MAS invests S$8 billion in climate transition
THE Monetary Authority of Singapore (MAS) has set aside about 2 per cent of its portfolio, which amounts to slightly over S$8 billion, for its climate transition programme, said managing director Ravi Menon.
This allocation, which is from the equities portion of the central bank’s official foreign reserves, has gone into companies that are part of two climate indices – one of them is an off-the-shelf index, and the other is a bespoke product tailored to suit MAS’ requirements.
Given that this climate transition programme was launched only recently, MAS decided to “start small”, but has plans to scale it up as it becomes more confident about the effectiveness of the indices.
Speaking at the release of MAS’ annual report and sustainability report on Wednesday (Jul 5), Menon said the reason the central bank is starting small is because climate indices do not have a well-established track record.
“A climate index basically gives an indication of what are the group of companies or sectors or industries that will be well prepared for the transition in future, as economies and societies become greener and reduce carbon intensity. And as you can imagine, that is not an easy thing to predict.
“Our approach to climate portfolio actions is to start small, learn fast, and scale up as new data provide greater clarity.”
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MAS had previously announced its target of reducing the weighted average carbon intensity of its equities portfolio by up to 50 per cent by the financial year of 2030 from FY2018, and it aims to hit that target via various ways. These include increasing its portfolio’s exposure to companies more aligned with the low-carbon transition, investing in transition opportunities and climate solutions, as well as divesting from carbon-intensive sectors.
The central bank relies on key findings from its latest climate-scenario analysis, conducted in 2022, to guide its investment strategy, which is aimed at protecting its equities portfolio from transition risks and gaining exposure to suitable investments that have a sustainability focus.
The climate transition programme, which has a particular focus on transition risk, is the latest avenue employed by MAS to make its overall portfolio more climate-resilient. Transition risk refers to uncertainties companies could potentially face as a result of changes in regulations, as well as consumer and investor preferences in the shift towards a low-carbon economy.
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The S$8 billion investment excludes companies exposed to significant asset stranding risks. MAS had previously announced that it will exclude companies with more than 10 per cent revenues from thermal coal mining and oil sands activities from its investments.
However, the central bank did not exclude entire carbon-intensive sectors, as it chose to adopt a more granular approach of targeting allocations towards less carbon-intensive companies within each sector.
Menon said such an approach would strike a balance between reducing the portfolio’s carbon intensity while continuing to support companies which are transitioning to a lower carbon intensity.
Going forward, MAS will look at the scoring methodologies of these climate indices and assess whether they are indicators of actual company actions, whether these company actions translate to a reduction in climate risk and financial market pricing, as well as how fund managers calibrate their investment process when their performance is measured against a climate index instead of a conventional market capitalisation-weighted index.
The decision to increase MAS’ allocation in climate transition will depend on how transition risks evolve over time and the carbon intensity profiles of the portfolio companies, said Leong Sing Chiong, deputy managing director for markets and development at MAS.
With new data that could guide them towards the correct transition pathway, the central bank stated in its sustainability report that it may eventually decide on one or two climate indices for the long term.
In addition to this climate transition programme, MAS had previously set up a US$2 billion green investments programme to invest in public market asset classes that have a green focus as part of a broader initiative to align the rest of its investment portfolio towards climate transition. The sum of US$2 billion has been fully deployed in 2023.
It has also completed divesting from companies that fall under its exclusion criteria, and has integrated environmental, social and governance considerations of external fund managers during evaluation.
MAS said in its sustainability report that its next focus will be on its corporate bonds portfolio, which saw its weighted average carbon intensity increase to 192 tonnes of carbon dioxide equivalent per US$1 million of revenue in FY2021, from 147 tonnes the year before.
“MAS’ future actions will likely involve tilting the corporate bonds portfolio towards exposures that are less carbon-intensive and more aligned with the low-carbon transition,” said the report.
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