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GIC’s governance of climate-related risks and opportunities
The GIC Board oversees GIC’s management of climate-related risks and opportunities. Where appropriate, the Board and its committees receive updates on GIC’s progress on climate-related issues, and incorporates such issues in guiding GIC’s overall strategy.
At the management level, GIC’s Sustainability Committee oversees GIC’s management of climate issues, and regularly updates the Board and its committees. Formalised in 2016, the Committee comprises senior leaders from the investment, risk, and corporate functions, and is currently chaired by the Chief Investment Officer for Fixed Income, who is also a member of GIC’s Group Executive Committee. It develops GIC’s sustainability strategy, drives the implementation of GIC’s sustainability policy, supports and promotes sound stewardship, monitors and responds to relevant sustainability issues including climate change, and regularly reviews portfolio metrics such as the weighted average carbon intensity (WACI).
The investment committees and the heads of GIC’s asset departments are responsible for assessing and managing the relevant sustainability and climate-related risks and opportunities for their asset classes and portfolios, and for driving the integration of GIC’s sustainability policy including climate-related issues into their investment processes.
Impact of climate-related risks and opportunities on GIC’s investment strategy and planning
Climate change is one of the defining long-term issues of our era. Physical risks (for example, water or heat stress) and transition risks (for example, increased regulation, access to capital, and consumer behaviour) will affect the long-term investment value of companies. The transition has already begun. The implementation of carbon taxes in some countries, the phasing out of coal, falling prices for renewables, and changes in the global energy mix are clear signals of this shift. The physical impact of climate change will be unavoidable for many investments, and those costs will show up in portfolio performance going forward.
Climate change is a long-term trend, similar in scale or impact to digital technology, urbanisation, and other disruptive forces we have encountered in recent decades. As with any disruption to industries, climate change will also present new opportunities. As regulators and consumers act on ESG and climate-related issues, and businesses rethink their operating models, new investment opportunities will open up.
As a long-term investor, we seek investment opportunities in companies or sectors aligned with the transition to the low carbon economy, while ensuring that the portfolio is hedged against left-tail risks. Where we identify companies exposed to greater physical or transition risks arising from climate change, we will seek to engage with those companies to understand if they have viable plans to mitigate those risks, or to transition to a more sustainable pathway.
We believe that it is more constructive to actively engage and support companies in their transition towards a lower carbon economy, rather than to mechanically divest from certain industry sectors. Divestment would not necessarily be effective in reducing carbon emissions, and may even lead to unintended consequences, such as potential negative impact on the social development of certain countries. By directly engaging with company management on how to operate more sustainably, we believe that we can create more value and more beneficial outcomes for our stakeholders over the long term.
We have a dedicated team driving climate change research in GIC. The research provides us with a view on potential near-term climate-related disruptions, and long-term climate scenarios. With these scenarios, we stress-test the GIC portfolio’s value at risk from climate-related issues, including, for example, the impact of increasing carbon prices for emissions-heavy sectors (transition risks), or the impact of extreme weather events on our real estate portfolio (physical risks). The scenarios used in the stress tests cover global warming outcomes between 1.5°C to 4°C (by 2100), are applied in the time horizons of 2030 and 2050, and are in line with the scenarios recommended by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Based on the insights from the climate stress tests, the Sustainability Committee works with the asset departments to consider and implement appropriate portfolio actions. For example, our bottom-up investment teams may actively engage the most at-risk companies on their climate transition plans.
The domain is complex, and there is rapid innovation in the ways in which investors develop and apply climate-related scenarios. It is a journey of continuously learning new techniques, acquiring new data, and developing new insights for making investment portfolios more climate-resilient.
How GIC identifies, assesses and manages climate-related risks
We seek to manage the climate-related risks in our portfolio through both top-down and bottom-up measures. Our ability to identify and evaluate these risks depend on the quality of information available. To improve our access to high quality and consistent carbon emissions and climate risk data for portfolio companies, we support TCFD’s efforts to enhance climate risk disclosures by companies.
We integrate the assessment of climate change-related risks and opportunities into each step of our investment process, from opportunity sourcing and due diligence to post-investment monitoring. The investment committee for each asset class is responsible for defining the physical or transition risks most applicable to each investment opportunity and integrating the risk considerations into the investment decision.
For example, teams that invest in physical assets, such as Real Estate and Infrastructure, conduct assessments of the physical risks of climate change, including extreme weather events. The Infrastructure department also adopts a tailored approach to assessing climate change-related physical risks on large scale infrastructure installations, such as transmission grids, road networks and pipelines. In addition, transition risk is also assessed in pre-deal due diligence and ongoing monitoring, particularly for utilities companies.
The teams take into consideration transition risks associated with a low carbon economy, and adopt proprietary tools such as a carbon dashboard to gauge a company’s carbon emissions, and the impact of emissions taxes and other regulations on the company’s performance. In public equities, companies that face higher transition risks from climate-related disruption are evaluated more closely by the investment teams.
Beyond these processes, we also stress-test our portfolio against a set of climate scenarios that we have developed.
We seek to actively engage portfolio companies that are exposed to elevated climate-related risks to help them build awareness of those risks, and gain access to tools to measure and monitor the metrics relevant to their industry. Our aim is to encourage these companies to transition to a more sustainable pathway.
Metrics and targets used to assess and manage climate-related risks and opportunities
As a large asset manager that invests over long horizons, diversification is essential to GIC’s strategy to secure good long-term returns. As the world transitions to a low carbon and more sustainable economy, more commercially viable low carbon assets would become available to investors. On the other hand, companies that have a relatively high level of carbon intensity in their operations would face high carbon costs.
GIC seeks to grow our low carbon assets as the opportunity set expands, while remaining more carbon-efficient than our policy portfolio benchmarks. To track our progress in these areas, we estimate the “green revenues” of companies in our portfolio to identify opportunities and monitor exposures to the emerging low carbon economy. We also overlay carbon emissions data to estimate the carbon footprint and weighted average carbon intensity (WACI) of GIC’s public equities portfolio, and apply various carbon price scenarios to identify companies vulnerable to transition risk.
The combined Scope 1 and 2 WACI of our public equities portfolio is currently below that of its allocation in the policy portfolio. This indicates that our active strategies’ investment decisions in this asset class have resulted in a better carbon footprint for our portfolio. We will continue to take a holistic approach to monitoring and managing the carbon efficiency of portfolio companies, where doing so would improve the portfolio’s long-term investment value.
In GIC’s own operations, we have achieved our target to become carbon neutral in our global operations by FY20/21. We started measuring our global corporate carbon footprint in 2019, and obtained third-party verification of the measurements. We now have a view of the emissions profile of our operations for Scope 1 and 2 and business travel emissions.
GIC has put in place measures to actively reduce the emissions profile of our operations, through measures such as reducing energy usage in our offices. We will offset the remaining emissions using Gold Standard-certified projects in the near term, and seek to reduce our emissions even more in the longer term.
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