Climate Risk Assessment

Quantitative measurement is useful for our continuous risk monitoring and assessment of measures taken for strengthening of risk management. For climate change, we analyse climate scenarios and measure carbon emissions to understand the climate risk profile and resilience of our portfolios.

We leveraged the expertise of an external consultant to assess the resilience of the Exchange Fund’s Investment Portfolio (IP) under four climate scenarios (i.e. current policies, orderly transition, rapid transition and hot house world) with varying degrees of expected transition and physical damage from extreme weather events over the short, medium and long term.

Results of the analysis showed modest return impacts across different scenarios. A more in-depth study revealed that the IP in general was better positioned for – or less impacted by – the climate transition shock than relevant market benchmarks. This reaffirmed that our implementation of RI emphasising on climate change could enhance portfolio resilience.

More details of our climate scenario analysis can be found on pages 186-187 of the Sustainability Report in our Annual Report 2021 and pages 22-23 of the Sustainability Report 2022.

Net-Zero Emissions Target

To reinforce our commitment in supporting the global agenda to combat climate change and further bolster the Exchange Fund’s climate resilience, we have set a target of net-zero carbon emissions¹ by 2050 for the IP.

¹ Carbon emissions according to the Greenhouse Gas Protocol.

Measuring Portfolio Carbon Emissions

Carbon emissions measurement enables us to understand the portfolio climate risk profile and identify carbon-intensive areas that require further actions. Results from the analysis can also be used to guide the external managers to engage with targeted underlying companies with a view to reducing their carbon emissions.

Weighted average carbon intensity of public equities portfolios

Monitoring of emissions from public equities portfolios is given priority due to the more consistent measurement and disclosure practices in the market. In addition, based on the results of the abovementioned climate scenario analysis, public equities are more susceptible to climate risks than other asset classes of the Exchange Fund.

We measure the weighted average carbon intensity (WACI), expressed as tCO2e/US$ million revenue (i.e. tonnes of carbon dioxide equivalent per unit of revenue), in line with industry practice. Scope 3 emissions are excluded due to the high data uncertainty and lack of a consistent methodology for measurement, rendering them prone to double or even multiple counting.

Source: MSCI and HKMA calculations

Note on use of information

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The WACI of the public equities portfolios as at the end of 2021 was 126 tCO2e/US$ million revenue, representing a reduction of 2% compared to 2020 and an overall 43% reduction compared to the 2017 level. This figure is persistently lower than the market investment benchmark, an indication of the Exchange Fund’s lower exposure to carbon-intensive assets when compared to the broader market.

The pathway to net-zero is, however, non-linear. Portfolio decarbonisation of the Exchange Fund is subject to short-term fluctuations driven by multiple factors apart from emissions, such as changes in portfolio asset mix and strategies in response to market developments, in addition to fluctuations in underlying asset valuations.

While the WACI is widely adopted for assessing portfolios’ carbon exposure, its measurement is inherently backward-looking and does not account for companies’ future decarbonisation or transition potential. We envisage that our approach to engage with external managers for long-term changes and transition of portfolio companies, rather than divestment, will result in short-term increases in the WACI before positive outcomes are materialised. We believe that by continuing investment in companies which adopt good ESG practices to align with a credible net-zero pathway, the emissions reduction will pick up in the years to come.

More details of our carbon emissions measurement can be found on pages 30-31 of our Sustainability Report 2022.

Last revision date : 28 April 2023