The Monetary Authority of Singapore (MAS) is walking away from equities and corporate bonds of companies that derive more than 10% of their revenues from thermal coal mining and oil sands activities.
“Such companies will be exposed to significant risks of asset stranding as the world increasingly shifts towards the use of cleaner or renewable sources of energy,” says MAS at the release of its second annual sustainability report on July 28.
Managing director Ravi Menon is confident MAS will hit this target “well in advance” of FY2030 and that “there will be no sacrificing returns”.
Energy and mineral stocks have enjoyed strong gains over the past year because of the Russia-Ukraine war, but MAS is taking a longer-term perspective. “We think they will become stranded; there is a high chance that they will have much less value,” says Menon.
The move is expected to reduce the weighted average carbon intensity (WACI) for equities investments by up to 50% by FY2030 ending March 2031, compared to the base year of FY2018.
WACI measures the equities portfolio’s exposure based on the carbon efficiency of the underlying companies. MAS’s equities portfolio WACI as at end-March 2019 was 268 tCO2e/US$ million for the emerging markets (EM) equities portfolio and 165 tCO2e/US$ million for the developed markets (DM) equities portfolio.
As at end-March 2022, the WACI for MAS’s EM equities portfolio remained lower than its benchmark by 19%.
The DM equities portfolio did not fare as well. According to MAS, the effects of the “cyclical market movement and active allocation” caused the WACI for its DM equities portfolio to move 8% higher than its benchmark as at end-March 2022.
As at end-March 2022, the WACI of MAS’s corporate bonds portfolio — comprising mainly DM issuers — was 76% lower compared to the benchmark, at 147 tCO2e/US$ million.
MAS says corporate bonds are “relatively less impacted by transition risks than equities”, since bonds generally have fixed tenures and corporate bonds investors as creditors are higher up on the capital structure relative to equity shareholders.
In measuring the carbon intensity of its equities and corporate bonds portfolio, MAS only considered Scope 1 and Scope 2 emissions, which are direct emissions controlled and produced by the company, and the indirect emissions from electricity, heat or steam use by the company, respectively. “We excluded Scope 3 emissions as the level of reporting of Scope 3 emissions by companies remains low today, therefore requiring a larger degree of estimation, and the inclusion of Scope 3 emissions would result in double-counting when emissions statistics are aggregated at the portfolio level,” says MAS.
ESG disclosures for retail funds
With the financial industry jumping on the ESG (environmental, social and governance) bandwagon wholeheartedly, MAS sees a need to impose some yardsticks.
With effect from January 2023, firms selling ESG funds to retail investors must put out disclosures detailing the fund’s investment strategy; criteria and metrics used to select investments; and risks and limitations associated with the fund’s strategy.
MAS will require the disclosures to be made on an ongoing basis, and investors will receive annual updates on how well the fund has achieved its ESG focus. “The new guidelines will help to reduce greenwashing risks and enable retail investors to better understand the ESG funds they invest in,” says Menon.
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These guidelines will apply to funds that use or include ESG factors as its key investment focus and strategy, and represent themselves as ESG-focused schemes.
Conversely, schemes that only use negative screening, or merely incorporate or integrate ESG considerations into the investment process to seek financial returns, will not be regarded as having an ESG investment focus.
To be sure, these guidelines are not meant to be punitive, says MAS, given the regulatory reach it already wields. “Let me assure you — if MAS calls up a fund manager to a meeting, that usually sends the message across. We don’t have to take other steps,” says Menon.
MAS’s own emissions
MAS has set emission reduction targets across its operations and investments. In its Sustainability Report 2021/22, MAS set FY2025 and FY2030 targets for its Scope 1, Scope 2 and Scope 3 emissions, with the latter focusing on business air travel and outsourced currency operations.
Using FY2018 ended March 2019 as the base year, MAS aims to cut Scope 1, Scope 2 and Scope 3 (business air travel) emissions by 17.5% by FY2025, before reaching 30% by FY2030.
For its Scope 3 (outsourced currency operations) emissions, MAS targets a 10% reduction by FY2025 and a 20% reduction by FY2030. “MAS is committed to reducing Scope 3 emissions as it forms the bulk of our carbon profile, despite the greater challenges in reducing such emissions,” it says.
MAS’s so-called “currency value chain” comprises currency production, processing and transportation, as well as incineration of notes taken out of circulation.
There is an annual strain ahead of every Chinese New Year, where around 100 million new notes are printed and distributed to the banks so that red packets can be stuffed — only for the very same notes to be put back into banks within weeks or even days.
According to Menon, the carbon footprint of the excess new notes issued to meet festive demand each year makes up about 8% of MAS’s total emissions. That is equivalent to the emissions from powering 430 four-room HDB flats annually.
MAS will discourage the use of new notes and push for wider use of “e-gifting” instead.
In FY2021, MAS’s Scope 1 and Scope 2 emissions were 10.2% and 0.9% lower than the base year, respectively. Meanwhile, its Scope 3 emissions for business air travel and outsourced currency operations were 92.2% and 24.3% lower respectively, which MAS says is an “aberration”.
This is because of Covid-19 border lockdowns and a lower demand for coins during the pandemic. “Overall, our FY2021 emissions declined 39% from FY2018 baseline, given substantial decline in business air travel due to the Covid19 pandemic,” say MAS.
Precedent for listed companies
MAS is perhaps setting a precedent for sustainability reports among companies here. The Singapore Exchange (SGX) has mandated that all SGX-listed entities provide climate reporting on a “comply or explain” basis from 2022.
Climate reporting will be required in phases, based on the Task Force on Climate Related Financial Disclosures’ (TCFD) recommendations.
Disclosures will become mandatory from FY2023 for companies in the financial, agriculture, food and forest products and energy industries. TCFD has identified these sectors to be most affected by climate change.
By 2025, mandatory climate reporting will cover 60% of SGX-listed entities by number, and 78% by total market capitalisation. Unlike some listed companies, however, MAS has no plans to tie employee remuneration to its sustainability objectives. “I think there are larger fish to fry, which is really about getting the financial sector to be an engine of decarbonisation across the Asian economy,” explains Menon.
Currently, MAS expects all financial institutions to make climate-related disclosures from June 2022, in accordance with international reporting frameworks, such as the TCFD recommendations.
For upcoming mandatory reporting, MAS has judged that a seamless move to the International Sustainability Standards Board (ISSB) standard would be more efficient, says Menon. “We will consult on the disclosure requirements for financial institutions as soon as the ISSB standard is finalised.”
Scope 2 and facility management
To reduce its Scope 2 emissions, MAS will introduce new metrics to report energy use, water efficiency and waste disposal, in accordance with GreenGov.SG targets.
Launched in July 2021, GreenGov. SG is the public sector’s sustainability movement. By 2030, MAS aims to improve energy use and water efficiency by 10% each from a 2018-2020 baseline, while improving waste disposal by 30% from a 2022 baseline.
These are measured against MAS’s Energy Utilisation Index (EUI), or annual energy consumption divided by the total gross floor area; the Water Efficiency Index (WEI), or annual water consumption per day divided by the total number of occupants including visitors; and the Waste Disposal Index (WDI), or the total amount of waste disposed per day divided by the total number of occupants including visitors.
At 118 kWh/sq m and 94 litres per person per day, only EUI and WEI are reported in the FY2021 report. WDI uses 2022 as the base year, and MAS will only report its waste figures in 2023.
As of March 2022, MAS has fully funded a group of five externally-managed mandates amounting to US$1.8 billion ($2.5 million) under the Green Investment Programme (GIP).
First announced last June, 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.
The asset managers appointed under the GIP have established their Asia Pacific sustainability hubs in Singapore and launched new ESG thematic funds for the Asia Pacific region, which can hopefully help support the region’s transit to become low-carbon economies.
MAS has not disclosed the names of the five asset managers, said to be BlackRock, BNP Paribas, NN Investment Partners, Robeco and Schroders.
While relevant opportunities here are few, there is good growth potential. “Just to give an example, when you look at the opportunity set, companies that earn more than 30% of green revenues [and] are liquid enough for our purposes — they constitute only about 5% of total market cap,” says Leong Sing Chiong, MAS deputy managing director (markets and development).
Leong adds: “The investment opportunity set in this space is actually quite small. But as it grows, we will be looking for opportunities to potentially deploy more funds.”
Photos: Albert Chua/The Edge Singapore, Bloomberg