Catalysing Capital for Real-World Decarbonisation, At Scale

By: Laurent Poirot, Head of Product Strategy & Development, SGX Group Nov 2023

In an era where climate change is a pressing concern, exchanges play an instrumental role in driving capital towards the much needed transition to a low-carbon economy.

The window to make an impact on real-world decarbonisation is closing. Large amounts of capital – in the trillions, not billions – need to be moved, at scale.

Today, passive investing takes up a growing share of equity capital invested. To combat climate change, we do not need to only rely on new capital. By encouraging the reallocation of existing funds towards climate action, we can support the global transition to a low-carbon future.

A case in point is the $13.7 trillion of global assets tracking the MSCI Equity Indexes. What if a quarter of this amount were to move to climate action indexes that facilitate the flow of capital towards credible transition plans?

Greatest capital market failure in history

Transition finance – which is poised to become an essential part of capital markets – offers substantial opportunities for investors to create long term value and manage their investments exposures to climate risks.

However, the failure to price in the negative externalities of greenhouse gas emissions is perhaps one of the greatest capital market failures in history.

It was with this in mind that Singapore Exchange (SGX Group) and MSCI collaborated to develop a unique, simple and transparent benchmark methodology for climate transition, following extensive consultation with asset owners worldwide. The resulting MSCI Climate Action Indexes introduced in October 2022 are designed for investors to invest into companies committed to drive decarbonisation in the real economy today.

The MSCI Climate Action indexes include companies from all sectors, actively taking concrete steps to reduce their carbon emissions. The evaluation criteria consider various climate indicators, such as carbon intensity, climate opportunities, science-based targets or credible track records and climate risk management. By focusing on real-world progress, the indexes aim to support the flow of capital towards firms with credible transition plans and facilitate price discovery and risk management. Additionally, they align with recommendations of the Glasgow Financial Alliance for Net Zero (GFANZ) and Net-Zero Asset Owner Alliance (NZAOA) on allocating capital towards emissions reductions in the real economy.

Sustainable investing does not always imply inferior returns

Lower-than-parent benchmark returns have also often been cited as a reason why investors, especially in Asia, shy away from sustainable investing.

Understandably, asset owners have fiduciary duty and often it is to generate highest possible return with acceptable risk over time. However, there is an increasing realisation amongst the investor community that sustainable investing can no longer be kept on the sidelines. The risks posed by climate change are being acknowledged as material to both real economy as well as the financial system, and to mitigate or manage such risk, a large amount of patient capital is required.

Notably, we have seen that climate or sustainability-linked indexes can deliver outperformance or performance close to the parent indexes. For instance, FTSE Blossom Japan Index, designed to select companies that demonstrate best ESG practices, has consistently witnessed overperformance of 2-3% versus its parent index over a one to three-year period. MSCI World and USA Climate Action indexes have beaten the returns of its parent over one to two years. Similarly, the Nikkei 225 Climate Change 1.5C Target Index, a Paris-aligned benchmark version of its parent, has deviated from parent index returns by less than ~ 80bps. These examples indicate that investors need not always compromise on returns or significant tracking error in order to meet their sustainable investment objectives.

Creating a global ecosystem of climate solutions

SGX Group aims to address climate transition through collaborative and more inclusive financial solutions, leveraging strategic partnerships to deliver global impact. To mobilise capital at scale, SGX Group is building a global ecosystem of equities-based climate solutions comprising ETFs, derivatives and data.

In collaboration with the world’s largest asset manager, Blackrock, SGX Group launched a landmark climate action ETF based on the MSCI AC Asia ex Japan Climate Action Indexes.

The introduction of MSCI Climate Action ETFs has triggered capital movement, with approximately US$6.5 billion tracking these ETFs across the US, Europe, Japan and Singapore in just six months.

Derivatives and futures serve as classic instruments for large-scale transitions, providing liquidity and risk management solutions. As such, SGX Group introduced listed derivatives based on MSCI Climate Action Index, providing investors with an avenue to hedge their exposure to climate change risks and gain exposure to portfolios of companies committed to transition.

As capital flows into climate action ETFs, increased traction in derivatives for transition trades is expected. Asset managers need to re-align their derivatives with their mandates, to prevent additional tracking error or correlation noise.

To effectively drive real-world decarbonisation, we recognise it is essential to provide investors with a range of investment options. Therefore, besides ETFs and futures, we also offer an international platform for the listing of green bonds and sustainability-linked bonds, connecting issuers with investors who are interested in financing climate solutions. These bonds provide issuers with an avenue to raise capital for green projects, while also giving investors the opportunity to support environmentally-friendly initiatives.

Efforts Towards Standardised ESG Disclosures

Disclosure and data are the bedrock of transition financing. On SGX Group’s part, we strive to ensure that disclosures and data are reliable, consistent and comparable.

To promote standardised ESG disclosures, SGX Group has developed the ESGenome platform to simplify ESG data disclosure and benchmarking for companies.

SGX Group and the Monetary Authority of Singapore (MAS) will be collaborating with the Climate Data Steering Committee (CDSC) to strengthen global access to climate transition-related data. ESGenome will allow reporting companies to transmit their Scope 1, 2 and 3 greenhouse gas (GHG) emissions data to CDSC’s Net Zero Data Public Utility (NZDPU). This collaboration is a significant step towards allocating public and private capital towards financing transition.

The Road Ahead

While progress has been made in pricing carbon emissions, there is still a long way to go in addressing climate-related challenges. As exchanges, we have a collective responsibility to contribute towards a low-carbon future. By harnessing the power of capital markets, we can contribute to solving the largest market failure and drive real-world decarbonisation.


The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.