GIC, Temasek eye trillions of growth in climate adaptation market

Singapore’s two largest asset owners, GIC and Temasek, see attractive investment opportunities in climate adaptation solutions – an area relatively underfunded but equally important as decarbonisation which received the bulk of climate-conscious capital in recent years.  

In two separate reports released in the same week, the funds – which collectively manage an estimated $1.1 trillion in assets according to consultancy Global SWF – said climate adaptation is an investment theme understudied by private investors due to the fact that the public sector has accounted for most of its funding in recent years and it is seen as a government responsibility. But adaptation covers a broad range of commercial subsectors including weather intelligence, wind and flood-resistant building materials, indoor cooling and water storage. 

Authors of the GIC paper, senior vice president Wong De Rui and assistant vice president Kim Kee Bum in the sustainability office, told Top1000funds.com that the fund has selectively invested in adaptation solutions but is still in the “early stage” of evaluating the broader universe of opportunities.  

Across 14 climate adaptation solutions examined, the GIC report estimates that the corresponding opportunity set in public and private debt and equity could increase from $2 trillion today to $9 trillion by 2050. 

Some more bullish analysts are already saying climate adaptation strategies could deliver better returns than mitigation strategies – which focus on reducing greenhouse gas emissions – in the short term. Jefferies estimated that over a one-year horizon climate adaptation strategies could bring 13.5 per cent extra return than mitigation strategies, and 21.1 per cent over a three-year horizon, based on an analysis of 300 companies across sectors. 

But the return comparison is not so straightforward for Wong and Kim. “Our report highlights that many adaptation solutions also contribute to emissions mitigation, making it challenging to draw a clear distinction between the two,” they said. 

“We view climate adaptation as a significant and complementary investment theme alongside decarbonisation. Rather than prioritising one theme over the other, we focus on exploring investible opportunities in both.” 

Wong and Kim said GIC is conscious that climate adaptation is a rapidly evolving space and is carefully assessing the economic viability and scalability of any potential investment.  

“Understanding climate adaptation opportunities requires an interdisciplinary approach of blending scientific evidence with traditional industry knowledge; this, coupled with the variability in standards and taxonomies for adaptation solutions further complicate investment decisions,” they said.  

Tale of two in PE 

Temasek’s report focuses on breaking down private equity opportunities in climate adaptation. Investors in the asset class could help plug the significant gap in climate adaptation projects’ financing needs, which is projected to grow to between $0.5 trillion and $1.3 trillion a year by 2030, it said.  

But at the moment, PE investors often must choose between two types of strategies: investing in pureplay adaptation solution companies which tend to be early-stage targets with higher risks, or larger growth or buyout targets where adaptation only accounts for a small portion of the overall revenue. 

“These dynamics mirror the climate mitigation industry in its early days. Private investors approached that market by buying into large companies with legacy businesses that can provide cashflows as a way of investing in decarbonisation-focused companies,” the report said.  

“Similarly, many established players are (re-)aligning their strategies with Climate A&R (adaptation and resilience) as a growth vector.” 

The report also notes that many of the adaptation solutions are tailored to local climate needs but have the potential to be applied globally. For example, several wildfire management providers, which was a market almost entirely confined in North America, are experiencing growth outside of the US due to wildfire incidents in Europe.  

“The localised nature of Climate A&R markets allows investors to enter at lower valuations before market expansion can be fully priced in,” the report said.  

“Private equity firms have the opportunity to invest in areas where climate risks are still underappreciated.” 

Both asset owners are headquartered in Singapore where there is urgent need for climate adaptation solutions. Sitting on the Southern tip of the Malay Peninsula, the city-state faces challenges such as sea level change, which could have a mean rise of 1.15m by the end of the century, according to Singapore’s National Climate Change Study in 2024.  

Coupled with high tides and storm surges, some estimates suggest that one-third of Singapore will be vulnerable to coastal flooding.  

Wong and Kim from GIC noted the physical risks locally are “severe and imminent” but stressed that they will intensify across all regions, and climate response needs to be coordinated on a global scale.  

“Our research indicates that the adaptation investment opportunity remains significant regardless of the climate scenario, so investors can build conviction in this space without having to predict the specific climate pathway that will unfold,” they said. 

“This analysis reinforces our view on the growing importance and potential of adaptation investments.” 

The GIC and Temasek reports were conducted in conjunction with Bain & Co and BCG respectively.