[Opening Title – Journey to Net Zero]
Voice Over
Joining us today is Dr. Jeffrey Jaensubhakij, Group Chief Investment Officer at Singapore's GIC. As one of the world's largest sovereign wealth funds, GIC is invested in more than 40 countries around the globe. Its portfolio spans a wide array of industry and frontier technologies as it looks to promote sustainability and accelerate the world's transition to net zero. Dr. Jeff is in conversation with Bank of America, Singapore Country Executive, Martin Siah.
Martin
Thank you, Jeff, for joining us today.
Jeff
Oh, my pleasure, Martin.
Martin
I'd like to start this conversation by asking you about your personal journey. So what motivates you and what inspires you?
[Speaker Title – Martin Siah, Singapore Country Executive, Bank of America]
Jeff
Yeah, I tumbled into asset management a little bit by accident. I really thought economics as mainly about bettering people's lives, changing policy and so on.
Jeff
But I did have a wonderful encounter with a recruiter from GIC, and the next thing I knew I was flying out for the interview and was offered a job within two weeks.
[Speaker Title – Dr Jeffrey Jaensubhakij, Group Chief Investment Officer, GIC]
Jeff
Actually when I visited Singapore, I had not lived in Asia for more than ten years and I felt homesick.
Jeff
My wife, who is Singaporean, asked me: How can you be homesick, you didn't grow up in Singapore? But I just being homesick for Asia, just thinking that the opportunities to build a career in Asia with an Asian company was a wonderful one. So, I'm glad to be back.
Martin
Today, you’re now the Group CIO of one most powerful, and also global, investors in the world.
Martin
On one hand, you have to safeguard the wealth of a nation and you have to balance against what the world needs when it comes to climate change and also impact investing. So how do you balance these two?
Jeff
Well, I think many of the people who invest in a capitalist system believe that ultimately the capitalist system will drive behavior that is good for the investor, good for the saver. But ultimately also good for the world. But in the meantime, actually, sometimes the price signal cannot be right and so on.
Jeff
In GIC, we try to ask the question, will investing in companies and in technologies that are good for the health of the economy in the long run, the health of the environment, the health of the people in the long run, would it also be good business?
Jeff
And we think that if we can reconcile that, that eventually it will be good business. Then, maybe it's not the most profit maximizing in the near term, but we know that in the long run it will work out.
Jeff
And I think coal actually has been a good example of that. Pull back 10, 15 years, coal companies were doing very well. It was the source of a lot of emergent energy. But we knew that it is one of the most dirty, difficult to get rid of pollutants in the world.
Jeff
And starting to think about it that way and asking the question, well, can it remain like that forever? Won't there be taxes? Won't that be restrictions? Won't that be public pressure on these companies and on power generators to use an alternative fuel?
Jeff
So if you think long term enough, I think, especially with hindsight now, you could see that the pressure would be coming and that maybe the right thing was to already start thinking of alternatives.
Martin
One of your quotes was that sometimes what the world needs may conflict with profit maximization.
Jeff
In the near term, sometimes it can be. And there are two ways you can go about about it.
Jeff
So one is to sort of say, well, I look at all the things that I'm invested in that are potentially not very good for the environment. Maybe eventually governments will have to tax them, tax the activities that are not good for the environment.
Jeff
Maybe carbon prices will go up, maybe restrictions will come in that actually prevents certain types of businesses from being done. And you can opt to defend yourself by either engaging the company, asking them to change their practices, or you can decide to divest. But that's only a negative, right? You're trying to avoid what could be a declining asset.
Jeff
I think just as important, is to look for things that will benefit and will do well in an environment in which companies and governments and consumers are changing their behavior, to take on more sustainable industrial processes, to start using power generation that comes from clean sources and so on. And if you can find the positive things, then it doesn't feel so hard to remove yourself from the negative things, even if they go up in the near-term, because you already have something else that is positive.
Martin
Did you encounter any internal obstacles or do you have to educate your colleagues in terms of shifting their mindset.
Jeff
I think ESG has been a journey for GIC. We set up a Sustainability Committee about six years ago, with the idea that we needed to have people who dedicate a little bit of their time to making sure that, A, we really understood what the scientific issues were, what the potential policy and cost implications were for the companies and the industries that we're invested in.
Jeff
And then the second, to ask what are some of the actions that GIC would have to take immediately, to ask are there companies that we should immediately divest away from because they are most at risk. And also to ask, what are some of the activities that we ourselves were doing that needed to change?
Jeff
So the Sustainability Investment Fund that was set up in GIC, which was really I cannot take any credit for, really tried to take the stance that there are technologies that will develop that will be helpful for energy efficiency. That will be helpful for climate mitigation. That will be helpful for maybe just resource efficiency. And if we invest in those, then the demand will come for that.
Jeff
And by pulling in people from the different departments, it also had a demonstration effect. So if someone from real estate could find positive investments, that could do well, that had kind of clean real estate, better buildings, using better materials and or investing in companies that produce better materials could make money. Actually, the rest of of their colleagues within real estate could also see it and sort of say: ‘Oh, maybe I can do that, too’.
Jeff
So, I think it had a little bit of that desired effect. In fact, so much so that now there are other, if you will, sustainability focused investment portfolios that are set up: in private equity, in public equities, we're going to set one up in fixed income. So I think it is having that effect. But it did take quite a bit of time.
Martin
So it’s basically an ESG ethos across all your investment teams globally?
Jeff
Well, we are definitely trying to get that because we think it is ultimately an issue that has enough breadth that it will affect all the different industries we invested in.
Martin
So, our own research demonstrated that for every $1 in $10 of the global bond funds, you'll be focused on the in terms of ESG investing. I think last year there was about close to a trillion US of ESG related bond issuances. And talking about real estate, there's about US$1 trillion of listed real estate bonds in Asia-Pacific but less than 2% are focused on green bonds.
Jeff
Right.
Martin
So what are some of your thoughts, in terms of the entire ecosystems of investors, issuers, financial intermediaries, to accelerate the pace of ESG related investing?
Jeff
The fact that there are so many funds that are set up specifically targeting ESG investments gives us a glimpse to the mindset of savers and investors today. That the population at large, savers at large, think that this is an issue, that is kind of a moment defining for us as an industry.
Jeff
And they want their fund managers to be doing the right thing, to be invested in these industries. And so that's why actually, all fund managers are raising ESG funds because they know that the demand for it is there and that there is a real interest. And in fact, they might even be willing to accept a more pedestrian return in exchange for being able to be invested in the right thing.
Jeff
The problem is that the number of really good green investments that the money can go into is still somewhat limited. For many companies, actually, it doesn't represent a an existential threat yet. It's not as if the governments have put a regulation saying that by year 2030, you need to be out of this business or you need to have net zero carbon emissions by this year.
Jeff
Otherwise, the fines will come or the cost of carbon will come because that has not been determined by policy yet. For most companies, there isn't a real need to put it in place yet. And so long as that need isn’t then the technologies that can help, the CapEx that can help, won't get spent.
Jeff
And so in actual fact, the opportunity set for which ESG funds can go into is still somewhat limited.
Jeff
And I think that's the difficulty that there is a time inconsistency problem between the desire to do good today and actually the opportunities to actually put that money to work.
Jeff
I think it will come. We are taking the approach of saying that while some of the technologies are not yet at commercially position stage and previously we would have said: ‘Oh, it's not commercial yet, we can't put a lot of money. Maybe it's not worth looking at’.
Jeff
We are so convinced that this is a trend that will pick up that we've gone earlier in the process.
Jeff
We’ve gone to venture firms that are focused on environmental sciences, green technology, agritech - things that saves on resources.
Jeff
And sort of saying, that we don't know which technologies we will win, but we know that the tailwind is behind them. And better to get in early, get to know the company and get to understand whether or not this is one of the likely winners, whether they will actually be able to take the cost to a commercial level where they can compete with non-green, if you will. Also put ourselves in a position to give them growth capital in future rounds.
Jeff
So I think, we’re not the only, by any means, the only people who are taking that approach. And I think large investors, thoughtful investors are doing that more and more.
Martin
And I know it's a very tough to pivot, with the reserves that GIC is managing now, with more coming from the MAS. But do you think that in the near future that as part of the KPI for GIC and for your teams, that you’ll set a minimum in terms of ESG portfolio allocation.
Jeff
That's probably not the best approach. And we discussed a little bit earlier about all these ESG funds that are looking for things to invest in. And in the end, they actually all crowd in on the same kind of investments. Yeah, but if you do that, then you force the rate of return lower and actually in the end you don't give the outcome you want.
Jeff
Actually, we're seeing that in some of the renewable energy projects. So what used to be a 12% return has become 11, 10, 9, now it's around 6. At 6%, you can't really get a lot of money in. And so too much money chasing after the very narrow set of investments can lead to that. And so in the end, actually, not enough money goes into setting up new projects.
Jeff
I think there are a couple of ways we can address that. I think the first is that governments need to think about how they can de-risk some of the projects so as to make that 6% return investable. So as I mentioned, in emerging markets where there's a lot of construction risk, political risk and so on, I think investors will find it difficult to accept a 6% with so much risk, so much volatility in the projects still.
Jeff
Either governments or multilateral organizations like the World Bank or the IFC, if they can help de-risk some of this, maybe, maybe take the first loss risk and so on the way, then I think at that lower hurdle rate, because money is chasing for safe but decent return, assets can then come in and then you can have enough flow to fund the projects that you need.
Martin
Once GIC has made the decision to invest in a company, what are some of your focus in terms of helping the country to transition faster or stay on track towards net zero, in terms of mission?
Jeff
There aren’t many metrics that you can sort of say, I just look at this and then that'll be enough. There are lots of different measures that that you can speak into the health of the company. What we are very thankful for is that there are now a lot of organizations, a lot of data providers who are willing to measure all these different things and put them together.
Jeff
And in fact, there are now international organizations like the International Sustainability Standards Board that are trying to narrow down and put together a list that everybody can agree on. So that companies are also very clear what are the targets that investors care about? However, I think it still doesn't take away from the fact that, each company will approach sustainability differently and their practices may look different but may be equally effective.
Jeff
And I think the only way to know that is to have a fundamental team that understands what the company should be trying to achieve from a sustainability perspective and can go in and take a look at the company, understand it. Maybe engage with the management if we think that some of their practices are not good. So one of the things that we've done in the last year is really to put additional resources into our equities investing group to make sure that in addition to our normal financial analysts, we put in sustainability analysts who can work with our financial analysts understand the companies.
Martin
I read that in recent years, that GIC has partnered with a group of global equity investors in highlighting that, I think they are five power and utilities company in Asia Pacific that contribute to about 27% of the carbon emissions in Asia Pacific. Now, this group of investors, including GIC yourself, have more or less imposed a timeline for these companies to reduce their net income emissions. Do you think that GIC will be doing more of such partnership going forward?
Jeff
I think there's only so much that one individual investor can do. And ultimately, if we don't invest in this company, somebody else will. And so, I think there is power in pulling like minded investors together. And yeah, as you mentioned, maybe in Asia we’ve come to the game a little later than say Europe.
Jeff
There is an opportunity for investors in Asia to start helping our companies to realize that these are very important, not only because the investors say they're important, but they're important for the health of the company in a future in which governments may well raise carbon taxes and so on. So we indeed did sign up with the AIGCC, which pulls together Asian investors who look at Asian utilities.
Jeff
We're also signatories to the CDP as well as a couple of other international organizations. But at the end of the day, each investor is responsible for their own funds. And we know we have to do the work to analyze and to engage our investee companies to make sure that the outcomes are right.
Martin
Some of the sovereign wealth funds have taken a more firmer stance in terms of acquiring their own portfolio companies to achieve net carbon in terms of reduction by certain years. Temasek has also made a similar statement. GIC has been quite silent on this in public disclosure thus far. Is it about maintaining your in terms of investing flexibility or.
Jeff
There is the issue of announcing a destination and then figuring out how to get there. And I think we're still in the process of trying to figure out if we announce a destination, actually, whether we can get there. Now, for fund investors actually announcing a net zero by whatever year, there’s an easy way to get there, right? Which is you sell all the companies that are high emitters.
Jeff
And unfortunately, that means actually you sell a lot of the emerging markets because that's where, if you will, the poorer countries haven't been able to transition to more costly but cleaner technologies and so on. But does that mean that the world will actually see fewer carbon emissions? Because what we sell may go to a lower price and somebody else will pick it up and they will just let the company run as it is.
Jeff
And I think we are very engaged and very concerned about the issue of how does the world actually get to that lower emissions that is necessary for maintaining a temperature path that is acceptable. And I think we're really thinking through our part, the part that we play. So, some of it maybe indeed announcing divestment of some types of investments, some of it will be working with companies that can make an easy transition.
Jeff
I think a lot of it will be investing in the types of solutions that will help the global economy make that transition.
Martin
Myself and my colleagues would like to do our own individual part when it comes to our personal ESG investment and consumption decisions. So, if there's a Dr. Jeffrey advising me and my colleagues, what would that advice be? Because I know the GIC advice, but how can we as an individuals do our own part?
Jeff
I'm not a paragon of virtue by any means, but one of the things I'm most concerned about is kind of the wastage of materials, especially now with e-commerce. You think about the packaging that comes and you throw away, does it get recycled properly and so on. And so there are ways of in which we live our life that we add to the problem.
Martin
Yeah.
Jeff
And so on. So for me personally, one of the things I have been trying to do is reduce my use of plastic bags.
Martin
I thought you're going to say online shopping but ha ha!
Jeff
I have to support our company investments also. But I've taken to bringing along a ‘tingkat’, you know, with me or a carrier with me when I buy food on Saturdays and Sundays. So, I’ll ask for the economy rice to be put into a metal container that I take home and I just wash and I don't have to get rid of the Styrofoam and so on.
Jeff
Look, it's not a big thing. Doesn't help very much. But I'm hoping that it's the start of some other things that I will also do in order to reduce wastage in my household. And then I have kids they're a little bit more grown now. But what we do as parents in front of our kids really matters because they will remember it and they will keep it as a habit through life.
Jeff
My parents grew up during the Second World War, very frugal, never throw anything away. So when my kids look at me and every morning my newspaper comes, I take out the rubber band and I hang it there. And they ask me, Dad, why don't you just throw away the rubber band? Or because it can be reused, right? You can use it to tie your hair.
Jeff
You could use it to tie up plastic bags. So I think that mindset where we care about the world, where we try to economize on things that could be wasted, and where we try to reduce the kind of behavior and usage that will pollute the world. I think every bit helps.
Martin
Looking to the future. If we were going to have this same conversation in five years time, what do you think you would like the world, GIC, myself, yourself and my colleagues at Bank of America to do, from an ESG and also an impact investing standpoint.
Jeff
I think it is a wave that is coming. It's not yet fully here, even though it feels like there's been a lot of talk about it. And I think that a lot of industries will need to make tremendous CapEx spending in order to become greener, in order to get better industrial processes and to use different sources of energy.
Jeff
And that will require a lot of financing. And I think BofA really has a role to play because you are that intermediary between companies that need to spend that CapEx, that need the funding for that CapEx. and the savers and investors, both your retail investors as well as your institutional investors, in matching that up.
Jeff
So we look to partnering with you in this journey. Those opportunities to invest will come and they will earn good returns. And at the same time, we'll be exiting some of the others where the cost pressure will come and things will be compressed. So anyway, we look forward to working with you on this and really thank you for your tremendous help already.
Martin
Thank you.
Jeff
My pleasure, Martin. Thank you.
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