Strategy
Overview
In the Sustainability Report 2021/2022, we outlined MAS’ strategy and approach to address climate-related financial risks associated with the investment of the Official Foreign Reserves (OFR) portfolio. Since then, we have implemented various aspects of that strategy to identify, assess and manage climate risks and opportunities. This report provides updates to portfolio actions and metrics and should be read in conjunction with previous Sustainability Reports, which set out the details of these actions and metrics.
Formulate strategy informed by assessing portfolio returns impact over the long-term
Given the uncertainty over eventual transition pathways, scenario analysis that references multiple scenarios across a wide range of plausible outcomes helps with understanding and analysing the potential impact of climate change on portfolio risks and returns.
MAS conducts scenario analysis in partnership with GIC, Ortec Finance and Cambridge Econometrics, and we update this analysis periodically – most recently in 2024 – to revalidate the relevance and parameters of the scenarios considering ongoing developments in climate risk assessment
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This most recent iteration of the scenario analysis incorporated more recent economic and climate data, alongside improvements in modelling techniques.
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MAS analysed the portfolio impacts under four climate scenarios that were similarly referenced in the 2022 study.
| Net Zero (NZ) | Delayed Disorderly (DDT) | Too Little Too Late (TLTL) | Failed Transition (FT) | |
| Transition Risk | Moderate | Moderate | High | Low |
| Nature of transition |
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| Physical Risk | Low | Limited | Moderate | High |
| Temperature outcome and extreme weather events |
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The results of the 2024 climate scenario analysis revealed a modest increase in the overall negative impacts of climate change on the portfolio across the four scenarios, due to both transition and physical risk factors.
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There is elevated transition risk in the transition scenarios because more stringent policy interventions are needed to achieve net-zero targets, to offset the accumulated slippages in the global transition.
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The increased physical risk is largely due to model accuracy improvements in the area of impact estimation of extreme weather events. The updated model accounts for a steeper increase in the severity of extreme weather events as temperature rises and evaluates these impacts at a more detailed geographic scale, resulting in higher aggregated physical risk impacts across regions.
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Nevertheless, the negative impact of climate change is mitigated by the well-diversified nature of the portfolio, given the larger allocation to fixed income instruments (which are better shielded from climate change risk).
The broad key findings from the 2024 scenario analysis remain in similar ranges as those from previous studies, validating our strategy of focusing on mitigating transition risk, especially in the equities portfolio.
- The 2024 scenario analysis affirmed that equities exhibit a higher degree of sensitivity, in terms of risk and returns, when compared to other asset classes. Transition risk is also expected to remain the more imminent risk to manage. Nevertheless, the scenario analysis also indicated a need to address both transition and physical risk considerations over time as the long-term consequences of physical risk are likely to exceed those of transition risk in specific scenarios (e.g. TLTL and FT).
- We will continue to closely monitor our portfolio actions and adjust them as needed, based on evidence of real-world transition progress and its implications for portfolio returns.