For years, ESG and Sustainable Investing have been a voluntary market trend for asset managers to identify risks and opportunities. A main driver contributing to the increasing demand for sustainable strategies comes directly from asset owners and a recognition that these long-term risks should be incorporated as a core part of the investment process. However, many believe that to make this a mainstream practice, markets require a stronger nudge, especially in the form of new regulation and government intervention to alter market rules and steer us all towards a more sustainable future.

The Monetary Authority of Singapore (MAS) has started taking such an approach. After publishing guidelines for environmental risk management in December 2020, MAS expects asset managers to implement, in the coming months, a comprehensive framework to manage and disclose environmental risks throughout their investment processes.

It’s all about Materiality

The financial materiality of environmental risk stems from the concept of natural capital.

Natural capital is the stock of natural resources that nature provides us all with (e.g., water, forest, and air). This natural capital in turn provides ecosystem services like food, coastal protection, and absorption of pollution that underpin economic activity and human well-being. Every financial asset is directly or indirectly impacted by changes in our natural capital and any disruption to the provision of ecosystem services. Therefore, significant environmental changes, both short and long-term, can have an impact on the value of financial assets and portfolios. This makes environmental risk financially material.

Asset managers need to develop the right processes and capabilities to be able to accurately assess the materiality of these risks. Key distinctions should be made on a periodic materiality assessment depending on factors such as asset class, sector, geography, and mandates, among others.

Preparing for Compliance

To comply with MAS’ guidelines, Invartis has built a capable team of subject matter experts and established a framework to help asset managers develop and integrate an environmental risk management framework into their current investment and operational processes. Our model utilizes well-regarded and accepted international standards (i.e., TCFD, SASB, PRI, GRI) and is periodically updated as all these standards continue to evolve.

Our framework starts by assessing materiality and subsequently delves into 5 key areas of the investment process:

1. Governance and Strategy – Create an oversight structure with clear responsibilities from the Board of Directors and Senior Management
2. Research and Portfolio Construction – Integrate materiality assessments into the overall investment analysis and decision-making process
3. Risk Management – Establish proper processes for ongoing monitoring, scenario analysis, and capacity building
4. Stewardship – Empower asset managers to shape positive corporate behavior through shareholder engagement, proxy voting and sector collaboration
5. Disclosure – Share environmental risk management practices to potential and existing clients, as well as other stakeholders

Sustainable investing demand from clients will continue to increase as well as regulatory oversight. Asset managers need to start assessing how ESG will impact their business model and operations. Contact us for more information on how Invartis can help you put in place robust environmental risk management policies and processes.