Singapore: ESG Standards Within Fund Marketing And Management

Driving this growth trend is the sentiment shared by investors, corporates and the public sector who are demanding greater accountability for ESG issues, as the world transitions to a greener, more sustainable future.

Global regulators have therefore recognised the need for ESG regulation, especially in the financial sector. Similarly, in Singapore, the Monetary Authority of Singapore (MAS), as the key financial services regulator, recognises the need for sound environmental risk management practices by institutions and for consistent, comparable and reliable data and disclosures to guide decision making by financial market participants.

While Europe has led the way in implementing ESG regulations, Asia is not far behind. In Singapore, the MAS has developed ESG regulations to deal with climate resilience, greenwashing and transition planning, among other areas. In doing so, MAS has considered international standards of global organisations and regulators, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).

With a plethora of ESG regulations in place, financial institutions including asset managers, especially those that operate globally, will need to navigate these different regulations and adopt a consistent group ESG policy.

This article provides an overview of the key Singapore ESG regulations impacting asset managers and the risks and challenges associated with regulation. The recent focus has been on the ‘E’ in ESG, although certain existing rules address the ‘S’ and ‘G’ aspects.

Environmental Regulations

Climate Resilience

Financial regulators are identifying climate risks as not merely a macroeconomic issue, but as one that has direct impact on the financial industry. In Singapore, MAS acknowledged that environmental risk gives rise to reputational concerns and bears a monetary impact on asset managers and the assets they manage on behalf of their customers.[2]

To address climate risks, MAS is working with financial institutions to strengthen the financial industry’s climate resilience through robust risk management and disclosure practices.

With the issuance of the MAS Guidelines on Environmental Risk Management (Asset Managers) in 2020, MAS has mandated the incorporation of environmental risk management in the risk management policies and frameworks of asset managers in Singapore. Under the guidelines, asset managers should:

• develop and implement environmental risk management frameworks and policies as part of governance and strategy;
• consider appropriate environmental risk factors that could impact their potential investments when carrying out research and portfolio construction;
• implement appropriate processes and systems to monitor, assess and manage the potential and actual impact of environmental risks on their portfolios in managing portfolio risks;
• exercise sound stewardship to encourage investee companies to raise their awareness of environmental risks and opportunities and to better manage and mitigate environmental risks; and
• disclose their approach to managing environmental risk in a manner that is clear and meaningful to their stakeholders.

To assist with implementation of the guidelines, the Green Finance Industry Taskforce (GFIT) has published a handbook to highlight practical implementation guidance and good practices.[3] MAS also published an information paper to highlight good practices by selected asset managers and identify areas of improvement.

Greenwashing: ESG Fund Disclosure And Reporting

2022 saw a global increase in regulatory proposals to combat greenwashing with an increased focus on enforcement actions. Similarly, MAS has highlighted that greenwashing remains a real and present danger to a greener and more sustainable future.[4]

Observing that an increasing number of retail funds with ESG investment focus are being offered in Singapore, MAS had in 2022 issued new disclosure and reporting guidelines applicable to asset managers which sell funds with ESG labels to retail investors in Singapore.[5] These guidelines require funds to provide details on their investment strategy, criteria and metrics used to select investments, as well as risks and limitations associated with the fund’s strategy.[6] 

A key aim under the guidelines is to curb greenwashing by setting out requirements for the use of ESG factors as part of a retail fund’s name, strategy, investment focus or marketing. Such requirements include prescribing the disclosure of the retail fund’s ESG focus in its prospectus, as well as an assessment of how such ESG focus has been met in its annual reports.

Data And Methodology

Concurrently, MAS is cognisant that consistent, comparable, and reliable climate data and disclosures are key for financial market participants to better assess their exposure to ESG risks and opportunities.

One key challenge that asset managers face in this area is the difficulty in developing environmental risk assessment methodologies. These challenges are exacerbated by data availability, accuracy, and inter-jurisdictional comparability issues, such as incomplete public disclosures, inability or unwillingness of investee companies to provide data, and lack of data standardisation and granularity.[7]

Accordingly, MAS and SGX have taken steps to address these data challenges, such as mandating disclosures by listed entities, and aligning disclosures against international standards. Initiatives include:

• launching ESGenome, a disclosure portal for companies to report ESG data in a structured and efficient manner, and for investors to access such data in a consistent and comparable format;
• developing a Singapore-Asia taxonomy for Singapore-based financial institutions to identify and classify activities that can be considered green or in transition;[8]
• requiring SGX listed issuers (including funds) to announce a sustainability report annually; and
• developing a code of conduct for providers of ESG ratings and data products to, among others, establish minimum standards of transparency in methodologies and data sources.[9]

 

Net-zero Transition

Transition planning is another key ESG focus area of MAS in the recently launched Finance for Net Zero (FiNZ) Action Plan. The FiNZ Action Plan sets out MAS’ strategies to mobilise financing to catalyse Asia’s net zero transition and decarbonisation activities in Singapore and in the region.

In connection with Singapore’s plan to achieve net zero by 2050, the MAS has encouraged financial institutions to adopt net zero goals, and to back these up with robust transition plans. The MAS aims for financial institutions to be effective agents of change by engaging their clients, and to help set expectations for businesses to embed decarbonisation into their strategies.[10]

To this end, MAS intends to set supervisory expectations to steer financial institutions’ transition planning processes to facilitate credible decarbonisation efforts by their clients. The MAS will provide guidance on the governance frameworks and client engagement processes of financial institutions in this regard.[11]

Social And Governance

While concerns over climate change have dominated the ESG debate, the pandemic followed by the current cost-of-living crisis have put a sharp focus on the “S” in ESG globally. In Singapore, MAS observed that the linkage between environmental risk and impact on the financial system has been more established than social risk, while governance issues could be addressed by existing governance requirements, noting that this nascent area is evolving.[12]

That said, there have been certain developments in the social risk space. For example, the SGX requires issuers (including REITs) to set up a board diversity policy that addresses gender, skill and experience and other relevant aspects of diversity, and must disclose their board diversity policy and details such as diversity targets and timelines in their annual reports.

Existing governance requirements applicable to asset managers include, among others:

• MAS Guidelines on Individual Accountability and Conduct. These require asset managers to (1) set out clear reporting lines of responsibility from senior managers and key management personnel, (2) strengthen oversight over material risk personnel, and (3) reinforce conduct standards among all employees;[13]

• MAS Guidelines on Risk Management Practices – Board and Senior Management, which set out guidelines on the role that a financial institution’s board of directors and senior management play in risk management.

Risks And Challenges

With different ESG regulations across jurisdictions, asset managers operating in a group cited the divergence between local and home country requirements as a challenge, particularly due to their reliance on the group or parent company.[14] Industry experts in Asia have also highlighted the different regulatory approaches in regulating ESG investment funds – while Asian regulators are more concerned with risk management, European regulators are focused on promoting sustainable investments.[15]

Different regulatory approaches lead to increased compliance and operational costs for asset managers. Going forward, given the increased focus on enforcement actions in the ESG space, non-compliance with ESG rules is a key regulatory risk and has reputational implications on firms. 

Asset managers, however, acknowledge the need for ESG regulations, as they see increasing investment into ESG strategies as the top expected driver of growth in the next three years.[16] To stand out, it is critical to demonstrate strong ESG credentials and capabilities.

Amidst the risks and challenges, various opportunities abound. In Singapore, the MAS seeks to be a hub for green and transition finance in Asia. Beyond regulation, MAS aims to develop the ESG ecosystem in Singapore more broadly, by building vibrant markets and platforms for green and transition financing, leveraging on Green FinTech solutions, and investing in the skills and capabilities of its people and organisations.

1           Excluding exchange-traded funds and fund of funds. Morningstar, Morningstar Inc. and Asset and wealth management revolution (2022), PwC Singapore.

2           Please see Paragraph 2.3 of the Consultation Paper on Proposed Guidelines on Environmental Risk Management for Asset Managers.

3           Please see the Handbook on Implementing Environmental Risk Management for Asset Managers, Banks and Issuers.

4           Please see “Responding to Global Trends, Returning to Fundamentals” – Keynote Address by Mr Tan Keng Heng, Executive Director, Monetary Authority of Singapore, at the Investment Management Association of Singapore’s 8th Regulatory Forum on 28 January 2022.

5           The guidelines were issued by way of a Circular CFC 02/2022 on the Disclosure and Reporting for Retail ESG Funds, and sets out regulatory expectations on how existing requirements on disclosure and reporting for collective investment schemes (CIS) apply to retail ESG funds.

6           Please see the Remarks by Mr Ravi Menon, Managing Director, MAS, ‘From Green Finance to Transition Finance’, at the MAS Sustainability Report 2021/2022 Media Conference on 28 July 2022.

7           Please see the Information Paper on Environmental Risk Management (Asset Managers)

8           Please see the “Industry taskforce proposes taxonomy and launches environmental risk management handbook to support green finance” article. Additionally, on 28 June 2023, the MAS launched a public consultation to provide a credible standard to increase participation in projects for the early retirement of coal-fired power plants with a 1.5°C transition pathway.

9           Please see the Consultation Paper on Proposed Code of Conduct for ESG Rating and Data Product Providers.

10           Please see the Speech by Mr Lawrence Wong, Deputy Prime Minister and Minister for Finance, and Deputy Chairman of MAS, at the Official Launch of the Sustainable and Green Finance Institute (SGFIN) on 20 April 2023.

11           Please see “MAS to Set Expectations on Credible Transition Planning by Financial Institutions”; "Growth Opportunities of Alternative Investment Industry and its Ecosystem in Singapore" - Speech by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department, Monetary Authority of Singapore, at the Alternatives Investment Management Association Singapore Forum 2023 on 28 March 2023 (mas.gov.sg)

12           In December, please see Paragraph 2.3 of MAS’ Draft Response to the Consultation Paper on Proposed Guidelines on Environmental Risk Managements for Asset Managers.

13           Please see the Guidelines on Individual Accountability and Conduct.

14          Please see the Information Paper on Environmental Risk Management (Asset Managers)

15           Please see ASIFMA in the News: Eugenie featured in Ignites Asia story “Divergence in ESG regulations burdening Asia’s asset managers” - ASIFMA.

16           Please see the Asia ESG fund compliance costs expected to soar” article.