The Monetary Authority of Singapore (MAS) has embarked on its first-ever climate scenario analysis to assess the financial sector’s exposure to acute physical risks.
The Singapore central bank’s new focus on physical risks comes “in light of the increasing frequency and severity of extreme weather events observed globally,” it stated in its latest sustainability report.
Earlier this month, Singapore’s Temasek revealed it replaced its previous baseline assumption of a 1.8°C warming pathway with a 2.4°C scenario. State investor peer GIC has also previously warned that investors will need to prepare for an “increasing likelihood of disorderly transitions and elevated physical risks.”
Already battered by searing heatwaves across Europe and North America as well as devastating floods in large parts of Asia, the world is now bracing for a “super El Niño”, sparked off by significantly warmer than usual waters in the Pacific Ocean. While the climate phenomenon is part of a natural warming cycle, meteorologists are forecasting that this year’s event will rival a record El Niño that began in 1997, which led to 23,000 deaths and cost governments as much as US$45bn.
“This analysis reflects MAS’ continued efforts to improve its internal capabilities in climate-related modelling and scenario analysis,” a MAS spokesperson told Green Central Banking.
“Such scenario analysis helps financial institutions and MAS better understand the impact of climate-related risks on the financial sector, inform financial institutions’ risk management and mitigation efforts, and strengthen the resilience of Singapore’s financial sector to climate risks over time.”
The top-down climate scenario analysis will be conducted with technical assistance from the International Monetary Fund (IMF). A timeline for its completion has not been disclosed.
Transition finance in focus
The latest analysis builds on the central bank’s earlier study, which focused on transition risks. Published in 2023, it found that a disorderly transition – with climate policy actions only beginning in 2026 – would be 50% more costly for banks and insurers than if they had started transitioning towards a low-carbon economy that very year.
Managing the financial sector’s transition risks and spurring more private capital into the transition of hard-to-abate sectors in Asia has been a key focus of MAS in recent years.
The central bank released one of the world’s first taxonomies defining what counts as “transition” investments in 2023. Last year, Singapore saw its first transition transaction – a S$500m (US$388m) loan extended to electricity producer YTL PowerSeraya for its hydrogen-ready power plant – come to market.
Singapore has been pushing for more private capital into hard-to-abate sectors like power plants such as YTL PowerSeraya. Photo by YTL Power International Berhad
MAS chief sustainability officer Abigail Ng said that demand for sustainable finance in the region continues to be supported by underlying structural growth in areas like clean energy and resilient infrastructure.
Emerging areas such as adaptation, resilience and newer transition technologies, however, continue to face constraints from higher costs of capital, risk allocation challenges and limited project pipelines, she noted.
“The next phase of sustainable finance will depend on strengthening the conditions for capital to be mobilised at scale – through clearer regulatory guidance, more effective risk-sharing structures, and broader financing pathways,” Ng said.
In May, the first fund under the central bank’s flagship blended finance initiative also hit its second close and committed US$128m to four energy transition projects across Asia.
Simultaneously, MAS has commenced a review of the technical screening criteria in Singapore’s taxonomy “to identify credible transition and enabling activities, giving financiers greater clarity and confidence in allocating capital as Asia’s transition pathways evolve.”
Transition planning rules to kick in from 2027
In March, the central bank issued its finalised transition planning guidance for banks, asset managers and insurers engaging clients in high-risk sectors. The rules will take effect from 2027.
MAS, which manages Singapore’s foreign reserves, has also fully transitioned its climate transition equities portfolio – which it set aside S$8bn to start in 2023 – to become actively managed. The shift enables portfolio managers to “navigate the trade-offs between financial performance and climate objectives” amid evolving geopolitical and climate policy uncertainties, it stated in the sustainability report.
While the central bank does not disclose its top holdings, it shared that it has been engaging portfolio companies on how they manage climate risks in the past few years.
The Singapore central bank’s environmental-related engagements with its portfolio companies increased by 348% since 2020. Image: MAS
“These include encouraging them to establish clearer transition plans, make progress towards climate commitments, and improve climate disclosures.”
The total amount of environmental-related resolutions that its external fund managers voted on increased by 29% from last year, while the total number of engagements saw a slight increase of 4%.
While Europe and North America still account for the majority of its environmental-related engagements, at 35% and 34% respectively, MAS said that “portfolio companies in Asia Pacific have become more open to such engagements.”
