The portfolio actions which MAS implemented in FY2022 included making a small allocation to two climate indices in MAS' equities portfolio, excluding companies exposed to significant asset stranding risks from a low-carbon transition, and more systemically integrating ESG considerations into evaluation of MAS' External Fund Managers (“EFMs”).

The range of actions seek to protect MAS' portfolio from the impact of climate transition risks and benefit from low-carbon opportunities. MAS expects that these actions will contribute to reducing the Weighted Average Carbon Intensity ("WACI") of MAS' equities portfolio by up to 50% by FY2030 compared to the base year of FY2018, in alignment with a transition to net zero by 2050. MAS' portfolio actions will adjust over time, with better data, risk analysis techniques and clarity on the world’s climate transition pathway.

MAS commenced a small allocation to align the equities portfolio with the climate transition pathway.

Climate Transition Programme ("CTP") aims to mitigate the adverse impact of climate change, in particular transition risk on the portfolio. This is done by gradually tilting the portfolio to increase exposures to companies that are less carbon-intensive and more aligned with the low-carbon transition over time. In turn, this provides incentives for companies to improve their disclosures and reduce their carbon emissions.

In selecting the climate indices to tilt MAS' equities portfolio, MAS considered both off-the-shelf and bespoke solutions. Off-the-shelf climate indices have more established track records, whereas bespoke climate indices can be tailored to better suit MAS' requirements. Given the uncertainty of various transition pathways, MAS is piloting both types of solutions and will monitor them over time. This will include how the indices perform and influence active manager decisions.

In tilting MAS' equities portfolio, MAS adopted a more granular approach of targeting allocations to best-in-class, less carbon-intensive companies within each sector, rather than excluding entire carbon-intensive sectors.

MAS surveyed the types of climate indices available in the market. MAS found that climate indices can be broadly categorised into exclusionary and tilting indices. MAS focused on the tilting indices, as they strike a balance between reducing portfolio WACI and supporting companies in the low-carbon transition.

Additionally, MAS considered other factors such as the indices’ climate risk mitigation and opportunities profile, risk and return performance, construction methodology, market capacity and trading costs, as well as the index provider’s organisational profile.

MAS initiated a small allocation to one off-the-shelf and one bespoke equities climate index. MAS intends to scale up the programme over time as guided by new data and climate signposts, so that MAS is positioned for the correct transition pathway. Based on MAS' pilot, MAS may eventually land on one or two climate indexes for the long-term.

MAS is developing strategies to align the rest of the investment portfolio with the climate transition pathway, with corporate bonds as the next focus. MAS will take onboard insights from its current strategies, and MAS' future actions will likely involve tilting the corporate bonds portfolio towards exposures that are less carbon-intensive and more aligned with the low-carbon transition.

In implementing a tilting strategy for the corporate bonds portfolio, there are additional challenges to consider, such as:

• Market liquidity. Corporate bonds in general have lower liquidity compared to equities. Given that liquidity is a key investment consideration for the MAS portfolio, this could have an impact on the effective implementation of tilting strategies for corporate bonds.
• Climate index solutions. There are currently fewer climate indices in the market for corporate bonds than equities. The number of climate index solutions can be expected, however, to increase over time as more investors focus on decarbonising their corporate bonds portfolio, and as data and methodologies improve.

MAS has the responsibility as an asset owner to drive positive change in the companies it has invested in towards a sustainable future. MAS' External Fund Managers ("EFMs") play an important stewardship role by actively voting on resolutions and engaging portfolio companies across different sectors, as well as encouraging them to make progress in the transition towards net zero.

To align MAS' investments with its values, MAS has defined a set of stewardship principles and expectations for MAS' EFMs, across key factors such as materiality, progress, accountability and cooperation. MAS continuously monitors and assesses if MAS' EFMs’ stewardship efforts are aligned with this set of principles and expectations.

MAS hopes to improve industry stewardship standards over time – by setting out MAS' expectations on EFMs for the integration of Environmental, Social and Governance ("ESG") considerations (including climate transition) at different stages of the investment process, and how MAS intends to hold them accountable.

Over the course of FY2022, MAS further integrated ESG considerations (including climate) into MAS' evaluation process of all MAS' existing EFMs.

This has allowed MAS to better assess its EFMs’ sustainability efforts and their adherence to MAS' stewardship principles in a more structured manner. These new processes have helped improve MAS' assessment of various elements, including:

• Accountability e.g. Board/C-suite level responsibility on ESG matters
• Integration of ESG considerations in investment process
• Stewardship i.e. level of voting activity and engagement with portfolio companies
• Active participation on collective engagement platforms
• Alignment with global standards e.g. UN PRI, ICGN Global Stewardship Principles
• Transparency e.g. disclosure of progress and outcomes of stewardship measures.

These processes have allowed MAS to better identify EFMs who are relatively more advanced in their thinking and approach towards sustainability.

This assessment is subsequently integrated into MAS' overall assessment of each EFM.

Over the course of the year, MAS has had more frequent, in-depth engagements with its EFMs on both their investment performance and progress of their sustainability efforts. A summary of EFMs’ sustainability efforts is set out under the Metrics and Targets section.

In the absence of progress, these engagements may escalate to more punitive actions, which may include probation, partial withdrawal, or in-extremis, termination of the relationship.