GIC, the biggest real estate investor on PERE’s Global Investor 100 ranking, is looking to better protect the value of its real estate investments as it expects climate change and decarbonization to drive up economic costs, according to its annual report.
Lim Chow Kiat, CEO at GIC, noted in the opening letter of the institution’s annual report that the effects of climate change are becoming “both more intense and unpredictable.”
“It is no longer sufficient for investors to only consider where we are in the macroeconomic cycle or the future path of interest rates,” he said. “National security concerns, politically driven regulations, climate impacts and policy, and more must be part of the calculus.”
In particular, climate change has been addressed extensively in the report, as it can impact the portfolio through physical risk and green transition risk.
“Transition risk can be viewed as more imminent as policy actions are required now to ensure a smooth transition,” the report noted. “Physical risk, however, will likely become more important over the long term as temperatures continue to rise globally.”
For real estate investments, the investor has integrated physical risk analysis into its portfolio as part of its due diligence process. The process includes regularly screening its existing portfolios for material sustainability risks, conducting additional due diligence for companies and assets exposed to greater sustainability risks, adjusting the long-term valuation and risk models for such factors as well as stress-testing its portfolio against a range of climate scenarios and carbon price projections.
“We assess the financial impact of physical risks holistically by considering the impact of physical damages and business disruptions as well as any mitigating effects from adaptation measures,” the investor stated in the report.
Such assessments are both top-down and bottom-up, the sovereign wealth fund added. With top-down assessments, GIC works with best-in-class advisers to identify climate hazards, locations and assets that are most vulnerable within its portfolio. With bottom-up assessments, the organization focuses on asset-specific risks and how they can be managed or avoided, such as investing in flood defense infrastructure or adopting risk-monitoring systems.
In one example of how GIC incorporated physical risks into its overall investment process, the real estate team determined during the due diligence process that a data center asset did not have sufficient flood protection. To make the asset more resilient to such potential damage, the team designed a perimeter for flood protection barriers and raised the flood protection measures to preemptively provide for climate change-related increases in sea levels.
“This will make the asset more resilient to climate change and protect its long-term value,” the investor noted in the report.
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