Offense and Defense: GIC’s Sustainability Framework

Recently, we sat down (virtually, of course) with Rachel Teo, an upcoming keynote speaker at the 2021 Challenge of Change Forum happening in Vancouver from October 13-15. Rachel is Senior Vice-president, Head, Futures (Research) Unit, with GIC in Singapore. She will be presenting a case study of GIC’s approach to sustainable investing and, in advance of the event, she offered us some insights into GIC’s sustainable investing framework.

CLC: What does your approach to integrating sustainable investing at GIC look like?

Rachel Teo: We believe companies with good sustainability practices offer prospects of better risk-adjusted returns over the long-term, and this relationship is expected to strengthen over time. Hence, sustainability is core and central to the way we manage Singapore’s reserves, and is a key management priority. In terms of governance, we have our Sustainability Committee that oversees the design and recommendation as well as the implementation of our sustainability policies. It is important to note that the sustainability committee is made up of senior investment leaders across the organization and across the asset classes.

In terms of how we approach integrating sustainability into the investment process, we have an organizing framework of offense and defense. On the offense part, we are focusing on investment opportunities that are driven by underlying sustainability drivers.

The second part of the strategy is defense, which is looking at our portfolio and understanding what the ESG risks are, the effect they could have on the portfolio, and in response, how to position the portfolio. One piece of work that we did last year was to look at a range of climate scenarios and stress test the portfolio against these scenarios. As part of the defence strategy, we also integrate climate change and sustainability considerations in our due diligence process when reviewing new or existing investments, and then adjust our long-term valuation and risk models accordingly. In addition, we also engage with our investee companies to improve corporate governance, ensure resilience against climate risks, and advocate for other positive environment and social outcomes.

One important element of our sustainability framework is our view that it is more constructive to actively support our portfolio companies in their transition towards more sustainable business practices, rather than adopt a blunt divestment approach, as we believe this would lead to more beneficial outcomes for all in the long term.

CLC: What challenges are involved in implementing a sustainability framework?

RT: First, it’s important to establish the link between sustainability issues and the financial performance of the companies. For instance, climate change is not just about saving the world, but it has a direct and big impact on the investment portfolio. At GIC, we did the research and showed the analytics of how climate change related transitions and physical drivers affect companies’ earnings, and then communicated these findings to the organization.

Second, we need to provide the tools and analytics for investors to look at relevant sustainability risks. At GIC, we feel that the integration of sustainability considerations should not only be done top-down, but bottom-up as well. We have many investment teams across the different asset classes running active strategies, and they should factor in climate and sustainability risks when making investment decisions. Hence we looked into developing the right tools and frameworks to facilitate that. For example, we built a carbon emissions dashboard that portfolio managers can access quite easily for companies. We also provided a way for our managers to simulate carbon tax scenarios — what would happen if carbon taxes were $50 or $100? Given the emissions data and carbon tax, how would this affect the earnings of the company under assessment?

In addition, we developed tools that look at green revenues or companies, ESG profiles, as well as monitor climate policies of the different countries.

CLC: How hard is it to measure performance related to sustainability?

RT: We measure our performance against the standard market benchmark. Because if we start with a belief that companies with good sustainability practices offer prospects of delivering better risk-adjusted returns, then by factoring that into our investment approach, our performance over the long-term should be better than the market performance on a risk-adjusted basis.