This paper was co-authored by Wong De Rui, Lead, Sustainable Investment Research, Sustainability Office, and Rachel Teo, Head of Sustainability and Total Portfolio Sustainable Investing at GIC.
Climate issues are complex, multi-faceted and fast-evolving. GIC has established that climate change affects asset returns through three channels: physical risks, transition risks and, market risks. Significant uncertainty surrounds these risk drivers, and climate scenario analysis helps us understand their possible pathways. We used a combination of approaches, both top-down and bottom-up, to examine the range of impacts on investment portfolios and to identify critical pockets of risk.
Alongside climate scenario analysis, forming a view on the relative likelihoods of the climate scenarios is important for nimbly managing our investment portfolio and bolstering its resilience across different future plausible states of the world. This task, however, is complicated by dissenting views among experts in different domains.
To reconcile competing expert opinions, various investment organisations have developed tools to track the progress of the climate transition and navigate uncertainties surrounding it. At GIC, we have developed the GIC Climate Signposts (GCS) to provide a holistic and balanced appraisal of the likelihood of GIC’s four main climate scenarios: Net Zero (NZ), Delayed Disorderly Transition (DDT), Too Little Too Late (TLTL), and Failed Transition (FT). Figure 1 illustrates where these climate scenarios reside on the spectra of physical risks and transition risks.