Editor’s note: This article was first published on Fund Selector Asia.
Many Asian governments have taken steps since the 2016 Paris Agreement on climate change to tackle the problems of carbon emissions and embrace the doctrines of sustainable finance and responsible investing.
Singapore’s Green Finance Action plan launched in 2019 marked a significant step towards the transition of both the country’s and Asia’s move towards a sustainable future, according to Bey An Lim, head of green finance and asset management at the Monetary Authority of Singapore (MAS).
The plan comprises four main features, which have subsequently been fleshed out through research, initiatives and regulation, she told a webinar last week that was jointly organised by Natixis Investment Managers and NN Investment Partners.
The features include: strengthening the financial sector’s resilience to environmental risks; developing “green” markets and techniques to help create a sustainable economy; harnessing technology to enable efficient sustainable finance flows; and building appropriate knowledge and capabilities.
In the first instance, the “objectives are to respond to physical risks caused by climate change and to alleviate transitions risks arising from policy decisions, technological advances and shifts in consumer preferences that reduce demand for fossil fuels, which might devalue investments and loans with fossil fuel exposure,” said Lim.
Most recently, the MAS issued a set of three Guidelines on Environmental Risk Management in December, with one each for banks, asset managers and insurers to implement within 18 months.
As much as 40% of assets managed in Singapore incorporate ESG factors, with negative screening and ESG integration the most common strategies, comprising about 66% of those assets, a survey of 972 financial market participants last year by MAS found.
In June 2020, Jacqueline Loh, deputy managing director at the MAS, urged asset managers operating in Singapore to launching more ESG and sustainable funds, and “seize this opportunity to launch robust green and sustainable focused fund strategies, in anticipation of rising demand from investors in a post-Covid-19 world”.
The asset manager guidelines require them to include an evaluation of the potential impact of environmental risks (pollution, loss of biodiversity and lost land use, as well as climate change) on an investment’s return potential. They should put in place appropriate processes and systems to monitor, assess and manage the potential and actual impact of environmental risk on individual investments and portfolios on an ongoing basis.
Disclosure should reference internationally accepted reporting frameworks, such as those by the FSB Taskforce on Climate-related Financial Disclosures (TCFD), and within two years MAS intends to incorporate climate-related scenarios in its annual stress tests for the financial industry.
Moreover, the Singapore stock exchange (SGX) requires listed companies to deliver annual sustainability reports on a “comply-or-explain” basis to help asset managers to construct suitable portfolios; SGX also plans to include the TCFD within its guidance.
The second part of the Action Plan is to develop green markets, which the MAS is doing by promoting sustainability bonds and loans, attracting green funds and managers with a sustainability focus, encouraging providers of sustainability rating and verification services, and collaborating with international partners to create a common green taxonomy, according to Lim.
Around S$8bn ($6.1bn) in green, social and sustainability bonds have been issued in Singapore since the scheme launched in 2017, according to MAS figures, and the proceeds used to develop renewable energy projects, improve the energy efficiency of buildings and finance social enterprises aimed at helping low income women.
In 2019, MAS launched a Green Investments Programme under which it will place $2 billion of its funds with asset managers with a strong green focus, and it has a short-list of asset managers from which successful applicants will be announced this year.
The third feature of the plan is to harness technology, such as fintech, to deliver sustainable financial flows. MAS initiatives include organising its Global Fintech Innovation Challenge last year, which received entries that use AI and modelling techniques to help sustainable investment decisions.
The plan’s final aspect is to encourage financial institutions in Singapore to grow their sustainable finance teams in the city state, while the MAS attracts think tanks to undertake research focused on Asia.
“Ultimately, we must continue to build a sustainability ecosystem that fully incorporates the financial sector,” said Lim.
“This incorporates research, education, up-skilling, improved teamwork and partnership,” she said.