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 the Chief Investment Officer for Fixed Income & Multi Asset, who is also 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 roadmaps 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 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, and these developments will continue as the world works to get the economy onto a Paris-aligned pathway.  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 uses four main 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, climate scenario uncertainty remains high (no climate scenario has more than a 50% probability), and the world is facing elevated risks on both the transition and physical front. Moreover, recent climate progress in the form of commitments may be a leading indicator for disruptive future action, as policy-making catches up.  

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 making the transition.  

These three categories of companies would 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 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. 

Directing capital towards green solutions 

GIC is taking more steps to capture sustainability-related investment opportunities across the portfolio. We began with the experimental, cross-asset Sustainable Investment Fund (SIF) a few years ago, which since evolved into focused teams within asset classes: 

• The Climate Change Opportunities Portfolio (CCOP), which is a portfolio within the Public Equities division, has been set up to deploy long-term, dedicated public equity capital towards investments aligned with the themes of climate mitigation and climate adaptation. 
• The Sustainability Solutions Group (SSG), which is a dedicated team within Private Equity, seeks to deepen GIC’s exposure to early-stage energy transition opportunities.  
• The Transition and Sustainable Finance Group (TSFG), which is a dedicated team within Fixed Income & Multi Asset (FIMA), invests capital in sustainability-related opportunities across the FIMA universe. 

Supporting transition efforts by companies 

As a long-term investor, GIC aims to constructively encourage transition efforts by our portfolio companies. In addition to providing financing to support those efforts where the opportunities arise, portfolio managers in our Public Equities and FIMA departments maintain regular dialogue with portfolio companies on sustainability risks and opportunities, and vote responsibly. Our External Managers Department and private market teams also engage with external fund managers and general partners on their sustainability policies and practices, and ensure our investments with them are managed in a manner consistent with GIC’s sustainability approach.  

In addition, GIC collaborates with fellow asset owners through platforms such as the Asia Investor Group on Climate Change (AIGCC), CDP, and Climate Action 100+, to encourage companies to make sustainability disclosures and take steps to manage their transition risks and climate impact. We are a pioneering member of the AIGCC Asian Utilities Engagement Program, through which we have engaged Asian electric utilities on stepping up commitments to decarbonise. 

Managing risks from assets facing high stranding risk 

GIC’s approach is described in the next section on Risk Management. 

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 TCFD, the International Sustainability Standards Board (ISSB), and CDP to enhance climate risk disclosures by companies.  

Transition risks 

We size the impact of transition risks across various climate scenarios by considering potential changes in carbon prices. We identify and assess the transition risk to the GIC portfolio by applying projected future prices to individual companies, considering each company’s carbon intensity, transition plans and ability to pass through carbon-related costs. Based on such analyses, our investment teams then conduct deeper dives on selected companies deemed to have greater exposure to transition risks.  

Companies can mitigate transition risks by shifting their businesses towards more sustainable models. We recognise this and continue to engage and fund companies making this transition, where appropriate. Some of our portfolio companies are already taking actions, such as reducing the energy demands of their operations through energy efficiency and recycling initiatives; replacing fossil fuel-based energy and feedstocks with renewable sources; or accelerating the retirement of high-emission assets. 

A company’s transition plan should be supported by its business strategy and plans. Some companies may be unable or unwilling to develop credible transition plans despite being in businesses facing the most severe stranding risks. In such instances, we have removed the companies from our investment benchmarks and divested them from our portfolio. 

Physical risks 

Asset departments that invest in physical assets assess the physical risks of climate change as part of investment due diligence. The Real Estate team 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, 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.