GIC aims to bridge green assets funding gap with new initiative

SOVEREIGN wealth fund GIC has launched an investment programme to address the funding gap for green assets, such as sustainable steel and battery storage.

The investment programme, launched in April, focuses on climate real assets that are past the laboratory stage but have yet to be scaled up for commercial demand.

The capital markets are “not great” at funding these types of solutions, said GIC’s chief investment officer Jeffrey Jaensubhakij, who was speaking about the fund’s annual report at a press conference on Wednesday (Jul 24).

“There is a gap between venture growth (investments) and the more sustained infrastructure funding, where these companies are not able to bring their solutions to scale if capital doesn’t step in… We have decided to really step up and look very hard for opportunities to allocate capital in this area,” he said.

He cited Sweden-based H2 Green Steel as an example. Last year, the startup raised 1.5 billion euros (S$2.2 billion) in equity from investors, including GIC, to finance the world’s first large-scale green steel plant.

H2 Green Steel wants to decarbonise steel production by replacing coal with sustainably produced hydrogen. This method of steel production could have up to 95 per cent less carbon emissions, compared to traditional blast furnaces.

GIC’s bet on climate tech comes as the sector faced a difficult year. In 2023, venture and growth investment in the sector fell 30 per cent from the prior year, and investors saw fewer exits. This marked the first annual investment and deal count declines in climate tech since 2020.

Rising interest rates played a part in this correction, said GIC chief executive Lim Chow Kiat told reporters.

“For climate tech, a lot of (companies’) cash flows are way out in the distant future. When interest rates went up two years ago, those with distant cash flows were impacted the most. It was not surprising that many of those valuations had to correct,” he said.

In the annual report, Lim added that the slowdown happened despite the “clear, long-term opportunity” that the energy transition presents.

“Patient capital like ours is well-suited to navigate climate tech’s potential J-curve,” said Lim, referencing how returns in this sector tend to follow a J-shaped trend of initial losses, followed by rapid gains.

The green assets investment programme will be helmed by GIC’s Sustainability Solutions Group (SSG), a standalone investment group launched within GIC’s private equity department in April 2023.

Engaging portfolio companies

Besides investing in climate technologies, GIC is also engaging with portfolio companies on their green transition. This engagement has to be done on a “case-by-case” basis, as companies face different circumstances and macroeconomic challenges, said Lim at the briefing.

“But what we would like our portfolio companies to do is to take this transition seriously and have concrete plans to do so. Of course they have challenges; they have to make trade-offs,” he said.

One positive example is an electric utility in the US that GIC has backed. The company has set both a long-term net-zero target, as well as an interim emissions reduction target, and has reduced its share of coal in generation mix from around 70 per cent in 2007 to less than 20 per cent at present.

GIC also stepped in to help portfolio companies. For instance, an electronics company that GIC is invested in had indicated long-term ambitions to reach net zero, but lacked a road map with tangible mid-term milestones. GIC urged the company to set mid-term targets and enhance its green revenue disclosures.

“We believe providing transparency on their product and revenue exposure to specific green end-markets will help investors further appreciate the company’s growth opportunity,” GIC said in its annual report.

Asked about GIC’s own emissions goals, Lim said that GIC does not set a portfolio carbon intensity target.

“There could be portfolio actions which in the short term might add to carbon intensity, but actually are very good for the real economy transition in the long term… We do not want to be excluded from those efforts, because they are actually good for the real economy transition,” he said.

Such actions could include building gas plants to power data centres, given the intermittency of renewable energy sources, added Jaensubhakij.

That said, GIC internally measures the carbon intensity of its portfolio, and also assesses the sustainability impact when doing deals.

“In some cases, the sustainability factor could be a risk. For example, if you invest in some hotels, you really have to understand the climate of that location. We ask for our deal teams to make sure we take those things into account,” said Lim.

Need to invest

GIC noted in its report that there is a significant need to invest more in the energy transition and climate change adaptation. At the current pace of decarbonisation, the economic damage from climate change is expected to reach 11 to 29 per cent of global GDP, or US$19 trillion to US$59 trillion by 2050.

It estimates that the total incremental investment value of the climate solutions supply chain ranges from US$5 trillion to US$11 trillion in 2030.

“Most climate solutions are expected to have the fastest growth within this decade, while the Asia-Pacific region represents the largest total addressable market due to rapid economic and emissions growth,” GIC said.

Besides the SSG, GIC has two other investment platforms focused on sustainability opportunities. One of them is the Climate Change Opportunities Portfolio, which deploys long-term, public equity capital on the themes of climate mitigation and adaptation.

The other is the Transition and Sustainable Finance Group, which invests in sustainability-related opportunities across the fixed income and multi-asset universe.