Singapore’s sovereign wealth investors GIC, Temasek find adaptation potential

THE likelihood and extent of climate-related losses and damage have increased, with global warming likely to breach the 1.5-degrees Celsius threshold and possibly even 2 deg C.

Higher climate risks could induce greater spending on climate adaptation, especially as the impact of climate change intensifies. Surely there’s money to be made there.

Singapore’s sovereign wealth investors certainly think so. Two separate reports by GIC, which manages Singapore’s foreign reserves, and Temasek, which mainly invests in equities, focus on investment opportunities in climate adaptation.

Growing interest

GIC, which wants to determine the long-term investment value of climate adaptation, estimates that global annual revenues from a set of adaptation solution categories could grow from US$1 trillion today to US$4 trillion by 2050. The investment opportunity from these categories could increase from US$2 trillion today to US$9 trillion by 2050, of which US$3 trillion can be attributed to global warming. These assume that global warming will reach 2.7 deg C by the end of the century.

Temasek’s report, which focuses on private equity opportunities, reckons that annual worldwide demand for adaptation financing could grow to between US$500 billion and US$1.3 trillion from 2025 to 2030. That is far more than current levels of adaptation financing, which averages around US$76 billion a year and is mostly from public coffers.

But interest is definitely growing. Temasek notes the launch of a number of dedicated adaptation and resilience investment funds since 2019, including the Lightsmith Climate Resilience Partners’ US$185 million fund, the US$250 million Mirova Environment Acceleration Capital Fund and the targeted US$100 million InsuResilience Investment Fund Private Equity II fund.

Defining challenge

Climate adaptation refers to the broad class of climate action that seeks to address the effects of climate change. It’s distinct from climate mitigation, which is the type of climate action aimed at reducing climate change.

Global mitigation efforts have been insufficient so far to keep warming on track to stay below 1.5 deg C, a threshold past which catastrophic climate change becomes significantly more probable. That reality has made adaptation more important.

But what exactly counts as adaptation? Simple rules that investors can use to screen for potential investments are difficult to write. As Temasek explains, adaptation revenue streams “tend to be embedded in pre-existing industrial sectors such as materials, engineering procurement and construction, and infrastructure”. This makes it difficult to clearly define adaptation solutions providers.

Temasek, with consultant BCG, maps the universe of investment opportunities into seven impact themes:

GIC, with Bain & Co, identifies 14 categories of adaptation solutions that it deems to address the most likely and impactful climate hazards, and are investable:

• Water treatment;

• Indoor cooling;

• Water conservation;

• Water storage;

• Reflective and cooling materials and components;

• Weather intelligence;

• Weather-related insurance;

• Backup power systems;

• Pumping stations;

• Flood-resistant construction materials;

• Flood protection infrastructure;

• Fire-resistant building components;

• Firefighting equipment; and

• Wind-resistant building components.

Early bird benefits

Both reports suggest that adaptation opportunities are still undervalued, and that it pays to invest early.

Temasek notes that due to the local nature of adaptation measures – for example, North America uses detention and retention basis to curb inland flooding while Asia uses pipes and drains to divert floodwaters – investors have the opportunity to enter at lower valuations before valuations account for the potential of market expansion.

However, pure plays might only comprise early stage targets at this time; growth and buyout private equity investors might find only targets whose adaptation businesses are currently small but growing.

GIC estimates that 2050 revenues will exceed current business forecasts by 61 per cent largely because current models do not adequately price in growing demand for adaptation solutions.

Furthermore, GIC says its model’s sensitivity to different climate scenarios is relatively low for the next 25 years because the impact of global warming only becomes more severe in the latter half of the century. This means that current investments can enjoy a fairly high level of confidence about returns.

Long-term investors have a “unique opportunity to invest in a space where company earnings may positively surprise as demand for adaptation solutions increases”, GIC writes.

This article first appeared in BT’s ESG Insights newsletter on May 9