This is an adapted transcript of GIC CEO Lim Chow Kiat’s keynote speech on 15 March 2022 at the Nanyang Business School (NBS) Business Conference, lightly edited for readability.

Good afternoon. Thank you for the opportunity to speak at the inaugural Business Conference of the Nanyang Business School (NBS). It’s been almost 30 years since I left NBS and it’s great to be back. And congratulations – I am delighted to see the many partnerships forged and the numerous achievements made over the years.

I also serve on the board of Nanyang Technological University (NTU), so it’s really gratifying to see many companies partnering with the university and the whole community working together to build a robust talent pool which is so crucial to many employers in Singapore.

The topic of my speech today is “Investing with Purpose and Responsibility”. But given the uncertain times we are in today, I will add “in a World in Transition” to the title.

Less than three weeks have passed since the most recent seismic event in Europe. 24 February 2022 will be etched into the memories of most people. We will ask, “What were you doing on that day?” Just like we had asked, “What were you doing on the day of 9/11, the collapse of the Lehman Brothers and the Wuhan lockdown?”

Let me contextualise my sharing today through the lens of GIC’s purpose and responsibility. For 40 years, GIC has been tasked to preserve and enhance the international purchasing power of the reserves under our management over the long term. GIC’s purpose is to be a three-in-one fund for Singapore – a rainy day fund, a stability fund and an endowment fund. Ultimately, we aim to secure the financial future of the country, and we take that goal very seriously. In addition, beyond Singapore, in more than 40 countries, GIC has had a significant impact on our investee companies as well as communities. We take that seriously too, by supporting sustainable business practices.

Our goal is sustainable profitability, in line with Adam Smith’s invisible hand and guided by a broader set of values, looking after the interests of a wider group of stakeholders instead of maximising shareholder wealth only. This is in contrast with Milton Friedman’s narrow interpretation, which argued that “the only social responsibility of businesses is to maximise profits for the shareholders”. The bottom line instead is to create a bigger pie for all, over the long term.

Five key trends shaping the world in transition

I would like to share some thoughts on the transformation – which extends beyond sustainability – I believe the world is currently undergoing. We are experiencing big changes; some in short order like the tragic Russia-Ukraine conflict, best captured by a quote from Vladimir Lenin of all people: “There are decades where nothing happens and there are weeks where decades happen.” We have just witnessed the latter. Some changes take longer, but they are no less impactful. I will go through five of these trends briefly which ought to really percolate in our minds.

Pandemic

The first is the pandemic. We are not out of the woods yet. The Covid-19 situation remains uneven globally, spanning the full spectrum of a pandemic, and in some places, an episodic epidemic, as well as countries trying to normalise endemic living conditions, with all the attendant difficulties and measures which we are all very familiar with now.

Besides short-term effects, we are concerned about long-term scarring, akin to long Covid and its impact on social, political and economic health. Public health outcomes and policy choices have long-term consequences. Ballooning public debts in some countries resulting from government stimulus, loss of education from school shut-downs, greater inequality due to different levels of healthcare access, sectoral differences because of different help packages, new employment trends arising from specific policy choices – whether you choose to protect jobs or employees – all have long-term consequences. For example, in the US, we are seeing what’s been dubbed as The Great Resignation, partly due to the government’s choice of helping workers directly, giving many the freedom to quit or change jobs.

Now, not everything is bad. There are clear opportunities, including:

• Advancements in mRNA technology which could be put to use beyond Covid-19;
• Increased public-private sector collaboration in various fields;
• Acceleration of digitalisation, which is one of the most important developments in the last few years, especially for the business world;
• Supply chain realignment in certain countries – there are winners and losers; places like Vietnam and Mexico are clear winners, while other places have lost out.

Order

The second significant trend is what people call order. The war in Europe is a sad human tragedy. It also brings geopolitical and other strategic considerations back to the top of the agenda, which we had been able to ignore for many years, but can no longer do today.

Order, or the norms or institutions governing interactions, underpins the functioning of economies and markets. We are witnessing numerous military conflicts, but also the weaponisation of trade, finance, the Internet, amongst others. For investors and businesses, this is no doubt a significant concern. Great power rivalries are back due to structural changes in global power distribution. We are now moving from a unipolar to a multipolar world which brings with it a lot of competition and tensions, because fundamentally, there’s just a lack of trust.

Domestic order too has frayed, on the back of the stagnation of the middle class in developed countries. There is simply a lack of common national purpose. All these have resulted in higher political risks, domestically and across countries, which all businesses and investors have to deal with.

Based on recent experiences, we also see that investors and businesses need to adapt to these new realities, including market access and supply chain risks and disruptions, as well as the changing demands of customers, employees and other stakeholders.

Sustainability

The third trend is the topic of today’s conference. Sustainability can be thought of as externalities or impacts not yet captured by commercial prices. They present both significant threats as well as opportunities.

Using climate change as an example, we see the magnitude of its potential adverse economic impact. According to research by the Swiss Re Institute, we could lose up to 18% of global GDP if temperatures rise by 2.3 degrees Celsius by 2050.

As an investor, we see three challenges in the path towards net zero. First, it involves difficult trade-offs, including an inherent conflict of goals and time horizons, such as social versus climate goals, or the energy transition versus energy security. If you abandon fossil fuels, you might deny access to jobs for your local community. You might even create more gender inequality.

A useful angle here is to consider the additional costs involved and who is to pay for them. Of course, we always look towards governments to provide more subsidies or introduce carbon taxes and other mechanisms to price in the cost of carbon. Grants and other forms of financial support by philanthropists are also welcome – if only we had more of them. Consumers might also have to chip in, by paying a higher price for goods and services. In the best-case scenario, technology and economies of scale can reduce cost curves substantially. In some cases, innovative business models can address at least part of the additional costs, by building up scale. That’s the first challenge. How do we deal with these trade-offs and the costs which come with it?

The next is ESG data; improving the quality, availability, materiality and comparability of data for businesses and investors to be able to make more informed decisions. Fortunately, we are seeing progress made in the creation of more consistent standards for ESG reporting, especially with the launch of the International Sustainability Standards Board (ISSB) at COP26.

The third challenge relates to designing investment vehicles which can help crowd in private capital. This is very similar to the need – identified and recommended for many years by organisations such as the G20 or the OECD – to attract private capital to fund public infrastructure projects, especially in developing countries. Although trillions of dollars of capital are available to be invested in this space, attracting private capital has been met with limited success. Some of the barriers include potential political risks, lack of project pipelines or an enabling regulatory environment.  Bankability and scalability are key factors for attracting large institutional investors.

As an example, about 15 months ago, GIC invested approximately US$2 billion in Duke Energy Indiana (DEI), a subsidiary of Duke Energy, one of the biggest energy holding companies in the US. DEI is the largest regulated electric utility in Indiana, serving around 850,000 customers.

While DEI traditionally depended on coal-fired power plants to generate most of its electricity, proceeds from the transaction will support its clean energy transition, including investments in renewables and the retirement of existing coal-fired units. The governance and legal frameworks in the State of Indiana provide a clear and proven mechanism for investing in new energy sources, which allow long-term investors such as GIC to both support the utility’s low-carbon transition and earn good risk-adjusted returns over the long term.

Such an enabling regulatory design would help attract more private capital into the sustainable infrastructure space, but we don’t unfortunately see many similar examples.

Importantly, however, besides these challenges, we see a tremendous amount of opportunities. In fact, we look at our investment universe as made up of three parts. The first is new sustainable tech solutions, including traditional renewables such as wind, solar or hydro which are becoming commercially viable with cost curves decreasing substantially in quite a lot of countries. Hydrogen, especially green hydrogen, is still in the R&D phase from a scale perspective, but holds a lot of promise, as do nuclear fusion or carbon capture, use and storage (CCUS). Technology might be able to come to the rescue again, just like in the case of Covid-19 vaccines. So that’s the first category in the investment universe, which is still relatively small. It might be worth billions in value, but in the context of the investment world, it only accounts for a small sleeve.

The second category refers to transition assets which form the bulk of investments, as every asset needs to eventually transition. In fact, companies must start to transition now, because it’s the ultimate solution to climate change. It requires a lot of resources, extensive bottom-up engagement and the repurposing of existing assets. A pipeline for natural gas could be repurposed to transport hydrogen, for instance.

Here, we can also use some out-of-the-box thinking. For example, to address water scarcity, which is a massive challenge and could in fact create conflicts between countries, we should consider reducing food waste – as food production and processing can be quite water-intensive –, and increasing energy efficiency as energy is useful for water production, amongst others. Solving the sustainability challenge could offer a lot of potential for innovation.

Finally, you are left with a set of investments that could end up becoming stranded assets such as thermal coal. In the short term, given the current geopolitical and macroeconomic climate, some countries might need to continue using coal. In the longer term, however, coal is not the solution and should be phased out.

Inflation

The fourth issue is something that’s top of mind for most financial professionals: inflation. Inflation directly erodes purchasing power. The first job of any investor is to do better than inflation. Otherwise, your wealth or purchasing power will just keep depleting. Inflation also has the potential to change the interest rate regime which can usher in a whole new paradigm for economies and markets. Persistent inflation could transform economic behaviour and the psychology of people, and raise the dreaded risk of stagflation or a hard landing.

It’s therefore really important to look back in history, and understand how the Great Inflation between the 1960s and 1980s played out, and what lessons could be drawn for today.

This time round, the risk of persistent inflation is driven by a number of supply and demand factors which go beyond just supply chain disruptions. A broad range of issues are at play in the US, which is at the forefront of rising inflation, related to wages, commodities, housing and healthcare.

The longer-term backdrop is unfortunately also not very positive. You have what I call the five “Ds”: deglobalisation for various reasons; decarbonisation because of climate-related issues; demographic change (a shrinking pool of productive workers); debasement (the printing of a lot of money); and finally, disillusionment.

It will be challenging to achieve a soft landing. Historically, we have almost never succeeded at that, but policymakers around the world are clearly on high alert. We still have a window of opportunity in the form of anchored inflation expectations, meaning that inflation expectations are still manageable for the medium term. Short-term inflation expectations are pretty high, but that’s not the biggest challenge. We need to focus on three-, five- or ten-year inflation expectations. Will we able to anchor inflation expectations, or are we dealing with runaway inflation?

Technology

Finally, technology disruption is leading to an explosion of innovation across multiple fields. It invalidates existing assumptions held by businesses and investors, and often upends incumbents through new business models. It also shows up in the form of disintermediation. Tech disruption typically spells trouble for the middlemen between consumers and goods and services providers. Recent years have seen the emergence of platform companies which are essentially the powerful business outcome of tech disruption that we all should pay attention to.

There you have it, my five-letter Wordle of the Day, P-O-S-I-T. It means putting things in place. These are a lot of balls to juggle and I thought I would distil them into three key takeaways.

Be clear about your purpose

First, it’s key to be clear about your purpose. What is your goal beyond profit? How are you using our strengths to help others? Businesses need to be clear about the societal functions they are serving. In the words of Paul Polman, the former CEO of Unilever, “Is the world better off because we are in it?” With new societal expectations, it is fast becoming a licence for businesses to operate.

Adapt to the new environment

Secondly, we need to adapt to this new “VUCA” environment. It’s an acronym that has been around for almost 20 years, yet it describes the uncertain and complex environment we need to grapple with today really well. It’s in fact gone exponential.

We have to become armchair epidemiologists, studying diseases and vaccines. We have to become international relations experts, understanding the history of Europe and the Russian Empire. We have to become climate scientists and macro economists, and at the same time, understand how technology is changing the world. We have to keep ourselves continuously up-to-date, and importantly, we need to get the basic principles right.

For investors, that means being clear about your risk tolerance. How much risk are you willing to take? What is your investment objective? In GIC’s case, we continue to emphasise diversification because that’s the only free lunch in finance. Liquidity is equally important. Don’t run into problems that you cannot get out of. Patience: some of these things take time to play out, and in the process, great opportunities might emerge. Optionality: For businesses, it is still fundamentally about being faster, cheaper, and better. It also means watching out for these trends and being early in experimentation.

Look at the transition as an opportunity

Finally, view the low-carbon transition as a huge opportunity. Getting to net-zero requires a lot of money. McKinsey estimates it to involve an annual spending USD$9.2 trillion per year, and a cumulative US$275 trillion over 30 years. Investment in the energy transition alone will have to increase from $2 trillion to almost $4.5 trillion per year, according to the IEA, by 2050. So, investors and businesses have to be first movers to take advantage of these opportunities. For example, NTU last year issued a $650 million sustainability-linked bond, the world’s first publicly-offered sustainability-linked bond by a university. It was a bold innovative move.

The low-carbon transition presents a collective set of challenges, so everybody has to work together. The problem is too big to solve alone. At GIC, we also seek to accelerate the transition in the broader real economy through partnerships with key industry bodies such as Climate Action 100+, the Asia Investor Group on Climate Change (AIGCC), CDP or the Task Force on Climate-Related Financial Disclosures (TCFD).

As an example, GIC, together with 12 members of the AIGCC, has joined the Asian Utilities Engagement Program to help utility companies in Asia in their decarbonisation efforts. This is an important effort as Asian utilities are responsible for 23% of the world’s total carbon emissions.

In addition, we have collaborated with industry partners to publish research on a number of sustainability-related topics, including climate scenarios with Ortec Finance, carbon markets with McKinsey, avoided emissions with Schroders, or ESG metrics with the World Economic Forum. The work NBS is doing in bringing together industry and academic experts is equally crucial to finding the best way forward.

In conclusion, investing with purpose and responsibility is a continuous journey, but it is undoubtedly key to navigating the world in transition. Thank you very much.