GIC looks to integrate climate change into all investment processes

AS the world starts to recognise the impact of climate change, investors can no longer afford to dismiss risks associated with abrupt policy changes that may potentially hurt portfolio returns.

Against this backdrop, Singapore's sovereign wealth fund GIC is taking a "holistic and long-term approach" to integrate climate change into its portfolio, said Rachel Teo, head of futures (research) unit and senior vice-president, economics and investment strategy, in a report.

To incorporate climate change into its portfolio, GIC will evaluate the way long-term capital market assumptions are affected by climate change drivers and under different climate change scenarios. For instance, considering whether global warming is contained below two degrees Celsius by the end of the century due to strong climate action by all stakeholders.

The sovereign wealth fund is also ensuring that bottom-up active investment teams are integrating climate change considerations into their investment processes. Analysts tap environmental metrics to identify risks and conduct further due diligence and engagement with companies.

"Instead of bluntly divesting from companies with high carbon intensity, we would instead seek to engage and understand if the companies have plans to transit to a lower carbon business model, and will support them in their transition path towards long-term sustainability," said Ms Teo.

The focus for GIC will also be on "green thematic opportunities" including renewable energy, green buildings, sustainable food and agriculture, electric mobility and other emerging technologies that will facilitate a decarbonisation of the global economy.

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This comes as investors should be "highly concerned about the underlying policy uncertainty" with the reality of climate change now obvious, said Bob Litterman, chairman of the risk committee at Kepos Capital in a separate report. Yet, investors have not taken into account the broader risks that exist across their entire portfolio, he said.

He pointed out that all asset classes and most economic sectors are exposed to the risk of a rapid economic transition to a low-carbon economy.

To be sure, fossil fuel company valuations are highly sensitive to this risk. But there are many other companies and industries that will be impacted and whose business models or existing assets are also at risk of being stranded, said Mr Litterman.

Mr Litterman noted that there are "strong opportunities to generate additional return" as the transition towards a net-zero emissions economy will also create new technologies and business models.

"In fact, I suspect that transitioning to a net-zero economy, adapting to the new climate reality while building a sustainable economy, and simultaneously sucking carbon dioxide out of the atmosphere at the required scale will be the investing themes of the next several decades," he said.