GIC’s mosaic approach to ESG analysis

Sustainable investing is complex and still evolving, but is here to stay, according to speakers at 'ESG: From niche to norm', an AsianInvestor event held in partnership with Natixis Investment Managers in Singapore on Tuesday (October 18).

De Rui Wong, vice president at GIC’s sustainability office, said that GIC’s beliefs on sustainable investments are threefold: a belief in investing in green solutions and transitioning businesses; in constructive engagement over divestment; and that sustainability is nuanced among each sector, region and market. 

“We believe that if you merely flatly divest from investments, they may end up in the hands of investors who may not care as much about sustainability issues or helping companies transition,” Wong said during the panel discussion.

He also highlighted that environmental, social and governance (ESG) applies very differently to every region, sector and market, which underscores the need for investors to continuously assess, analyse and update their data sources as they develop their ESG investment strategies.

Despite the sovereign wealth fund being one of the most advanced asset owners in the region, he said that GIC is still “fairly early in our sustainability journey”.

“We’re still learning and evolving,” he said.

The main challenge that many investors face with ESG is in trying to translate the “broad array of ESG metrics” into an estimate of a company’s profitability and valuation, he said.

He describes GIC’s attempt at tackling the problem as “a mosaic approach”.

“We rely on an arsenal of different kinds of analytical tools that quantify both the risks as well as opportunities. For example, together with some partners, we have developed a top-down scenario analysis process that is able to [estimate] the impact of climate change on our total portfolio,” he said. “We have also developed Cesa, which stands for carbon earnings at risk scenario analysis, which really is about understanding every single security and a range of possible carbon pricing scenarios.”

The fund also uses another tool that conducts rigorous analysis on climate risk, including transition and physical risks, as well as looking at downsides and opportunities. GIC has also done a deepdive analysis into its real assets over the long term.

Portfolio returns for a 60/40 portfolio would be 10-31 percentage points lower over 40 years, more from physical than transition risks, he said, which prompted the team to start looking into the asset classes that were most directly impacted by those physical risks – infrastructure and real estate.

“We have different tools, different analysis; it can be overwhelming. But I’m sharing this because sustainability and climate are complex topics. There's no silver bullet, no panacea to try and address the issue. And we need to be quite multi-dimensional in addressing investments,” he concluded.

From a private wealth perspective, Jansen Phee head of fund investment solutions for APAC and head of global investment management for China at UBS said that at this point, clients should not be given a choice of non-ESG products.

“Some of the points raised, it almost seems like you're giving investors a choice: ‘do you want ESG or do you want non-ESG?’,” he said during the same panel. “What are we doing here? Should we be giving them the choice? No, I don’t think so.”

“We just integrate ESG into the process that we give our clients. Obviously, we do have our educational letters and stuff like that… If you look at how we select funds, and how we market the funds, I don't have a separate process for ESG,” he said.

“What we're trying to do here is to engage the clients and say that based on your portfolio, this product would meet your investment objective, but on a sustainable front.”

Register for an on-demand replay of the panel discussions.

This article has been edited to correct the acronym used for the analytics tool Cesa and to clarify that GIC has a three-fold approach to sustainable investments; that the analysis into portfolio returns over 40 years applied to a 60/40 portfolio; and that both real estate and infrastructure were most directly impacted by physical risks.