US$1.8b in official foreign reserves to go towards climate-linked investments

Singapore

THE Monetary Authority of Singapore (MAS) will deploy US$1.8 billion of the official foreign reserves (OFR) to five asset managers for climate-related investments, MAS managing director Ravi Menon has said.

The deployment is part of the US$2 billion Green Investment Programme (GIP) set up in 2019.

The names of the asset managers will not be disclosed, but they will set up their Asia-Pacific sustainability hubs in Singapore, and launch new environmental, social and governance or ESG thematic funds for the region.

They are expected to start operations in the next few months.

Mr Menon, speaking at the launch of the MAS' first sustainability report on Wednesday, said: "The GIP will help to enhance the climate resilience of the official foreign reserves, attract sustainability-focused asset managers to Singapore, and catalyse funding towards environmentally sustainable projects in Asia and beyond."

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The MAS manages Singapore's official foreign reserves (OFR), and has the mandate to preserve their purchasing power and long-term value. As of May 2021, the OFR stood at US$398 billion.

Mr Menon added: "As the guardian of Singapore's official foreign reserves, the MAS is integrating climate risks and opportunities into its investment framework."

Climate change is expected to drive more sovereign wealth funds and institutions managing reserves into embedding ESG criteria into their operations and investment decisions over the coming years, said financial data provider Preqin in a recent report put out in partnership with multinational law firm Baker McKenzie.

To build a climate-resilient reserves portfolio, the MAS will exclude from its portfolio those companies most at risk from the economy's transition towards lower carbon intensity.

For example, companies that derive a substantial part of their revenues from thermal coal mining and have no credible transition plan will be excluded.

The MAS is also expecting its external managers to integrate ESG considerations into their investment process over time to mitigate climate risks in their portfolio.

Mr Menon said: "By exercising their shareholder rights through voting, engagement and escalation, our external managers can influence their investee companies to address climate risks and shift towards more sustainable practices."

The MAS is the second central bank in the world to release a standalone sustainability report after the Bank of England.

In the report, Mr Menon warned that climate change can negatively impact the portfolio of MAS, with equities more badly hit than bonds and cash. However, the negative effects are mitigated by the "well-diversified nature of the portfolio", with fixed-income instruments accounting for the largest allocation, said the MAS.

As part of the report, the MAS partnered GIC and external consultants to conduct an analysis on the MAS' portfolio, based on various climate change scenarios, to find out possible investment implications.

The report said that equity returns are more sensitive to changes in macro-economic factors (such as gross domestic product) as a result of climate change, as well as changes in companies' earnings caused by climate-related variables such as carbon prices.

Sovereign bonds, on the other hand, are less affected by climate change, said the report. Even so, physical and transition risks from climate change are still present, potentially lowering portfolio returns.

Physical risks refer to damage to physical infrastructure, halted production of goods and services or disruptions to supply chains of companies, as a result of climate change. Transition risks arise from the process of adjustment towards an environmentally sustainable economy.

The MAS' sustainability report found that physical risk contributes more to portfolio impact than transition risk, but the most damaging effects of physical risk come much later; transition risks are a more immediate risk.

But even within the same scenario, it was found that the impact of transition risk can vary significantly, so nimbler portfolio actions are required to maximise portfolio returns, said the MAS in the report.

Given that equities investments are relatively more vulnerable to climate change, the MAS is implementing portfolio actions to address the more immediate transition risk on this asset class, including through its external managers, who directly manage the bulk of its equities portfolio.

The financial regulator plans to commence a climate risk mitigation overlay within the equity asset class.

Mr Menon said that such an overlay programme will reduce exposures to carbon-intensive sectors, such as energy, materials and utilities.

However, it will maintain some exposure to companies within these sectors that are likely to make a successful transition. "Excluding entire sectors could mean missing out on opportunities to facilitate transition."

To remain nimble, the MAS is looking to allocate more investments to actively managed strategies that seek out climate change-related opportunities, or tilt investments towards more climate-resilient companies.

The report also disclosed the carbon footprint of the MAS' equities portfolio, reported using weighted average carbon intensity (WACI), the preferred metric recommended by the Taskforce for Climate-related Financial Disclosures.

The WACI of a portfolio is derived by taking the carbon intensity for each of the companies in the portfolio, weighted by the relative size of the investments in the portfolio.

As at the end of March, the WACI for the MAS' emerging-market (EM) equities portfolio was 30 per cent lower than its benchmark; the WACI for its developed markets (DM) equities portfolio was 3 per cent lower than its benchmark.

The MAS will report its progress in strengthening the climate resilience of the OFR each year.

It disclosed that its carbon footprint has declined over the last two years, mainly due to a near-collapse in air travel due to the pandemic.

The central bank will "look for opportunities to reduce air travel in line with new norms of international engagement in a post-pandemic world", said Mr Menon.

By next year's sustainability report, the MAS will set targets for emissions reduction in 2025 and 2030, and consider the earliest possible time frame to achieve net-zero emissions.

Mr Menon said the "biggest challenge" in the MAS' drive to reduce its carbon footprint lies in cutting the environmental footprint of currency issuance.

"Ultimately, progress on emissions reduction in currency operations hinges on a reduction in public demand for notes and coins."

READ MORE: Climate-linked financial disclosures to be enhanced