MAS to cut carbon footprint of equities portfolio by up to half by FY2030
The central bank has said a climate-resilient reserves portfolio will help it to mitigate risks and capture opportunities arising from climate change.
SINGAPORE: The Monetary Authority of Singapore (MAS) expects to cut the emissions intensity of its equities investments by up to 50 per cent by financial year 2030, as it continues to work towards its goal of a climate-resilient reserves portfolio.
Measures to achieve that include the roll-out of a “portfolio overlay” by next year that would gradually tilt the equities portfolio towards less carbon-intensive investments, it said in its second sustainability report released on Thursday (Jul 28).
The MAS, which manages Singapore’s official foreign reserves, will also exclude from its portfolio companies which derive more than 10 per cent of their revenues from thermal coal mining and oil sands activities.
These exclusions will be “gradually implemented”, according to MAS chief Ravi Menon, and the central bank does not expect a significant impact on returns.
“We are looking at long-term returns. We have chosen these two activities because (there’s a) high chance they will become stranded assets in future, which means they will have much less value. So I think there will be no sacrifice in returns,” he said at a press conference.
Other steps include raising its allocations to climate and environmentally conscious investment strategies. As of March 2022, it has fully funded the US$1.8 billion planned under the Green Investment Programme which it announced last year.
Mr Menon noted that the transition to a low-carbon global economy could accelerate amid a growing importance placed on climate mitigation.
MAS’ equities portfolio is “expected to be the most impacted” under such a scenario so it is taking these portfolio actions to guard against the risks while capturing opportunities, he added.
Over the last financial year, the carbon footprint of the equities portfolio – comprising developed and emerging-market equities – has increased, mirroring a similar trend in the market benchmarks.
This is due to a cyclical rotation in market capitalisation towards energy, materials and utilities firms which “typically perform well in an inflationary, strong growth environment but are also the more
pollutive sectors”, according to the report.
MAS reports its portfolio carbon footprint via the weighted average carbon intensity (WACI). This metric is derived by taking the carbon intensity of each of the companies in the portfolio, weighted by the relative size of the investments in those companies.
“Notwithstanding the increase in WACI over the period, we expect the WACI of the equities portfolio to decline over time, supported by the implementation of the portfolio actions,” the central bank said.
The annual report also disclosed the WACI of MAS’ corporate bond portfolio for the first time.
Even though corporate bonds are relatively less impacted by climate change, the central bank said it decided to expand its scope of monitoring and reporting as part of efforts to manage long-term risks.
At the end of March 2022, the WACI for corporate bonds was 76 per cent lower than its market benchmark due to how its framework screens out debt securities with smaller issuance sizes.
This, it added, has resulted in a lower portfolio exposure to securities issued by companies in carbon-intensive sectors compared to the benchmark.
The MAS first published a sustainability report last year, laying out the need for a climate-resilient reserves portfolio.
“As the steward of Singapore’s official foreign reserves, MAS will ensure that the reserves investment portfolio is well-positioned for the transition to a low-carbon future,” said Mr Menon.
“MAS will continue to monitor climate signposts to assess the pace and nature of the low-carbon transition, and will adjust our portfolio actions accordingly.”
MAS’ sustainability push also includes the greening of the country’s finance sector.
For one, MAS and the Singapore Exchange are stepping up efforts to strengthen the comparability and reliability of sustainability disclosures for listed companies, major financial institutions and retail ESG funds.
First, funds that are sold to retail investors in Singapore under the ESG label will soon have to provide relevant information to better substantiate their ESG label. These include details on the fund’s investment strategy, criteria and metrics used to select investments, as well as risks and limitations associated with the fund’s strategy.
“MAS will require the disclosures to be made on an ongoing basis. Investors will receive annual updates on how well the fund has achieved its ESG focus,” said Mr Menon.
“The new guidelines, to take effect from January 2023, will help to reduce greenwashing risks and enable retail investors to better understand the ESG funds they invest in.”
Asked if there will be ratings or colour codes to depict different fund standards, MAS’ deputy managing director for financial supervision Ho Hern Shin said the latest initiative is “not a rating system per se, but a disclosure guidance”.
“There won’t be a colour coding. It’s essentially focused on reporting and disclosure requirements at the prospectus stage, as well as the ongoing basis. It’s really to allow retail investors some way to compare across the funds they invest in that are supposedly ESG,” she said.
In addition, listed companies will be required to disclose their climate-related risks based on recommendations by the Task Force on Climate-related Financial Disclosures (TCFD) from 2023 onwards.
Those in the financial services, energy, agriculture, food and forest products industries will be scoped in first. By 2025, more than 60 per cent of SGX-listed entities by number and 78 per cent by total market capitalisation will be required to make mandatory disclosures.
Mandatory climate-related disclosures for major financial institutions will kick in later, but reference the International Sustainability Standards Board (ISSB) standard.
“We will consult on the disclosure requirements for financial institutions as soon as the ISSB standard is finalised,” said Mr Menon.
MAS is also planning to engage financial institutions on their transition plans towards net-zero or other relevant emissions targets.
In addition, it will launch an ESG disclosure platform later this year, which aims to allow listed companies in Singapore to upload their sustainability data in “a structured and efficient manner” while enabling multiple external stakeholders to access these data.
It will also help “streamline and reduce corporates’ ESG reporting burden, and ensure comparability for users of these data sets such as financial institutions and service providers”.
Among other moves, it intends to incorporate a range of long-term climate scenarios into its industry-wide stress test exercise this year.
Doing so will help raise awareness of the potential economic and financial implications of climate risks, and facilitate learning for both the central bank and financial institutions, MAS said.
As part of developing a vibrant green finance ecosystem, the central bank has introduced various grants to support the issuance of green bonds or nudge businesses to take up green and sustainability-linked loans.
It also worked on nurturing the local talent pool by anchoring think-tanks and centres of excellence in Singapore, as well as launching skills training roadmaps in sustainable finance.
Meanwhile, MAS is also eyeing its own organisational carbon footprint and aims to reduce emissions “sizeably and achieve net-zero at the earliest possible timeframe”.
For this, it said it has come up with a framework to reduce emissions from business air travel and embarked on measures to further reduce its upstream and downstream emissions from currency operations.
On the latter, Mr Menon said the carbon footprint of the excess new notes issued to meet festive demand each year makes up about 8 per cent of MAS' total emissions, comparable to the emissions from powering 430 four-room HDB flats annually.
He added that MAS will step up efforts to reduce demand for new notes during festive seasons by encouraging the use of fit notes and e-gifting.
Asked if the central bank might consider taking a harsher stance such as limiting or even halting the issue of new notes, Mr Menon replied: “That’s something we keep in the back pocket but we are hoping public sentiments and behaviours will change, rather than suddenly yank the new notes out of circulation.”
“If you just pull the rug out, there’ll be a lot of unhappiness,” he added. “You want to make sure there’s public education and social awareness. It’s better that people do this voluntarily out of a sense of conviction for the environment and (are) willing to change their mindsets.”