As global momentum on climate policies evolve, MAS continues to take a measured, long-term approach to building a climate-resilient portfolio. Our efforts to shift our CTP equities portfolio from passive to active management enables us to be nimbler as geopolitical and climate policy uncertainties shift.  We have also initiated a small allocation of our corporate bond portfolio to climate transition management to build up our understanding of how the climate transition affects this asset class.

Climate Transition Programme - Equities

Climate indices offer an accessible starting point for asset owners to tilt their portfolios towards investments that are more aligned with 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. Under the Climate Transition Programme (CTP), MAS initiated a small allocation to one off-the-shelf and one bespoke climate equity index in FY 2023. In FY 2024, we fine-tuned the bespoke index methodology and streamlined processes around index production based on implementation experience and developed a roadmap for active management of the CTP equities portfolios against these indices. In FY2025, MAS has begun to shift the CTP equities portfolios from passive to active management.

The shift to active management is premised on the view that reserve portfolios can be managed actively, where practicable, in order to provide greater resilience. This may be even more true of portfolios managed against climate indices, where index weights are partly determined by longer-term factors like green revenue, but constituent prices may be affected by short-term factors like energy or weather shocks, or policy uncertainty. Hence, active management can help to mitigate financial risks and enhance resilience of the portfolio. 

Active management will also help MAS to better understand the trade-off between investment performance and carbon reduction by observing how portfolio managers calibrate their investment decisions when their performance is measured against climate indices instead of conventional market capitalisation-weighted indices.

This will help to inform future decisions around potential implementation areas such as: 

• Whether a WACI constraint might need to be imposed. This is important as such guidelines may have implications for the scope of investment opportunities that could impact the investment value-add by managers. For illustration, a no-constraint option for WACI reduction for the portfolio would provide managers with the widest scope of investment opportunities for generating potentially higher value-add. However, it may also lead to an uncertain WACI outcome for the portfolio as WACI may simply be a consequence of the managers’ returns-driven investment decisions, rather than a targeted metric. In contrast, a hard constraint on WACI would provide more certainty on emissions reduction but potentially impact managers’ investment value-add due to the potentially smaller scope of investment opportunities.
  
  
• How to develop a framework to assess the performance of active portfolio managers that encompasses both investment returns and climate resilience. This performance assessment will extend beyond the usual analysis of financial returns and risks and include climate metrics. These metrics could include data such as carbon emissions, green revenue, and climate value-at-risk. Our understanding of the climate risk profile of the portfolio will be clearer as the availability and quality of climate metrics improve over time.
  
  
• Monitoring of portfolio managers’ active investment strategies will also improve understanding of the drivers of financial performance and climate risk profile of the portfolio. This includes reviewing country, sector, and company deviations between the active portfolio and climate benchmarks. This process will help refine and enhance the design of the active investment programme over time, and achieve its dual financial and climate risk mitigation objectives.

Climate Transition Programme – Corporate Bonds 

As part of MAS' continuing efforts to mitigate climate risks, in particular transition risks, MAS will be extending the CTP to our corporate bond portfolio.

Under the programme, we will gradually tilt the corporate bond portfolio towards less carbon-intensive exposures and align it more closely with the low-carbon transition over time by using climate indices. 

Corporate bonds are relatively less impacted by climate risks than equities, since bonds generally have shorter duration, and corporate bond investors are higher up the capital structure relative to equity shareholders as creditors. However, they still pose risks to the portfolio as they can cause corporate creditworthiness to deteriorate, which impacts bond values. Implementing appropriate climate risk mitigation measures for corporate bonds is also important for creating a climate-resilient portfolio.

We will initiate the programme with a small allocation, with the aim of scaling up over time. This process will also be shaped by new data and climate signposts that will guide our positioning for the appropriate transition pathway. 

MAS has defined a set of stewardship principles and expectations for our EFMs, 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 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 structured manner and 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.