Ravi Menon: The future of capital is green
Central bank: mas | Type: speech | Date: 2021-03-09

## Ravi Menon: The future of capital is greenKeynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at IMAS-Bloomberg Investment Conference, 9 March 2021.*

*

*Ms Susan Soh, Chairman of IMASMr Steven Yankelson, Head of ASEAN, BloombergDistinguished guests, ladies and gentlemen, good afternoon.

## The future of capital is green.

There are three powerful forces driving this:- growing recognition of climate change as a global priority;- advances in approaches to sustainable investing; and- changing investor preferences.

## First, climate change has become a risk that is too important for investors to ignore.- The

world

needs

to

sharply

reduce

greenhouse

gas

emissions

if

we

are

to

limit

global warming to well below 2, and preferably 1.5 degree Celsius above pre-industrial levels as committed under the Paris Agreement …- … specifically, reducing carbon emissions by half from 2010 levels by 2030, and reaching net zero around 2050.- This implies a major transformation of economies and societies - affecting how we work and how we live.- The transition to a low-carbon economy will impact every sector.- It is not just about renewables and electric vehicles.- Greening will have to take place across all industries - steel, cement, mining, buildings, construction, maritime, agriculture, the list goes on.

## Given the scale of the transformation, asset values will change quite fundamentally.- Technological

changes

leading

to

a

sharp

decline

in

the

cost

of

renewables

or

policy interventions such as a sharp hike in carbon taxes, will have diverse effects on asset values.- Some assets will be stranded - such as those in carbon-intensive sectors - while others such as those in the renewable energy sector - could enjoy strong tailwinds.- The value of global financial assets at risk from climate change has been estimated at $2.5 trillion by the London School of Economics and $4.2 trillion by The Economist . 1 2- Investors cannot ignore these potential changes in asset values.

## Second, approaches to sustainable investing have developed significantly in recent years.- There is growing evidence that investments incorporating strong ESG considerations can reduce exposure to systemic risks and improve resilience to market shocks.- Some recent

research

has

found

a

strong

correlation

between

market

performance

and ESG ratings,

for

both

equity

and

fixed

income

portfolios.

During

the

early

weeks

of

the COVID-19

crisis,

there

was

also

some

evidence

that

major

ESG

funds

were

able

to outperform broad indices like the S&P 500. 3

## Sustainable investing is becoming mainstream.BIS central bankers' speeches- More than $30 trillion of assets globally are being managed in ESG investments, up 34% from 2016. 4- Global funds linked to ESG principles more than doubled in 2020 compared to just a year before.

Global investors plan to further double ESG assets over the next five years. 5 6

## Third, investor preferences will change as wealth is handed over to the next generation.

## We are on the cusp of the most significant inter-generational transfer of wealth in history.- US$15 trillion of assets is expected to change hands between generations by 2030.

This is about the size of the entire Chinese economy. 7- In Asia, many families will soon see a transfer of assets from an aging first generation of business founders to the next generation.- About

35%

of Asia's

wealth

will

be

in

the

hands

of

millennials

in

the

next

five

to

seven years. 8

## There are stark differences in outlook between the next generation and their parents.- Born into a globalised world, the younger generation is more socially aware.- While

wealth

preservation

is

important,

they

are

also

concerned

about

the

impact

their wealth will make on society and the environment.- They are twice as likely to invest in companies targeting social or environmental goals. 9

## Nonetheless, the financing gap to build the green economy of the future remains large.- Not

enough

of

global

wealth

is

being

channelled

towards

sustainable

development

at

the scale and speed necessary to achieve the goals of the Paris Agreement.

## The gap is particularly large in Asia - which is where the outcome of the battle against climate change will be determined.- Asia accounts for almost half of global greenhouse gas emissions. 10- It also bears the brunt of economic losses from natural disasters - and climate change will amplify the impact.- To sustain economic development and eradicate poverty while mitigating carbon emissions, Asia needs $1.7 trillion a year of investments in sustainable infrastructure through 2030. 11

## Investors are beginning to mobilise capital to support Asia's development.- Total ESG assets in the region more than doubled, from about $20 billion in 2019 to about $43 billion in 2020. 12- Of the record $30 billion global inflows into ESG funds last year, Asia attracted about $22 billion. 13- But we need to do much more to allocate the capital that is necessary to support Asia's transition to a sustainable future.

## As a centre for green finance in Asia, Singapore will play a purposeful role in this effort.

## We will do this in two ways:- as the platform for developing green financing solutions customised for Asia; andBIS central bankers' speeches- as the channel through which global capital is directed at meeting Asia's transition needs.There are three areas where we need to intensify efforts:- broaden the range of green financing solutions and markets;- improve the consistency and transparency of ESG reporting and disclosure; and- build knowledge and capabilities in sustainable finance.

## BROADEN GREEN FINANCING SOLUTIONS AND MARKETSLet

me

begin

with

broadening

green

financing

solutions

and

markets.

I

will

highlight

three strategies that Singapore is focusing on.

## First,

facilitate

the

issuance

of

more

established

green

financing

instruments,

such

as green bonds and green loans.- Bonds and loans are a familiar and key source of financing for corporates of all sizes.- Green, sustainability, and sustainability-linked bonds and loans enable corporates to raise financing

as

they

take

up

green

projects,

invest

in

green

assets,

or

move

towards

more sustainable business practices.

## MAS is supporting corporates in Singapore and in Asia to issue green, sustainability and sustainability-linked bonds and loans.- MAS introduced

a

grant

scheme

in

2017

to

help

corporates

defray

the

costs

of

issuing green, social, sustainability and sustainability-linked bonds

aligned with international standards.- Last year,

MAS introduced a similar scheme for green and sustainability-linked loans, the first of its kind in the world.

## The outcomes from these efforts have been encouraging.- Despite the pandemic, green and sustainability-linked loan issuances in Singapore grew by 65% last year.- Some S$3.5 billion of green, social and sustainability bonds were issued in 2020, bringing total issuance in Singapore to S$10.9 billion.- These loans and bonds have supported many meaningful outcomes - such as renewable energy, green buildings, sustainable water and wastewater treatment.

## The Singapore government will start issuing green bonds to finance major sustainability projects, including green public infrastructure.- This

should

help

to

deepen

market

liquidity

for

green

bonds,

and

attract

green

issuers, capital, and investors to Singapore.

## Second, promote innovative disaster risk insurance products to strengthen climate risk resilience in Asia.- Singapore has gained good traction as an Asian domicile for insurance-linked securities innovative instruments that securitise and transfer peak risks such as catastrophe risks to capital markets.- A total of 10 such insurance-linked securities have been launched in Singapore.

They cover a range of natural catastrophes across Asia and Australia, including earthquake and typhoonBIS central bankers' speechesrisks.Third, attract green funds and asset managers with a sustainability focus.I am pleased to announce that MAS will soon be placing US$2 billion of our funds with asset managers that are committed to deepen green finance activities out of Singapore.- MAS announced the programme just over a year ago.- Through

a

highly

competitive

process,

we

have

now

identified

a

select

group

of

asset managers with a strong green focus.- They have a good track record of sustainability investing, robust stewardship policies, and a strong understanding of how to deliver a portfolio that has a deep environmental footprint while still delivering good returns.

## The selected asset managers will designate Singapore as their sustainability hub in the Asia Pacific.- Their Singapore offices will lead Asia-focused sustainability research and spearhead ESG engagements in the region.- Many also have plans for designing training curriculum in sustainable finance to help build relevant skills among the broader investor community.- These asset managers will be valuable partners to MAS and the investor community in the sustainability journey.

## IMPROVE CONSISTENCY AND TRANSPARENCY OF ESG REPORTING DISCLOSURESOur second area of focus is to improve the consistency and transparency of ESG reporting and disclosures.

## The biggest challenge to sustainability investing is a lack of clear, agreed definitions of what is green and what is sustainable.- Despite

good

improvements

in ESG

disclosures,

there are varying

standards

and inconsistent definitions.- ESG

scores

of

companies

vary

due

to

differences

in

methodologies

used

by

rating agencies, and these methodologies are often opaque to the investor.- The lack of consistency and transparency affects investors' ability to monitor progress in emissions reduction or measure outcomes in sustainability.We are tackling this issue through four strategies.

## First,

provide

guidance

for

asset

managers

to

assess,

monitor,

mitigate

and

disclose environmental risks.- MAS recently issued to all financial institutions guidelines on environmental risk management incorporating best practices drawn from around the world.- In

fact,

MAS co-created these guidelines with IMAS, actively engaging asset managers to better understand industry practices.- I am pleased that IMAS will be conducting workshops to strengthen capabilities in this area.AND

## Second, develop taxonomy to identify and classify activities that can be considered green or in transition towards green.- An industry-led green finance task force has issued a consultation paper setting out a green taxonomy for Singapore-based financial institutions.- The taxonomy references international best practices and adapts them to the Asian context where relevant.- A unique feature of the proposed taxonomy is that it covers transition activities that allow for a progressive shift towards greater sustainability while supporting inclusive economic and social development.- It

adopts

a

'traffic-light'

system

which

sets

out

how

activities

can

be

classified

as

green, yellow, or red according to their level of alignment with environmental objectives.- The taskforce will develop, in its next phase of work, a combination of principle-based criteria and quantifiable thresholds for green and transition activities.

## Third, promote active stewardship by investors to promote sustainability in their investee companies.- Asset managers have a responsibility as stewards of capital, to engage companies in your portfolios to ensure appropriate climate risk management and objective reporting.- MAS will

support

the

review

of

the

Singapore

Stewardship

Principles,

to

provide

specific guidance on stewardship with respect to environmental considerations.- The review will be undertaken by an industry group led by Stewardship Asia Centre.

## Fourth, work with other central banks and regulators to shape internationally consistent ESG reporting and disclosure.- MAS

is

leading

the

work

at

the

Network

for

Greening

the

Financial

System

to

set

out supervisory expectations on climate-related disclosures by financial institutions.- We

are

participating

in

efforts

by

the

International

Platform

on

Sustainable

Finance

to develop

a

'common

ground

taxonomy'

to

highlight

commonalities

across

existing

green taxonomies and contribute to greater comparability in data definitions.- MAS is

on

the

IOSCO

Sustainable

Finance

Task

Force,

which

is

working

on

improving securities issuers' sustainability-related disclosures.- MAS is also working with our ASEAN peers to harmonise taxonomies and standards.- There

has

been

good

progress

in

this

space,

with

the

development

of

the

ASEAN Green, Social and Sustainability Bond Standards.

## BUILD KNOWLEDGE AND CAPABILITIES IN SUSTAINABLE FINANCEOur third area of focus is to build knowledge and capabilities in sustainable finance.

## Portfolio managers and analysts need to be upskilled with the knowledge and capabilities to execute and evaluate sustainability investment strategies.- They must develop a keen understanding of climate risk and its various possible effects.- They must be able to design innovative ESG scoring methodologies, investment strategies, and product offerings.- They must acquire the expertise needed to mitigate the risk of greenwashing.MAS is working to anchor in Singapore relevant centres of excellence, think tanks, and research networks.BIS central bankers' speeches- We want to promote sustainability research tailored for Asia's needs and the capacity to train a strong pipeline of professionals in green finance.- The recent launch of the Singapore Green Finance Centre, a partnership between Singapore Management

University

and

Imperial

College

Business

School,

is

a

major

step

in

this direction.I am pleased to announce two more developments on this front.

## First,

Moody's Corporation is building a comprehensive suite of ESG resources out of Singapore to spearhead its sustainable finance agenda in the Asia-Pacific.- Moody's key initiatives in Singapore include:- an ESG Centre of Excellence for investor outreach, engagement and training; and- an ESG-focused Innovation Lab and Technology Accelerator to develop ESG analytical solutions and assessment tools in partnership with local FinTech firms.- Moody's will also dedicate significant ESG resources in Singapore to:- provide end-to-end sustainability solutions for companies and sovereigns; and- deepen ESG insights in the Asia-Pacific for existing credit ratings and risk management frameworks.- Moody's new ESG efforts will help position Singapore as a leading international centre for ESG finance and investment.

## Second, the Sustainable Finance Institute Asia (SFIA) has established its headquarters in Singapore.- SFIA,

an

independent

research

and

capacity

building

institute,

aims

to

support

the implementation of sustainable finance policy initiatives in Asia.- SFIA is partnering the investment community to develop an AI-driven ESG information tool to harness qualitative data at scale to support investment decisions relating to Asian assets.- It is already in discussions with several asset managers and financial institutions on a proof of concept.- SFIA is a strong addition to Singapore's ESG eco-system.

## CONCLUSIONThe

transition

to

a

net-zero

economy

is

the

greatest

collective

endeavour

humanity

must undertake in the decades ahead.- How capital is allocated to support this endeavour will be critical to the outcome.- As owners and stewards of capital, you have a great responsibility - to direct investments to activities that promote sustainable development.Together, let us make the future of capital green.- Nature Climate Change, 2016, Climate value at risk of global financial assets. 1- The Economist Intelligence Unit, 2015, The cost of inaction: Recognising the value at risk from climate change. 2- Fidelity , 2020, Putting sustainability

to the test: ESG outperformance amid volatility. 3- Global Sustainable Investment Alliance, 2019. 45- CNBC, 2021, Money invested in ESG funds more than doubles in a year. 5- BlackRock, 2020 Global Sustainable Investing Survey. 6- Wealth-X, 2019, A

Generational Shift: Family Wealth Transfer Report. 7- Financial Times, 2018, A sia's Y oung Rich and The Challenge for Private Banks. 8- Morgan Stanley Institute for Sustainable Investing, 2017, Why M illennial Investors are Different. 9- McKinsey, 2020, Climate risk and response in A sia. 10- Asian Development Bank, 2017, M eeting Asia's Infrastructure Needs. 11- Morningstar, 2021, Global Sustainable Fund Flows: Q4 2020 in Review. 12- The Business Times, 2021, ESG magnates pour money into China and its Asian peers. 13