Short-term ESG investing trade-offs expected: GIC

These trade-offs will reduce over time and GIC believes that sustainable companies offer better risk-adjusted returns in the long term.
Short-term ESG investing trade-offs expected: GIC

Temporary trade-offs when investing in environmental, social and governance (ESG) are expected, with controversial solutions such as carbon offsets necessary in the short-term, according to panellists at the Milken Institute Asia Summit 2022 held in Singapore on Friday (September 30).

Rachel Teo, head of sustainability at GIC, noted during the panel discussion that in the long-term, however, the trade-offs will diminish as companies are put under pressure by governments, investors and societies to transition their businesses.

“This relationship will be strengthened over time, because negative externalities are getting priced in, from government actions to the changing preferences of consumers, investors and companies,” she said.

“In the short term at times, there can be trade-offs between doing well and doing good. But these trade-offs are reducing,” she said.

Consumers and employees are increasingly aligning their choices with their values, she explained. Companies that can align their purpose, culture and values with potential employees can attract and retain talent, hence manage their labour costs better, she added.

In addition, “governments are getting more serious about fighting climate change. So business costs are rising for businesses that have less sustainable practices. For example, today, 23% of global greenhouse gases are covered by some form of carbon pricing or carbon tax. This is up from less than 2% two decades ago.”.

The sovereign wealth fund has also eyed investment opportunities that are emerging from the energy and low-carbon transition.

“Our teams are investing in renewable energy, energy storage, carbon capture and sequestration, even direct air capture. We are also invested in a few large green hydrogen platforms. And we also have investments in food waste solutions and green buildings.”

Teo also noted that low carbon technologies are advancing rapidly. Costs have also been falling and these companies have become more competitive against traditional fossil fuel-based activities, she said.

“For example, on a global basis, the levelised cost of electricity generation using solar and onshore is cheaper than gas and coal. In transport sector, we are seeing that electric vehicles are disrupting and displacing the internal combustion engine. The cost of green hydrogen, green steel, green materials is also declining.”

However, she acknowledged that investors face risks to do with underperformance or overpaying for assets. “So I think besides very deep investment research into the sustainable financing opportunities, we need to apply investment discipline when evaluating the deals,” she said.

GIC has been active in the space, for instance, it last year became an equity partner in Arctic Green Energy with a $240 million injection of funds. In January, it made an equity investment of an undisclosed sum in InterContinental Energy, which has a portfolio of projects dedicated to green hydrogen production at scale.

More recently in August, GIC invested an undisclosed sum with Carlyle into green ammonia project development company Eneus Energy to support the development of a 14GW+ pipeline.

Teo also cited a McKinsey report about the need for $3.5 trillion of investments annually to reach net-zero and keep global warming below 1.5 degrees. GIC’s counterpart, state investment firm Temasek, voiced similar concerns earlier this year that the world’s net-zero ambitions face a funding gap.

Speaking at the same panel at the Milken summit, Karen Fang, managing director and global head of sustainable finance at the Bank of America said: “The dollars don't add up. So clearly, we need to have profit seeking capital in the private sector joining the public sector – charitable capital pools, as well as multilateral development banks and development finance institutions – to collectively make sure that capital is flowing to these decarbonisation efforts.”

Fang believes that purpose and profit must co-exist, and that it has been proven that returns “are absolutely higher” from investing in “the right companies with positive social and environmental impact”.

“They outperform, if not on absolute return year over year, but absolutely on a risk-adjusted return basis. So this can happen,” Fang said.

The bank financed 16% of the US’ wind and solar installation, she said, which equates to about 4 gigawatts. “We’re not concessionary. We’re making money, so we’re doing well. Mature technologies in the OECD countries, I would say, largely fall in that bucket. You can do well and you can do good.”

The Bank of America has net-zero greenhouse gas emissions goals set for 2050 and aims to deploy $1.5 trillion of capital to sustainable finance by 2030. In 2021, it mobilised and deployed $150 billion into sustainable finance.

On their $1.5 trillion goal, Fang said that “we have no problem doing that just by doing wind and solar. But that’s clearly not where our money is needed the most. How do we catalyse emerging technologies development, such that they can become a gift to the world?”

“Think about digital infrastructure, think about the internet, think about iPhones. We have to make sure these technologies can be used around the globe to reduce the levelised cost of these carbonisation efforts, while at the same time, not pause on the intended consequences for populations,” she said.

Fang also noted the need for carbon offsets in the short term. “Hopefully, over time, we'll reduce the reliance over time. But we do have to think about credible carbon removal solutions. And that's where nature-based solutions come in.”

“But you have to really heavily invest in carbon capture solutions like direct air capture. So this is just to say nature can probably take care of 30% of decarbonisation technologies and to address the rest of the 70%, but it really takes all of us to work together,” she said.

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