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 and failed transition) with varying degrees of expected transition and physical damage from extreme weather events over the short, medium and long term.

The IP has demonstrated resilience, as evidenced by the minimal impact on returns across all analysed scenarios over the medium to long term. 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. The analysis results further underscored the importance of our ongoing RI efforts in mitigating the risks associated with a failed transition scenario, which could be challenging for the IP, to 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,
Pages 22-23 of the Sustainability Report 2022, and
Pages 39 of the Sustainability Report 2023

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.

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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 2022 was 119 tCO2e/US$ million revenue, representing a reduction of 6% compared to 2021 and an overall 46% 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.

It is important to note that our net zero philosophy does not rely on simply walking away from heavy emitters, but to support a whole-of-economy transition by engaging with companies and funding solutions that facilitate the transition. Therefore, short-term increases in the WACI may occur before the positive climate outcomes are realised in the longer run.

While the WACI is widely adopted for assessing portfolios’ carbon exposure, its measurement is based on investee companies’ disclosures, which are inherently backward-looking and do not account for companies’ future decarbonisation or transition potential. We will keep abreast of latest developments in disclosure standards and measurement methodologies to explore suitable metrics for further enhancing climate exposure monitoring and reporting.

More details of our carbon emissions measurement can be found on pages 43 of our Sustainability Report 2023.

Last revision date : 05 June 2024