Dan Purves speaks with Rui Xiong Kee, Executive Director of the Reserve Management Department at MAS about how climate change might affect the portfolio.
The Monetary Authority of Singapore (MAS) is unlike any other regulator. Whereas in Australia, the central bank and regulatory bodies are separate agencies, in Singapore they are integrated.
In addition, MAS has two other roles. MAS manages Singapore’s Official Foreign Reserves (OFR), which are meant to serve as a buffer in times of crisis, while also preserving purchasing power over the long term. It also has a mandate to work with industry partners to develop and promote Singapore as a regional and international financial centre.
As both a regulator and developer of Singapore’s financial sector, MAS is moving the industry to consider sustainability as a material part of portfolios, with a focus on climate change. At the same time, being both an investor and a regulator means it has first-hand experience of the practical implications of adjusting an investment strategy to meet these requirements.
Rui Xiong Kee is the Executive Director of the Reserve Management Department at MAS. He spoke to [i3] Insights about the investment approach the central bank is taking.
Kee explains the OFR need to be ready for a “rainy-day scenario”, and thus have high-liquidity requirements. Because of that, the portfolio tends to focus on fixed income by tradition and has a large exposure to developed market sovereign debt. That said, equities and other asset classes still feature, though the exact asset allocation is not disclosed.
When it comes to adjusting the portfolio with regards to climate change, MAS uses the three As: Analysis, Action and Accountability.
“Our framework is to analyse what is the impact and then take action. Accountability is also a very important aspect, talking to others and showing what you have been doing, especially in the area of sustainability, which is a developing space,” Kee says.
Risks and Opportunities
Climate change not only presents risks to portfolios; there are plenty of unique opportunities to be had as it can trigger market repricing of assets.
On one hand, most of the physical risks are limited to the downside, for example, physical infrastructure being damaged, production being halted or supply chains being interrupted. On the other hand, transitional risks provide both downside and upside potential for various sectors and businesses.
“There are going to be firms whose way of doing things are outmoded, but there are going to be firms who are taking the opportunity to ramp up their production because there’s going to be suddenly a large demand for what they’re producing and that is where opportunities lie,” Kee says.
“As with any trend that has a significant impact on a portfolio, as an investor, if you are best able to capture that trend, there are a lot of risks you can avoid and there’s a lot of return that you can seek. That’s how we looked at it.”
As with any trend that has a significant impact on a portfolio, as an investor, if you are best able to capture that trend, there are a lot of risks you can avoid and there’s a lot of return that you can seek. That’s how we looked at it
As uncertainty remains as to how the world will respond to climate change, MAS has mapped out three scenarios to analyse how their portfolio might be affected. The first is termed Paris Orderly Transition, in which global warming is limited to 1.5°C.
The next is Delayed Disorderly Transition, in which global warming is between 1.5°C and 2°C. The final scenario is Failed Transition, in which global warming is close to 4°C.
Physical risks are higher in Failed Transition, but take longer to manifest compared to transition risks, which form a much more immediate risk to manage. Transition risks are higher in the Paris Orderly Transition scenario.
“The important thing to note is that the expected physical impact in the Failed Transition scenario is a much bigger negative, a much bigger drag than the transition risks manifesting in the Paris Orderly or the Delayed Disorderly scenarios,” Kee says.
MAS uses signposting to try and track which scenario is unfolding and refine the portfolio, but the portfolio always seeks to be resilient across the three scenarios.
Action
Part of the MAS portfolio is managed by external managers. The first action MAS takes is to engage managers to ensure environmental, social and governance factors are integrated through to the underlying investments.
Another action MAS has considered is to tilt its portfolio to reduce exposures to companies that are assessed to be vulnerable in transition scenarios.
“One thing we want to be clear with the tilting strategy is not to exclude sectors. It would be in a sense too heavily leaning in the direction of divestment to cut out whole sectors. We think that engagement is an important tool, so you have to stay engaged in all the sectors because each sector, especially the carbon-intensive ones, actually hold a lot of promise in their ability to contribute to transition if investors and management can get on board a good transition plan,” Kee says.
Green Investment Fund
MAS also has a dedicated green investment program, which was announced in 2019. The idea here is twofold. First, to help develop a climate-resilient portfolio. MAS wants to invest through fund managers that have robust methodologies in identifying opportunities and protect or tilt portfolios in a manner that builds climate resilience. The other objective is to support the greening of the economy and for Singapore to play a role as a hub for green finance.
With our inaugural sustainability report, we wanted to take a first step to disclose where we are right now. Every year, we’re trying to improve our capabilities, our read of the environment and therefore what actions we should take, what can we disclose. For all these aspects we hope to adapt as we go along.
“We want to encourage these funds to set up more capabilities in Singapore, invest themselves in understanding the regional investment climate pertaining to green opportunities and so in that way help to build up activity in green finance in the region,” Kee says.
He adds that MAS’s current approach to sustainability is a starting point.
“With our inaugural sustainability report, we wanted to take a first step to disclose where we are right now. Every year, we’re trying to improve our capabilities, our read of the environment and therefore what actions we should take, what can we disclose. For all these aspects we hope to adapt as we go along. One thing we would like to emphasise is we’re trying to open this up as a discussion, here is where we’re at and then we hope for feedback and then to iterate,” he says.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.