Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at IMAS-Bloomberg Investment Conference.

Ms Susan Soh, Chairman of IMAS

Mr Steven Yankelson, Head of ASEAN, Bloomberg

Distinguished 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;
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• advances in approaches to sustainable investing; and
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• 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.
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• This implies a major transformation of economies and societies – affecting how we work and how we live.
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• The transition to a low-carbon economy will impact every sector.
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• It is not just about renewables and electric vehicles.
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• 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.
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• 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.
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• The value of global financial assets at risk from climate change has been estimated at $2.5 trillion by the London School of Economics1 and $4.2 trillion by The Economist2.
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• 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.
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• Some recent research has found a strong correlation between market performance and ESG ratings, for both equity and fixed income portfolios.3During 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.

Sustainable investing is becoming mainstream.

• More than $30 trillion of assets globally are being managed in ESG investments, up 34% from 2016. 4
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• Global funds linked to ESG principles more than doubled in 2020 compared to just a year before. 5Global investors plan to further double ESG assets over the next five years. 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. 7This is about the size of the entire Chinese economy.
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• In Asia, many families will soon see a transfer of assets from an aging first generation of business founders to the next generation.
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• 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.
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• While wealth preservation is important, they are also concerned about the impact their wealth will make on society and the environment.
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• 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
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• It also bears the brunt of economic losses from natural disasters – and climate change will amplify the impact.
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• 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
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• Of the record $30 billion global inflows into ESG funds last year, Asia attracted about $22 billion. 13
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• 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; and
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• 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;
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• improve the consistency and transparency of ESG reporting and disclosure; and
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• build knowledge and capabilities in sustainable finance.

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