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GIC’s governance around climate-related risks and opportunities
Formalised in 2016, GIC’s Sustainability Committee comprises senior leaders from our investment, risk, and corporate functions, and is currently chaired by our Chief Investment Officer for Fixed Income, who is also a member of GIC’s Group Executive Committee. It is tasked to implement GIC’s sustainability framework, support and promote sound stewardship, and monitor and respond to emerging ESG issues, including climate change.
The investment committees across GIC are responsible for assessing and managing the relevant ESG and climate-related risks and opportunities for their asset classes and portfolios, and play major roles in integrating GIC’s sustainability framework and climate change-related considerations across the investment process.
Impact of climate-related risk and opportunities on GIC’s investment strategy and planning
Climate change is one of the defining long-term issues of our era. Physical risks (e.g., water or heat stress) and transition risks (e.g., 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, phasing out of coal, falling prices of renewables, and changes in 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 of impact to digital technology, urbanization, 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 investors should support and encourage companies that offer sustainable technology and solutions that support the transition to a low-carbon economy, rather than focus only on divestment. Divesting from entire industry sectors would not necessarily be as effective in reducing carbon emissions, and it may even lead to unintended consequences, such as potential negative impact on social development of some countries.
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 can stress-test the portfolio against various carbon pricing pathways to understand, e.g., the value at risk due to transition for carbon intensive sectors, or the value at risk from physical risk to our real estate portfolio in the event of a failed or stalled transition.
The domain is complex, and there is rapid innovation in the ways in which investors develop and apply climate-related scenarios. The insights acquired from our research equip GIC management and investment teams to formulate informed strategies to make the portfolio more resilient to the impact of climate change.
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 of 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 flooding and 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 also 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.
Through our portfolio managers, we actively engage investee 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 transits 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 are relatively high 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 of GIC’s equities portfolio and apply various carbon price scenarios to identify companies vulnerable to transition risk.
The combined Scope 1 and 2 weighted-average carbon intensity (WACI) of our public equities portfolio is currently below that of our equities allocation in the policy portfolio. This indicates that our active strategies’ investment decisions in public equities 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, considering the impact beyond our own portfolio’s carbon footprint, and across the companies’ value chains.
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