A set of targeted portfolio actions had been implemented, mainly focused on the equities portfolio, drawing from the findings of the scenario analysis. 

The broad range of portfolio actions include: 

• setting expectations and monitoring the stewardship and engagement efforts of our external fund managers;
• investing in transition opportunities and climate solutions (Green Investment Programme or GIP); 
• tilting portfolio exposures towards companies that are more aligned with the low-carbon transition over time (Climate Transition Programme or CTP); and  
• excluding from the investment universe companies that derive more than 10% of revenues from thermal coal mining and oil sands activities. 

We expect that our actions will contribute to reducing the WACI of our equities portfolio by up to 50% by FY2030 compared to the base year of FY2018, in alignment with a global transition to net-zero by 2050.

Climate indices offer a useful starting point for asset owners to tilt their portfolios towards investments that thrive in a low-carbon transition. Such indices are constructed to include factors such as carbon emissions and green revenues, on top of traditional factors such as market capitalisation and liquidity, and may be tailored to achieve goals such as reducing portfolio carbon emissions or gaining exposure to climate opportunities. Under the CTP, MAS initiated a small allocation to one off-the-shelf and one bespoke climate equity index in FY 2023. In addition, we fine-tuned the bespoke index methodology based on implementation experience and are developing a roadmap for active management of CTP equities portfolios against these indices.  

Implementing climate indices could pose challenges, often necessitating careful consideration of trade-offs associated with their design. We have set out a few lessons that we have gleaned through our experience:

• The introduction of non-financial parameters in climate indices (e.g. to steer the decarbonisation of the portfolio) could result in significant deviation in financial returns from conventional benchmark returns. For instance, introducing a climate objective to decarbonise a portfolio through a climate index could narrow the investment universe by reducing the allocation to carbon intensive sectors such as energy, and such an underweight would have underperformed a conventional, market-weighted portfolio in an environment of high oil prices such as the one we experienced in 2022. Such trade-offs can be mitigated through thoughtful constraints that reflect the extent of an asset owner’s appetite for deviations in returns (e.g. imposing limits on the sector tilts, resulting in a sector neutral index that tilts towards the low-carbon leaders within each sector).

• The availability and quality of climate data present challenges in implementing climate indices. Climate data is needed to quantify climate objectives in climate indices. Such data includes carbon emissions, green revenue, and climate value-at-risk. However, there are challenges in the quality of such data and methodologies used to derive them, and these challenges can impact the effectiveness of climate indices in achieving their intended climate goal. For example, in the evaluation of climate transition risk, while a comprehensive view necessitates the use of all three scopes of carbon emissionsThe GHG Protocol Corporate Standard classifies a company’s GHG emissions into three ‘scopes’. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions., Scope 3 data is still lacking. Scope 3 emissions are complicated to estimate as they cover all indirect emissions not included in Scope 2 that occur in a company’s value chain, including many sub-categories of upstream and downstream emissions. Furthermore, emissions data is backward-looking and offers limited insight into future exposure. As an alternative, forward-looking metrics can offer an indication of companies’ potential exposure to climate risks and opportunities in the future. One example would be the climate value-at-risk metric, which models the potential impacts on companies’ valuation based on climate scenarios, and takes into account drivers of physical and transition risks such as extreme weather events, government policies, and technology developments. However, these modelled metrics are sensitive to assumptions, and subject to underlying methodologies which are still evolving. The challenges associated with climate data highlight the need to monitor various types of climate data and track how they evolve over time.

• Index rebalancing methodology and frequency can affect the returns and overall feasibility of the climate indices. Changes in the climate data can also create substantial swings in the composition of index constituents, and a higher turnover of index constituents can incur higher transaction costs for rebalancing to target compared to conventional, market-weighted indices. Less frequent rebalancing may lower transaction costs but could result in suboptimal index tilts. Such a trade-off underscores the need to balance between timeliness of climate data updates in index design versus rebalancing related transaction costs. 

We have a responsibility as an asset owner to drive positive change in the companies we have invested in towards a sustainable future. Our EFMs play an important stewardship role by actively voting on resolutions, engaging companies across different sectors, and encouraging them to make progress in the transition towards net zero.

MAS has defined a set of stewardship principles and expectations for our EFMs. We continuously monitor and assess if our EFMs’ stewardship efforts are aligned with this set of principles and expectations, which are: 

• 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 

We hope to improve industry stewardship standards over time – by setting out our expectations on EFMs for the integration of ESG considerations (including climate transition) and how we intend to hold them accountable.

We have integrated ESG considerations into our assessment of all our existing EFMs since FY2022. This allows us to assess our EFMs’ sustainability efforts in a more structured manner and allows us to identify EFMs who are relatively more advanced in their thinking and approach towards sustainability. For EFMs which did not demonstrate progress, MAS’ engagements with them may escalate to more punitive actions, which may include probation, partial withdrawal, or in-extremis, termination of the relationship.

Over the course of the year, we have had more engagements with our EFMs on both their investment performance and progress of their sustainability efforts. A summary of EFMs’ sustainability efforts is set out under Metrics and Targets section.