Loan quantum for investment financing will be higher for mutual funds that have the best-of-class MSCI ESG Fund Ratings of AAA or AA.
Bank of Singapore is the first in Asia to incorporate environment, social and governance (ESG) factors in the assessment of the loan quantum for investment financing. With the inclusion of these, the quantum will be raised when the loan is secured by a mutual fund with the best-of-class MSCI ESG Fund Ratings of AAA or AA.
Prior to this, the financing against mutual funds was determined based on three factors – volatility of the asset’s value, liquidity of the asset and the credibility of the fund manager. The incorporation of ESG factors is part of the Bank’s push for sustainable investing.
Investment financing is commonly used by high-net worth individuals in growing wealth and enhancing investment returns. Bank of Singapore registered a compounded annual growth rate of close to 10% in the loans for investment financing over the period of 2016 – 2020. By offering a higher financing quantum for highly-rated sustainable mutual funds, the Bank aims to encourage high net worth individuals to invest sustainably by integrating ESG factors into their portfolios.
When the sustainable mutual fund is assessed to be an acceptable collateral and is rated AAA or AA (based on MSCI ESG Fund Ratings), the advance ratio – the maximum percentage amount of the market value of the collateral that could be extended as a loan - will be increased by 5 percentage points. For illustration purposes, a client with US$10 million in acceptable mutual funds could previously get a loan of US$7 million based on a 70% advance ratio. With the addition of the ESG factors, the advance ratio will be increased to 75% if the mutual funds have a MSCI ESG Fund Rating of AAA or AA. This will result in a US$500,000 increase in additional financing available for the client. The final loan quantum is lesser than the collateral value, in line with the industry practice.
Bank of Singapore currently offers more than 130 acceptable mutual funds with a MSCI rating of AAA or AA. The MSCI ESG Fund Ratings assess the resilience of a mutual fund’s aggregate holdings to long term ESG risks and opportunities, and rates it on a scale from CCC to AAA. Mutual funds with the ratings - AAA or AA - are invested in companies that are leaders in tackling environment, social and governance problems and have sustainability at the core of their business strategies.
A 2019 report by MSCI shared that mutual funds with better MSCI ESG Ratings are likely to be less volatile as compared than those with lower ratings. In a 2020 report by PwC, ESG-aligned funds outperformed their traditional counterparts by 9% in the period from 2010 to 2019.
This initiative is the latest effort by Bank of Singapore to further the sustainability agenda amongst its clients. In 2020, it had adopted MSCI ESG Ratings to provide clients with greater transparency on the ESG characteristics of their portfolios so they can be better-informed in making investment decisions.
Bank of Singapore defines sustainable investments as those with MSCI ESG Rating BB and above. As of 31 May 2021, more than 50% of the Bank’s assets under management were rated BB and above.
Said Mr Alexandre Lotfi, Global Chief Risk Officer, Bank of Singapore, “We believe that as a private bank, our core business activities of wealth management can be a lever for positive environmental and socio-economic impact. While financial returns will always be important, there is a growing momentum among clients to do good by doing well. By adding an ESG lens to our lending framework, we hope to create a direct and positive impact in the investment of highly rated ESG assets, starting with mutual funds.”
