GIC’s governance of climate-related risks and opportunities

The GIC Board has oversight of GIC’s sustainability approach and management’s considerations on climate-related risks and opportunities.    

At the management level, GIC’s Sustainability Committee oversees the management of climate issues, and regularly updates the Board and its relevant committees, as well as GIC’s Group Executive Committee, Investment Management Committee, and other relevant management bodies. Formalised in 2016, the Sustainability Committee comprises senior leaders from the investment, risk, and corporate functions, and is currently chaired by a member of GIC’s Group Executive Committee. The Sustainability Committee’s terms of reference are set out by the Group Executive Committee, and includes developing GIC’s sustainability strategy and policy, driving sustainability integration across investment and corporate processes, monitoring the sustainability characteristics of the GIC portfolio, and managing external communications and partnerships.  

At the working level, GIC has established a dedicated Sustainability Office to deepen research into sustainability issues and to drive integration. The Sustainability Office works closely with all investment departments to develop their respective sustainability integration priorities and monitor their exposure to climate-related risks and opportunities, in support of the longer-term objectives set out by the Sustainability Committee.  

In each asset department, the Chief Investment Officer and the investment committee are responsible for assessing and managing climate-related risks and opportunities for their asset classes and portfolios, and for integrating GIC’s sustainability policy into its investment process. 

Climate-related risks and opportunities that may affect investment prospects 

Climate change is one of the defining long-term issues of our era, and the impact of transition policies and physical risks will affect the long-term investment value of companies.  The transition has already begun. The implementation of carbon taxes or carbon trading schemes in some countries, the phasing out of coal, falling prices for renewables, adoption of electric vehicles, and changes in the global energy mix are clear signals of this shift, and these developments will continue  – albeit through cycles of optimism and bearishness – as the global economy decarbonises.  The physical impact of climate change, such as severe global warming and sea level rise, will continue to worsen over decades, but extreme weather events have already increased in frequency and severity, and will impact business operations even in the short term.  

As with any disruptive trend, 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. 

Climate scenario analysis to understand anticipated effects on asset returns and portfolio climate resilience 

Climate change will affect investment risks and returns through three channels – physical risks, transition risks, and market risks. There is significant uncertainty around each of these risks, and scenario analysis helps GIC understand how they could possibly unfold over time. GIC has developed four main in-house climate scenarios, which represent how different combinations of risks could play out. These are not exhaustive or complete, but are useful heuristics to inform GIC’s strategy: 

• Net Zero: Early and orderly transition to a global warming trajectory reaching +1.5ºC by 2100. Financial markets price in transition and physical risks smoothly.  
• Delayed Disorderly Transition:  Climate policies are slow to be implemented, until a surge in extreme weather events causes the world to take urgent action. Policies enacted at that time are more substantial than those in the Net Zero scenario due to the delay. Financial markets suffer sharp shocks due to a combination of extreme weather and policy measures. 
• Too Little Too Late: Policymakers act only when public pressures rise in response to extreme weather events. However, policy responses are insufficient to cut emissions sufficiently to keep global warming below +2ºC. Global average temperatures reach +2-3ºC by 2100. 
• Failed Transition: Only currently implemented policies remain in place. Physical risks manifest in severe forms, as global average temperatures reach +4ºC by 2100. Financial markets price in future physical risks, including long-term ones beyond 2050. 

GIC has also developed climate signposts to assess the likelihood of each scenario. The signposts comprise a range of indicators across countries, businesses, technology, and the physical environment, to track the progress of the climate transition. Based on GIC’s climate signposts, the odds of a Too Little Too Late climate scenario has meaningfully increased,  with the world facing elevated risks on both the transition and physical front. As physical risks intensify, investors will need to step up their understanding and management of physical risks; at the same time, the demand for adaptation and resilience solutions will likely grow. 

Strategy to address the range of climate-related risks and opportunities 

GIC is committed to enabling the global transition to a net-zero economy through our investments and operations. We approach this task by considering the investment universe across three categories: 

• On one end of the spectrum are companies deriving a high percentage of their revenues from renewable energy and other decarbonisation solutions. We expect to see more companies increase their participation in the green economy, which will give rise to sizeable investment opportunities.  
• At the other end of the spectrum are companies in carbon-intensive sectors such as power utilities and transport. The transition of these companies will be important for the decarbonisation of the economy. Companies in this space that are unable to transition their businesses to more sustainable operating models risk becoming stranded. 
• Most companies are in between these two ends of the spectrum. They have lower emissions intensity compared to those within the most carbon-intensive sectors, but they would also be transitioning their direct operations and supply chains over time.  

These three categories of companies require different capital needs and approaches to manage their decarbonisation journeys. To create and capture these opportunities, and to protect the portfolio, GIC has adopted three main strategies, to: 

1. Direct capital towards green solutions, or enablers, of the low-carbon transition;  
2. Support transition efforts by companies, through active engagement, directing capital towards those companies with credible transition strategies, and strengthening the ecosystem for sustainability disclosures; and 
3. Manage the risks from assets that face high stranding risk due to their inability to transition their businesses. 

How GIC identifies, assesses, prioritises, and monitors 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 efforts by the International Sustainability Standards Board (ISSB), and CDP to enhance climate risk disclosures by companies.  

Transition risks 

At the portfolio level, we have developed a forward-looking transition alignment metric to better evaluate transition risks. This involves evaluating portfolio companies’ emissions disclosures, emission reduction targets across various time horizons, decarbonisation strategies, capital expenditure plans that support decarbonisation efforts, and emissions reduction performance relative to relevant decarbonisation pathways. This approach enables GIC to holistically evaluate the portfolio’s decarbonisation profile according to the maturity of portfolio companies’ decarbonisation trajectories.
At the individual company level, companies can mitigate transition risks by adopting measures and initiatives to shift their businesses towards more sustainable models. As part of due diligence, where transition risk is considered material, we assess the credibility of a company’s stated transition plan by evaluating how its business strategy and plans are designed and aligned to support it. We continue to engage and support companies making this transition, where appropriate.

Physical risks 

Asset departments that invest in physical assets assess the physical risks of climate change as part of investment due diligence. For example, the Real Estate department conducts physical risk assessments as part of the assets’ due diligence process. The physical risk assessment considers hazards such as tropical and extratropical cyclones, storm surges, inland floods, and bush fires. To strengthen our assets’ resilience to climate change, investment teams may put in place pre-emptive measures to mitigate individual assets’ exposure to physical risks. The Infrastructure department adopts a tailored approach to assessing climate change-related physical risks on large-scale infrastructure installations, such as transmission grids, road networks, and pipelines.

Investments 

GIC is committed to enabling the global transition to a net-zero economy, through our investments and operations. We seek to grow our investments in climate solutions and other low-carbon assets as the opportunity set expands, while managing climate-related risks. To track progress, we estimate the green revenues of companies to identify opportunities and monitor exposures to the emerging low-carbon economy. We also use companies’ reported carbon emissions data to estimate the weighted average carbon intensity (WACI) of our portfolio.  It is important to note that investing in the global transition could mean investing in companies that are highly carbon-intensive today, but which are serious about decarbonising in the coming years. This could imply a higher WACI for our investment portfolio in the short term, even as WACI is expected to decline over the longer term.  

Operations 

GIC is committed to monitoring and managing our footprint by avoiding and reducing unnecessary carbon emissions. We do this by managing our operational resource use and emissions through environmentally conscious office design and smart technologies, in line with leading green building certification programs; switching to renewable energy sources where available; communicating clear expectations for sustainable behaviour in our business partners; and encouraging employees to adopt more sustainable behaviours at the workplace and beyond.