Environmental risk is now a primary consideration behind the construction of investment portfolios. Today, some of the world’s largest investors have made significant changes to incorporate ESG factors into their investment strategies to build more resilient portfolios and to avoid companies with higher exposure to climate change risk.
The pandemic has fundamentally altered how capital is allocated, further directing more attention towards tackling issues like climate crisis. This has sparked a change in mindsets within government agencies as they recognise the importance of factoring environmental risk into government and corporate financial decision making.
More asset owners are also beginning to recognise the impact climate change can have on government spending, which can in turn affect government bond values. For example, growing concern over climate change—and the resultant increased regulation— has many countries developing plans to reduce carbon emissions.
The UN estimates that such an undertaking would require investing about US$1 trillion per year over 30 years, with this expenditure largely financed by governments.
Recognising the importance of these issues, Singapore has also unveiled various initiatives to focus more on sustainable investing. The Monetary Authority of Singapore (MAS) has shared that they will soon be investing US$2 billion (S$2.7 billion) of its funds with a select group of fund managers with robust stewardship policies, who have a strong track record in sustainable investing who could help deliver a portfolio with deep environmental footprint and strong investment returns.
However, central banks and governments alone cannot mitigate the problem of climate change. Securing a sustainable future is a complex issue that requires the collective action of a broader community where governments, companies, investors and individuals must all work together as stewards of a shared future. This is where the future of capital lies.
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While there are real opportunities for the investment community to leverage on decarbonisation and other innovations to create value for stakeholders and invest in sectors such as food, waste, energy, clean transportation etc. to do good for our planet, the road ahead is by no means straightforward.
Investors need to leverage on increasingly sophisticated climate risk assessment and management techniques as well as alternative data sources to better understand cross-portfolio climate risk. To name a few, alternative data sources such as satellite imagery, flooding maps, drought data and air quality data could be increasingly explored and incorporated.
To provide more insights on these issues, the Investment Management Association of Singapore (IMAS) and Bloomberg organised a two-day virtual conference on March 9 and 10, 2021, which convened the most influential investors, thought leaders and technology firms to discuss the future of capital and spotlight emerging innovations and challenges that will fundamentally alter the landscape of the asset management industry.
“We see three key challenges when using climate risk data – first, the availability, quality and consistency of data; second, the aggregation of data at the total portfolio level given GIC’s diverse asset base; and third, how climate scenarios will impact the expected returns for multiple asset types,” shared Liew Tzu Mi, Chief Investment Officer, Fixed Income of GIC.
IMAS has also launched their Digital Accelerator Programme (DAP) in 2019 to provide fintech with a platform to deliver solutions for a variety of challenges befalling the asset management industry by teaming up with an accelerator partner.
The DAP hopes to address key challenges and find viable, digital solutions to these issues that will potentially help investment management firms reduce costs or increase investment returns while delivering differentiated experiences.
The problem statements for this year’s DAP focused on a variety of topics ranging from ESG, to technology and data collection. These initiatives are only just the tip of the iceberg. There is much more that we can collectively do.
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We need to continue to raise the level of awareness and capability in ESG, foster new and innovative technological solutions to tackle these issues and redirect capital towards creating a better and more sustainable future together.
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