Chia Der Jiun: Investing in change - supporting Asia's development and transition

Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Investment Management Association of Singapore (IMAS) Investment Conference 2024, Singapore, 27 March 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Ms Jenny Sofian, Chair of IMAS,

Ladies and gentlemen, good morning.

I am delighted to join you at this year's conference.

The theme for this year, "Reshaping Tomorrow", is particularly meaningful.

The investment community has always been at the forefront of change. Your business strategies and investment decisions need to respond to geopolitics, growth and inflation developments, economic policy, trade and investment flows, technological disruption, climate risk and action. Change is constant in finance and asset management.

The theme of the conference calls for going beyond response and is about making change and having impact. Let me mention three areas of impact today:

Singapore as a Gateway to Serve Growing Investment Needs in Asia

First, Asia's growth story continues to be a compelling one. The asset management industry has a key role to play in meeting the investment and retirement needs in our region. It also plays a role in allocating global capital to support the region's growth – growth that is dynamic and sustainable.

a. The Asia Pacific (or APAC) region continues to be the fastest growing region.

i. From 2011 to 2022, total Assets Under Management (AUM) grew at an Annual Rate of 14%, outpacing the global average of 9%. ^[1]
ii. This has been driven by the region's growing wealth and affluence in the retail segment as well as diversification by global institutional investors into the region.
iii. Wealth in the region is expected to continue growing in the years ahead. This will largely be driven by the rising middle-class population in Asia, which is projected to increase from 2 billion in 2020 to 3.5 billion by 2030. ^[2] In particular, wealth in the affluent and mass-affluent segments is estimated to expand at an annual rate of 11% and 13% respectively from 2021 to 2026. ^[3]

b. There is much scope to channel growing family wealth, middle class savings and institutional assets in APAC into investments.

i. Asset managers currently manage a relatively small fraction of the region's total investable assets.
ii. In addition, continued growth in pension assets ^[4] and retirement savings will also provide more opportunities to deploy long-term capital into alternative and private market investments.

Many asset managers and asset owners have based their regional operations in Singapore to tap into a diversified asset management community that supports Asia's development. Assets under management (AUM) here grew steadily in the past decade at an annual rate of 12%. ^[5]

a. In particular, Private Equity (PE) and Venture Capital (VC) AUM has been growing twice as quickly as overall AUM. Singapore is now a thriving launch pad for Asian enterprises looking to raise capital.

i. From 2017 to 2022, Singapore's PE and VC AUM grew at an annual rate of 25% to more than S$500 billion.
ii. Over half of these assets were directed towards supporting the growth of businesses in the APAC region.
iii. Global PE managers have also set up and deepened their APAC presence here. There are over 470 PE/VC managers in Singapore as of December 2023.

b. Fund domiciliation in Singapore has also seen rapid growth. Many asset managers have found it advantageous to co-locate their investment management operations alongside their fund domiciliation activities here.

i. Since the launch of the Variable Capital Companies (VCC) framework in 2020, more than 1,000 VCCs have been incorporated or re-domiciled in Singapore by 550 regulated fund managers based here.
ii. As a flexible corporate structure, VCC can be set up as an open-ended or closed-end fund for traditional and private markets strategies respectively. This has allowed global and regional fund managers to utilise the VCC structure across various use cases and fund strategies for their regional investments, while enjoying cost economies and tax efficiencies. We are soliciting feedback from the industry to further enhance the VCC regime.
iii. The Limited Partnership (LP) structure is also a familiar Singapore vehicle available to private fund managers.
iv. The Accounting and Corporate Regulatory Authority of Singapore (ACRA) launched a public consultation in 2021 proposing a list of enhancements to the LP regime.

c. To support the talent needs of the sector, MAS is working with industry partners such as IMAS and IBF to prepare the workforce for the changes ahead. One major initiative has been the Jobs Transformation Map that assessed the impact of sustainability on our financial sector workforce.

A dynamic and diversified asset management ecosystem in Singapore will be well placed to meet the growing investment needs in the region, and contribute to Asia's development.

Sustainable Investments: Supporting Growth and Decarbonisation in Asia

Asset managers play an important role in sustainable investment. The industry helps raise awareness and demand for such investments, and in allocating capital according to ESG criteria, contributes to economies transitioning.

Globally, sustainable investing has gained traction, notwithstanding political attention, mixed financial performance and concerns over greenwashing.

a. Global ESG assets surpassed US$30 trillion in 2022 and are on track to surpass US$40 trillion by 2030, over 25% of the projected US$140 trillion assets under management. ^[6]
b. Assets held in sustainable bond-focused funds also reached a record US$41 billion in 2023. ^[7]

Underlying demand for ESG funds continues to be strong, but for the sector to grow sustainably, providing confidence to investors through transparency and governance will be key.

Many asset managers have taken steps to improve disclosures of their ESG strategy and methodology. These are positive developments. Regulation can also contribute to strengthening confidence in ESG funds.

a. In 2022, MAS issued guidelines which require funds that are sold to retail investors under an ESG label to provide relevant information and disclosures to substantiate the label.

i. These include clear disclosures on the ESG fund's investment strategy, criteria and metrics to select investments, as well as the risks and limitations associated with the fund's strategy.
ii. Such funds are also required to provide regular updates on how their ESG objective have been met.
iii. These guidelines facilitate greater comparability in the disclosures by retail ESG funds, allowing retail investors to make more informed investment decisions.

b. In December last year, MAS worked with industry players to issue a Code of Conduct for ESG Rating and Data Product Providers.

i. The Code sets out baseline industry standards on transparency of governance, rating methodologies and data sources, which will help to improve the quality, reliability and comparability of ESG rating and data products.
ii. Fund managers and investors can then have greater confidence when they use these products in their investment decision-making process.

Asset managers can also make a significant impact to our decarbonisation journey by developing and implementing robust transition plans in support of their net zero commitments.

a. Financial institutions have started publishing transition plans. We encourage more asset managers to do so, with these benefits in mind.

i. Having sound risk assessment and management tools will help asset managers to more effectively mitigate their climate-related risk exposure.
ii. Clearly defined decarbonisation targets and interim goals help foster greater accountability to stakeholders.
iii. Asset managers that have thoughtfully considered how to manage the transition are also better positioned to engage asset owners on their climate objectives and develop meaningful sustainable investment solutions.

In October last year, MAS consulted the industry on a set of proposed multi-sector guidelines on transition planning, which supports the development of high-quality transition plans.

a. The proposed guidelines set out expectations for asset managers to have sound transition planning processes and practices.

i. They encourage the use of forward-looking risk assessment tools to enhance risk discovery and quantification.
ii. The guidelines also propose active engagement with investee companies on their plans to manage climate-related risk, as part of asset managers' portfolio risk mitigation strategy.
iii. Asset managers are also asked to take a multi-year approach in ascertaining the sustainability of their business models and portfolios. This includes contextualising short-term increases in financed emissions in support of longer-term climate positive outcomes.

Asset Tokenisation: Transforming Practices and Creating Value

Let me turn now to asset tokenisation.

Asset tokenisation has the potential to streamline processes, improve efficiency, reduce costs and risks in asset and portfolio management.

a. Tokenised securities and financial assets and tokenised funds can be bought or sold and settled instantaneously against tokenised money.
b. Tokenisation facilitates automation or elimination of operational processes via smart contracts. Portfolio management processes such as customising investment strategies can be automated and executed based on the fulfilment of pre-determined rules and parameters.

18.  MAS in collaboration with industry is leading efforts to explore the potential benefits of asset tokenisation to the financial ecosystem.

a. We are already beginning to see forms of financial asset tokenisation take shape in our capital markets. In recent years, MAS has licensed a number of platforms that facilitate the issuance and secondary trading of tokenised securities.

i. With tokenisation, these licensed platforms have broadened investor access to private equity and private credit as it is now more cost-efficient to fractionalise and offer such products.
ii. Furthermore, by simplifying the distribution and trading of such products digitally, licensed platforms may improve the liquidity of these traditionally illiquid products.

b. Within the asset management industry, there is potential for a market for tokenised funds to develop here in Singapore. Let me highlight two examples:

i. UBS Asset Management is piloting the digital native issuance of Variable Capital Company (VCC) funds to simplify the traditional fund issuance process. This will also streamline the distribution and secondary market trading of fund shares through the elimination of intermediaries and traditional administrative steps.
ii. Schroders and Calastone are tokenising a VCC fund and recording the ownership of fund shares on a shared ledger. When tokenised investment vehicles are recorded on the same ledger with other asset or money tokens, this enables atomic and instantaneous settlement. This enhances operational efficiency and reduce settlement risks.

c. A 2023 survey of asset managers by Calastone revealed that 95% of APAC respondents were exploring or implementing tokenisation projects. ^[8] Moreover, 61% of APAC asset managers surveyed expected tokenised offerings to hit the market within the next 12 months.

To support fund tokenisation pilots as they move towards the commercial phase, MAS is working with these pilot managers on the legal and regulatory treatment and implications of tokenised investment funds. This also gives us an opportunity to review our regulatory framework so that it remains relevant to transformative new market practices. We welcome further proposals from the industry that address policy and legal considerations.

A second area that MAS is working on is in developing the infrastructure for asset tokenisation on a commercial scale together with international partners – both public and private sector.

a. Specifically, MAS is working with a group of financial institutions to develop a foundational digital infrastructure under the Global Layer 1 (GL1) initiative. This objective is to enable tokenised assets to be transacted across networks and across countries efficiently and seamlessly.
b. Through Project Guardian's policymaker group, MAS is also collaborating with international policymakers to promote the development of industry standards and frameworks for tokenised assets and digital asset networks.

Conclusion

To conclude, the asset management industry in Singapore is well placed to respond to changes, seize opportunities and help shape the future in Asia and beyond.

In particular, Asia's growth remains compelling. Asset managers have an important role to play in supporting the investment needs of a large and growing middle class; generate more interest and demand for sustainable investment, while supporting economic development and decarbonisation in this region. Asset and fund tokenisation is also an opportunity to deepen liquidity and generate business value.

I wish you a fruitful conference ahead and hope you will all take away ideas and contacts to make change and impact.

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