Disclosures on Climate-Related Risk Management

Aligned with the recommendations from the Securities and Futures Commission (the “SFC”) and Task Force on Climate-Related Financial Disclosures (“TCFD”), Gobi Admiralty Limited (“Gobi”) is pleased to share our developing commitment and approach to managing climate-related risks. This statement provides a high-level overview of the framework adopted by Gobi in governing its management of climate-related risks.

Gobi firmly believes that contributing to addressing climate change is crucial to creating long-term value for our clients. We also consider this as part of the concerted effort with the global platform of Gobi Partners in implementing our ESG initiatives.

A. Governance

The Board of Directors of Gobi discharges its stewardship responsibilities including those regarding climate change risks and opportunities.

The Board oversee the management of climate-related risks by a dedicated team that:

  • promotes internal awareness and understanding of climate-related threats and opportunities;
  • develops internal capacity to capitalise on climate-related risks and opportunities;
  • works together with investment team to integrate sustainability considerations across investment processes and drive sustainable investment research;
  • escalates to the Board where needed and appropriate, on material climate-related risk issues;
  • reports to the Board annually on reviews of the risk management framework and implementation covering climate-related risks.

B. Investment Management/ Strategies

As a venture capitalist, Gobi considers both climate-related risks and opportunities in the assets we manage.

Climate-Related Risks

With reference to the Task Force on Climate-related Financial Disclosures, we define climate-related risks as both transition and physical risks.

Transition risks are business-related risks that follow societal and economic shifts toward a low-carbon and more climate-friendly future, which includes policy risks such as increased emissions regulation and climate-related standards, and legal risks such as lawsuits claiming damages from entities.

Physical risks are the risks associated with extreme climate events such as floods, wildfires, hurricanes and typhoons, or risks related to long-term shifts in the climate such as rising sea levels, a rising heat index, prolonged droughts and flooding.

The following exhibit is a detailed breakdown of the climate-related risks and potential financial impacts over the short and long term:

Climate-Related Risks Potential Financial Impacts
Transition Risks

a) Policy and Legal

  • Increased pricing of greenhouse gas emissions
  • Enhanced emissions-reporting obligations
  • Mandates on and regulation of existing products and services
  • Exposure to litigation
  • Increased operating costs (e.g., higher compliance costs, increased insurance premiums)
  • Write-offs, asset impairment, and early retirement of existing assets due to policy changes
  • Increased costs and/or reduced demand for products and services resulting from fines and judgments

b) Technology

  • Substitution of existing products and services with lower emissions options
  • Unsuccessful investment in new technologies
  • Costs to transition to lower emissions technology
  • Write-offs and early retirement of existing assets
  • Reduced demand for products and services
  • Research and development (R&D) expenditures in new and alternative technologies
  • Capital investments in technology development
  • Costs to adopt/deploy new practices and processes

c) Market

  • Changing customer behavior
  • Uncertainty in market signals
  • Increased cost of raw materials
  • Reduced demand for goods and services due to shift in consumer preferences
  • Increased production costs due to changing input prices (e.g., energy, water) and output requirements (e.g., waste treatment)
  • Abrupt and unexpected shifts in energy costs
  • Change in revenue mix and sources, resulting in decreased revenues
  • Re-pricing of assets (e.g., fossil fuel reserves, land valuations, securities valuations)

d) Reputation

  • Shifts in consumer preferences
  • Stigmatization of sector
  • Increased stakeholder concern or negative stakeholder feedback
  • Reduced revenue from decreased demand for goods/services
  • Reduced revenue from decreased production capacity (e.g., delayed planning approvals, supply chain interruptions)
  • Reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention)
  • Reduction in capital availability
Physical Risks

a) Acute

  • Increased severity of extreme weather events such as cyclones and floods

b) Chronic

  • Changes in precipitation patterns and extreme variability in weather patterns
  • Rising mean temperatures
  • Rising sea levels
  • Reduced revenue from decreased production capacity (e.g., transport difficulties, supply chain interruptions)
  • Reduced revenue and higher costs from negative impacts on workforce (e.g., health, safety, absenteeism)
  • Write-offs and early retirement of existing assets (e.g., damage to property and assets in “high-risk” locations)
  • Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants)
  • Increased capital costs (e.g., damage to facilities)
  • Reduced revenues from lower sales/output
  • Increased insurance premiums and potential for reduced availability of insurance on assets in “high-risk” locations

Climate-Related Opportunities

We also consider climate-related opportunities in the assets we manage.

Climate-Related Opportunities Potential Financial Impacts
Resource Efficiency
  • Use of more efficient modes of transport
  • Use of more efficient production and distribution processes
  • Use of recycling
  • Move to more efficient buildings
  • Reduced water usage and consumption
  • Reduced operating costs (e.g., through efficiency gains and cost reductions)
  • Increased production capacity, resulting in increased revenues
  • Increased value of fixed assets (e.g., highly rated energy-efficient buildings)
  • Benefits to workforce management and planning (e.g., improved health and safety, employee satisfaction) resulting in lower costs
Energy Source
  • Use of lower-emission sources of energy
  • Use of supportive policy incentives
  • Use of new technologies
  • Participation in carbon market
  • Shift toward decentralized energy generation
  • Reduced operational costs (e.g., through use of lowest-cost abatement)
  • Reduced exposure to future fossil fuel price increases
  • Reduced exposure to greenhouse gas emissions and therefore less sensitivity to changes in cost of carbon
  • Returns on investment in low-emission technology
  • Increased capital availability (e.g., as more investors favor lower-emissions producers)
  • Reputational benefits resulting in increased demand for goods/services
Products and Services
  • Development and/or expansion of low-emission goods and services
  • Development of climate adaptation and insurance risk solutions
  • Development of new products or services through R&D and innovation
  • Ability to diversify business activities
  • Shift in consumer preferences
  • Increased revenue through demand for lower emissions products and services
  • Increased revenue through new solutions to adaptation needs (e.g., insurance risk transfer products and services)
  • Better competitive position to reflect shifting consumer preferences, resulting in increased revenues
  • Access to new markets
  • Use of public-sector incentives
  • Access to new assets and locations needing insurance coverage
  • Increased revenues through access to new and emerging markets (e.g., partnerships with governments, development banks)
  • Increased diversification of financial assets (e.g., green bonds and infrastructure)
  • Participation in renewable energy programs and adoption of energy-efficiency measures
  • Resource substitutes/diversification
  • Increased market valuation through resilience planning (e.g., infrastructure, land, buildings)
  • Increased reliability of supply chain and ability to operate under various conditions
  • Increased revenue through new products and services related to ensuring resiliency

Factoring Material Climate-Related Risks Into the Investment Processes

Gobi integrates climate-related risks considerations into the investment processes from idea origination, due diligence, post-investment value-creation, to investment exit, these considerations include:

  • Identifying and implementing a Negative List of sectors and verticals which are more likely to be adversely affected by the transition to a low-carbon economy;
  • Considering second-level effects on companies within the value chain of those sectors in the Negative List and evaluate whether the investment portfolio is unintentionally skewed towards these sectors;
  • Reviewing investment portfolio’s climate-related risk exposures by analysing the positioning of the investee companies’ business models towards risks and opportunities arising from climate challenges;
  • Reviewing climate-related concerns and issues flagged by the Investment Committee in conjunction with investment decisions making.

C. Risk Management

Gobi regularly reviews the effectiveness of its risk management systems to ensure that any potentially significant deterioration in climate-related risks is followed up promptly.

As part of the initiatives to value-add and safeguard risk control, Gobi plays a role in encouraging investee companies to adopt sustainable business practices including those regarding climate change risks and opportunities. Where applicable, Gobi engages portfolio companies by:

  • having regular discussions with their management to understand their policies and activities to manage climate-related risks and opportunities;
  • seeking commitments from investee companies and monitoring their progress in addressing climate-related concerns;
  • using voting authority to drive disclosures and practices related to climate-related matters. This may involve voting against the re-election of the company directors and senior executives of investee companies with poor overall ESG practices, or unsatisfactory disclosures of climate-related matters.

While the extent of the climate-related risk exposure may not necessarily be known or explicitly disclosed by the investee companies in the investment portfolios managed by Gobi, we may rely on proprietary research or subscribe to third-party information and datasets to assess climate-related risks, to the extent that such information is available at a reasonable cost.