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.