integration, scenario analysis, and TCFD-aligned disclosures.
Executive briefing: On 8 December 2020 the Monetary Authority of Singapore (MAS) released the Guidelines on Environmental Risk Management (Banks), setting binding supervisory expectations for climate and environmental risk governance, risk management, scenario analysis, and disclosures across all banks operating in Singapore. The guidelines emphasise board accountability, measurable transition plans, and credible disclosures that align with global standards such as the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). They also reiterate that environmental risk—covering climate, biodiversity, and broader ecological impacts—can affect credit, market, operational, and liquidity risk, and therefore must be integrated into the enterprise risk management framework. This briefing summarises the core requirements, provides implementation detail for risk and control owners, and highlights forthcoming supervisory themes signalled by MAS.
Supervisory expectations and governance
MAS expects banks to demonstrate end-to-end governance of environmental risk. Boards are responsible for approving the environmental risk appetite, overseeing progress against strategy, and ensuring internal audit provides independent assurance over controls. Senior management must translate board direction into policies, limits, and management information, with clear ownership across the three lines of defence. MAS also expects banks to ensure adequate resourcing and expertise—through training, recruitment, or external advisers—to interpret climate science, scenario pathways, and transition policies.
To evidence board oversight, MAS calls for documented mandates, minimum meeting cadences, and reporting dashboards that cover portfolio exposures, client transition plans, and remediation actions. Banks should embed environmental considerations into remuneration and scorecards for senior leaders whose decisions materially influence risk outcomes. MAS has also clarified that directors must be able to challenge management on scientific assumptions, transition trajectories, and any material deviations from policy limits, reflecting the financial materiality of climate and environmental drivers.
MAS’ supervisory follow-up reinforces these expectations. In a June 2022 information paper, MAS reviewed on-site inspections and thematic reviews, noting that strong practices included board-approved risk appetites with sectoral thresholds and escalation triggers, while weaker practices lacked clear handoffs between sustainability teams and credit decision-makers. MAS signalled that future supervisory work will test the evidence trail between strategy, risk appetite, capital allocation, and disclosures, and will pay close attention to how banks treat high-emitting or biodiversity-sensitive sectors.MAS Information Paper on Environmental Risk Management (Banks), 2022
Risk management integration
MAS requires environmental risk to be embedded in the overall risk management framework, spanning credit, market, liquidity, and operational risks. For credit risk, banks must assess how counterparties’ transition plans, emissions trajectories, and exposure to physical hazards influence probability of default and loss given default. Counterparty due diligence should include forward-looking indicators such as capital expenditure commitments, science-based targets, and dependence on carbon-intensive revenue streams. Sectoral risk appetite statements should be tailored—for example, differentiated limits for upstream oil and gas, power generation, shipping, agribusiness, and real estate—and incorporate both transition and physical risk drivers.
For market risk, MAS expects banks to capture valuation sensitivities to carbon pricing, renewable energy penetration, and demand shifts that could affect traded instruments. Liquidity risk considerations include the potential for collateral haircuts to widen in stressed transition scenarios or for funding markets to penalise banks with misaligned transition strategies. Operational risk controls should address supply-chain disruptions, data quality risks in emissions metrics, and the resilience of critical infrastructure to physical climate events.
Methodological expectations include the use of climate scenario analysis to inform risk identification, concentration management, and capital planning. MAS encourages banks to align scenarios with Network for Greening the Financial System (NGFS) pathways and to test both orderly and disorderly transitions. Scenario design should consider policy shocks (e.g., accelerated carbon taxation), technology shifts (e.g., faster electrification), and acute physical hazards (e.g., floods affecting key logistics nodes). Results should feed portfolio strategy, sectoral limits, and client engagement plans, with clear documentation of assumptions and limitations.
Data and metrics are central to MAS’ expectations. Banks should collect emissions data (Scopes 1, 2, and relevant 3), energy mix, and transition plans from clients, supplementing with reputable external datasets where necessary. Data lineage, validation controls, and model risk management must be applied to climate data and analytics, with independent validation of scenario models, probability-of-default overlays, and temperature-alignment tools. MAS also expects banks to establish early-warning indicators—such as carbon price breakevens, transition plan slippage, or exposure to deforestation moratoria—to trigger portfolio reviews and credit actions.
Product governance and client engagement
MAS highlights that environmental considerations must extend to product design and distribution. Sustainability-linked loans and bonds should include credible key performance indicators, realistic but stretching sustainability performance targets, and pricing adjustments that are transparent to borrowers. Green labels must align with recognised taxonomies—such as the joint Association of Banks in Singapore (ABS) and MAS environmental risk management principles—and avoid overstating environmental benefits. Product approval committees should test green or transition products for potential greenwashing, model risk, and operational readiness, ensuring that covenants, representations, and ongoing monitoring reflect environmental risk appetites.
Client engagement is a core supervisory theme. MAS expects banks to have structured engagement plans for clients in carbon-intensive or biodiversity-sensitive sectors, including dialogues on transition pathways, capital expenditure needs, and the feasibility of science-based targets. Engagement should be anchored in sector-specific guidance, such as power sector decarbonisation pathways, shipping efficiency standards, and agricultural no-deforestation commitments. Where clients lack credible plans, banks should consider time-bound escalation steps: enhanced due diligence, covenants linked to transition milestones, reductions in tenor or exposure, or ultimately exiting relationships that remain misaligned with risk appetite.
Third-party risk also features in MAS’ expectations. Outsourcing to asset managers or service providers for portfolio management, data, or analytics must include due diligence on environmental risk capabilities, data provenance, and operational resilience. Contracts should stipulate data ownership, validation rights, and incident reporting for climate-related model or data failures.
Reporting, disclosures, and assurance
MAS encourages banks to align disclosures with TCFD, covering governance, strategy, risk management, and metrics/targets. Banks should explain how environmental risk appetite shapes portfolio strategy, how scenario analysis informs capital and funding plans, and how metrics such as financed emissions, portfolio temperature scores, and green asset ratios are calculated. Disclosures should distinguish between transition and physical risk channels, describe limitations, and provide year-on-year progress against targets. MAS’ media release accompanying the guidelines confirms that supervisors will review disclosure completeness and consistency, particularly for systemically important banks.MAS media release on environmental risk management guidelines
Internal reporting must support board and senior management oversight. Management information should include sectoral exposures relative to risk appetite, concentrations in high-risk geographies, transition readiness scores, financed emissions trends, and breaches of policy thresholds. Early-warning indicators and watchlists should be integrated into credit and portfolio committees. Internal audit and compliance functions should test the completeness and accuracy of data feeding disclosures, as well as the control design around scenario models and metric calculations.
MAS also expects banks to be prepared for supervisory data requests and thematic reviews. This includes maintaining reproducible scenario analysis, clear model documentation, and traceable data lineage for emissions and environmental indicators. Banks should align regulatory submissions with the ABS environmental risk management principles and be ready to evidence how environmental risk informs the Internal Capital Adequacy Assessment Process (ICAAP). MAS has indicated that future stress tests will likely include climate scenarios, making consistency between internal and regulatory stress testing frameworks essential.
Action checklist for compliance teams
- Governance refresh. Confirm that board committees have explicit environmental risk mandates, reporting cadences, and escalation triggers, and that senior management scorecards incorporate climate objectives.
- Risk appetite and limits. Update sectoral and counterparty limits to reflect transition and physical risk metrics, with clear thresholds for enhanced due diligence and client engagement.
- Methodology uplift. Align scenario analysis with NGFS pathways, validate climate models, and integrate results into credit grading, provisioning overlays, and capital planning.
- Data controls. Strengthen emissions data collection, validation, and model governance; document data lineage and ownership for key metrics and disclosures.
- Product and distribution. Review sustainability-linked products for credible targets and anti-greenwashing controls; ensure third-party providers meet environmental risk standards.
- Disclosure readiness. Map existing disclosures to TCFD and MAS expectations; institute internal audit checks on metric calculations and narrative consistency.
Zeph Tech helps Singapore-regulated banks operationalise MAS’ environmental risk expectations through governance playbooks, sectoral risk taxonomies, scenario analysis tools, and disclosure workflows aligned to TCFD and ABS principles.
Continue in the Compliance pillar
Return to the hub for curated research and deep-dive guides.
Latest guides
-
Third-Party Risk Oversight Playbook — Zeph Tech
Operationalize OCC, Federal Reserve, EBA, and MAS outsourcing expectations with lifecycle controls, continuous monitoring, and board reporting.
-
Compliance Operations Control Room — Zeph Tech
Implement cross-border compliance operations that satisfy Sarbanes-Oxley, DOJ guidance, EU DORA, and MAS TRM requirements with verifiable evidence flows.
-
SOX Modernization Control Playbook — Zeph Tech
Modernize Sarbanes-Oxley (SOX) compliance by aligning PCAOB AS 2201, SEC management guidance, and COSO 2013 controls with data-driven testing, automation, and board reporting.