Published Date: 24 June 2021 The Monetary Authority of Singapore
It has been more than a year since the COVID-19 outbreak was declared a pandemic by the WHO. As we continue to navigate the “new normal”, it is timely to reflect on emerging risks and how we may “build back better”.
Let me touch on two areas
Climate risk and green finance; and
Enhancing the resilience of capital markets.
Climate Risk and Green Finance
Just as the COVID-19 pandemic presented us with a stark reminder of mankind’s fragility, climate change is the existential challenge of our lifetime.
Never before have the effects of climate change been more keenly felt — soaring temperatures, increased occurrence of extreme weather events, rising sea levels. 2020 was one of the warmest years on record
[1] .
To mitigate the impact of climate change risk, we have to take immediate action.
We must act now to limit global warming to 1.5°C, compared to 2°C or more, above pre-industrial levels
[2] . This is to avoid unprecedented global warming, loss of ecosystems, and other irreversible changes.
Asia, as a region, is particularly vulnerable to the effects of climate change.
There is high frequency and impact of disasters in Asia. In 2018, almost half of the world’s natural disasters occurred in the Asia-Pacific
[3] .This presents strong impetus for Asia to mitigate the impact of climate change, and to transit towards a low-carbon future.
Today, Asia accounts for almost half of global greenhouse gas emissions.
However, the majority of Asia is also at a different stage of economic development, with many countries undergoing rapid economic growth and urbanisation.
It is essential to balance sustainability considerations with the socio-economic development needs of the region.
This can be done by providing a progressive pathway to move away from fossil fuel-driven energy.
To create this pathway, we need to find common language on what economic activities can be considered green. This will allow financing to flow at scale to support the journey towards a low-carbon future.
Singapore is developing a taxonomy catered to the Asian context, building on the EU standard. The additional dimension in this taxonomy is the focus on identifying transition activities to facilitate financing activities that are not yet green, but are working towards carbon neutrality.
MAS is also working with our counterparts in the ASEAN region to develop a consistent regional ASEAN taxonomy that will consider international goals and standards, while tailored to the regional context.
In addition to creating this pathway, there are opportunities for greater collaboration between the public and private sectors to steer capital to finance the region’s transition needs.
MAS is partnering the industry to build up knowledge and capabilities. We are anchoring centres of excellence to conduct Asia-focused climate research and training.
We have also launched Project GreenPrint – a technology platform to support the green finance ecosystem. We are working with industry players to identify use cases where technology can help in the following three areas:
mobilise capital for green projects;
monitor commitments to emissions reductions; and
quantify the impact of abatement efforts.
A next area is in enhancing environmental risk management in our financial institutions (FIs). MAS has issued guidelines on environmental risk management that apply to all banks, insurers, and asset managers.
The guidelines set out MAS’ expectations for FIs to assess, monitor, mitigate and disclose environmental risks. It covers environmental risks beyond climate change – such as pollution, loss of biodiversity, and changes in land use, among others.
An industry task force on green finance, convened by MAS, has also issued an implementation handbook, providing guidance on best practices in environmental risk management.
MAS will review FIs’ progress in implementing the guidelines later this year, with a view towards sharing best practices and areas for improvement.
At the same time, FIs will need to build capabilities in climate risk analysis, to assess the impact of physical and transition risks associated with climate change.
MAS is also leading an effort under the Network for Greening the Financial System (NGFS), to study potential financial risk differentials between green and other assets, and review methodologies for climate and environmental risk analysis.
To attune FIs to the assessment of climate risks, MAS will conduct by end-2022 an industry stress test exercise that incorporates climate scenarios.
We will reference the climate scenarios developed by the NGFS, as well as best practices in climate stress testing approaches taken by other regulators.
Next, enhancing the quality and consistency of climate-related disclosures. The lack of consistent climate disclosure standards has resulted in selective reporting against different frameworks. This has impeded the growth of sustainable finance globally.
Comparable and reliable climate-related disclosures are critical for:
Better pricing of climate-related risks;
More effective risk management and market discipline; and
Effective allocation of capital towards financing green and transition activities.
MAS is encouraged by the recent acceleration in progress towards a global sustainability reporting standard, starting with climate.
The G7 countries have expressed support to move towards mandatory climate-related financial disclosures. The G7 has also agreed on the need for a baseline global reporting standard for sustainability.
Efforts by the International Organisation of Securities Commissions (IOSCO) and International Financial Reporting Standards (IFRS) Foundation towards a baseline global sustainability reporting standard have also gained significant momentum and support.
MAS is strongly supportive of these developments.
Enhancing the Resilience of Capital Markets
Let me now share some observations on enhancing capital markets resilience.
The spike in market volatility and dash-for-cash in March 2020 highlighted the potential impact of deepening capital markets globally, and their interconnectedness with the broader financial system.
For example, money market funds (MMFs) in the US and EU experienced massive withdrawals amidst a sharp repricing of risk and strong demand for liquidity. This contributed to stress in short-term funding markets
Massive central bank interventions were required to ease the strains on financial markets.
Recent market events further illustrated the close linkages between the non-banking and banking sectors, and potential financial stability risks.
For example, the collapse of Archegos Capital, an unregulated family office, set off a chain of events that saw markets rattled by the swift unwinding of positions.
The Archegos episode illustrated how unregulated entities could potentially destabilise markets with their outsized positions and opaque trades.
Yet another notable trend is the significant growth in crypto-asset activities. Globally, crypto-asset activities have grown significantly over this period.
Investors may be looking to crypto-assets for potential diversification benefits or trading gains given the low-yield environment.
Based on the FSB’s efforts in assessing the financial stability risks of crypto-assets, no crypto-asset has yet reached a scale that could pose a threat to financial stability.
Standard-setting bodies and national regulators are vigilantly monitoring the developments in crypto-asset activities, as disruptive technologies can potentially gain traction very rapidly.
Nevertheless, the increasing interest by retail investors in trading crypto-assets poses new challenges in investor protection.
Crypto-assets can be highly volatile, as their value is typically not related to any economic fundamentals.
Given that crypto-asset trading is generally not regulated for investor protection, such activities may be susceptible to misconduct perpetuated by crypto-assets players.
MAS has been studying this issue carefully. MAS’ approach has been to actively caution and educate investors about the risks of crypto-asset products, while continuously monitoring developments in crypto-asset activities and regulatory practices.
Conclusion
To conclude:
The COVID-19 pandemic has wrought social and economic disruptions that led to heightened market volatility and capital flows.
At the same time, it has rapidly extended the reach of technology into our lives, and provided a unique opportunity to reflect upon the future that we want.
As capital markets continue to deepen globally, we can strengthen efforts to monitor and address the risks posed by NBFI activities as well as enhance investor education.
At the same time, the financial services sector can be the catalyst for a green recovery – to build capabilities in environmental risk management, and ensure efficient deployment of financing towards transition needs.
[1] Report on State of the Global Climate 2020 by the World Meteorological Organisation (WMO)
[2] 2018 Report by the Intergovernmental Panel on Climate Change (IPCC)
[3] 2019 Asia Pacific Disaster Report by UN Economic and Social Commission for Asia and the Pacific (ESCAP)