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Gunung Capital eyes sustainability investments beyond steel industry

Chloe Lim
Chloe Lim8/25/2022 03:22 PM GMT+08  • 8 min read
Gunung Capital eyes sustainability investments beyond steel industry
Fu: Focusing on steel has been good [for us]; however, it is important to us to diversify away from that as well and look into how we can benefit from greener investments. Photo: Gunung Capital
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A “low-emission” future is what many companies are gunning for as they grow their business. For Gunung Capital, a Singapore-based asset management firm focused on impact investments guided by environmental, social and governance (ESG) principles, this process starts at home.

Gunung Capital is linked to the Gunung Steel Group, Indonesia’s leading steel conglomerate whose flagship entity is the listed Gunung Raja Paksi (GRP) which has increased its market value to some $740 million today by riding on Indonesia’s industrialisation and infrastructure growth which goes hand in hand with higher demand for building materials.

Kelvin Fu, Gunung Capital’s co-founder and managing partner, says the firm is working on shifting GRP’s manufacturing activities towards “low-carbon steel”. This means producing steel via electric arc furnaces or recycling scrap metal, as opposed to the heavily carbon-intensive method of blast furnaces. “We are currently in the minority, as only 20% of the world chooses to use electric arc furnaces to procure low-carbon steel at present,” says Fu in an interview with The Edge Singapore.

Gunung Capital is also doing a net-zero study for GRP so that the latter can reduce carbon emissions in its production every year. “If we don’t change, we become stranded, making our products uncompetitive [in the long run],” he says.

At present, most steel producers in Indonesia use coal to fuel their milling process — a heavy source of pollution. “We are now in discussion to switch these [plants out] to entirely renewable energy sources instead,” he adds. Fu points out that modifying the energy mix [of the process of making steel] to a greener one while continuing to decarbonise existing operations, is an important step for Gunung Capital in their work in impact investments.

“The way we make steel, the way we deliver the steel to our customers — that entire value chain — must be able to be tracked, verified and audited [by us] for our consumers to understand its [reduced] carbon footprint so that they know, when they buy the steel from us, that it’s as green as you can get for now,” says Fu.

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When Gunung Capital was founded in 2020, its initial aim was to be a family office to better manage the controlling shareholders’ investments in the listed company and to also better support their investments in other areas beyond steel and cement. Interestingly, ESG considerations were not the original intent, claims Fu. “The intent then was to invest in other industries, applying some of our own capital as well as our own expertise to help these companies and industries grow. The real [question we were going after] in the beginning when we started was — how do we manage the business better?” Fu adds.

However, with time, it became clear that ESG considerations were increasingly relevant and important for GRP as a way to tap capital while effecting change in the space. As a result, the private investment company has articulated plans to invest $500 million in ESG assets, particularly in decarbonising its steel and other manufacturing businesses it manages.

“Without Gunung Capital, we would be very narrow-minded [as a business],” says Fu. “Focusing on steel has been good [for us]; however, it is important to us to diversify away from that as well and look into how we can benefit from greener investments.”

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Making steel green

The steel industry is the third-largest contributor to air pollution and known for having one of the “dirtiest” manufacturing processes. According to Fu, this poses a huge problem for sustainability efforts and the production efficiency of large steel companies in the long run.

But the truth is that the traditional steel industry is here to stay despite its negative image, at least in the near future. This is considering how steel is very much an essential commodity in today’s world and is indispensable in many fields such as construction, automotive and electrical equipment.

According to the World Steel Association in an industry outlook released in April, worldwide steel demand grew by 2.7% last year and will grow by another 0.4% this year to reach 1.84 billion metric tonnes. It is expected to grow a further 2.2% to hit 1.88 billion metric tonnes come 2023.

Maximo Vedoya, chairman of the World Steel Association Economics Committee, says last year’s recovery from the pandemic by the industry turned out to be stronger than expected in many regions, despite continuing supply chain issues and Covid-19 waves caused by new variants.

“However, a sharper than anticipated deceleration in China led to lower global steel demand growth in 2021. For 2022 and 2023, the outlook is highly uncertain. The expectation of a continued and stable recovery from the pandemic has been shaken by the war in Ukraine and rising inflation,” states Vedoya in the association’s outlook commentary.

Separately, independent market intelligence by Visiongain Research published on Feb 3 notes that the global steel market, which was valued at US$1.09 trillion in 2020, is projected to continue growing at a CAGR of 3.9% from 2021 to 2031, thanks to growing investment in the infrastructure sector due to the urbanisation of emerging countries even as the sector embraces new technology and sustainable policies.

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These numbers reinforce Fu’s point that “the steel industry remains very much irreplaceable” and “therefore crucial that the group work towards a more sustainable and green production of the material while aiming for efficient production as well”.

New sustainability horizons

Gunung Capital is also actively looking out for companies outside of the realm of steel and construction but with like-minded intentions to make their operations more carbon-neutral, expanding the range of impact investments they work on in Asia.

Gunung Capital recently signed a memorandum of understanding (MOU) with TotalEnergies, a multinational integrated energy and petroleum company, to install solar panels throughout their plants to work towards a greener future for the oil and gas industry. According to Fu, the solar panels are expected to reduce their carbon footprint by 47,387 tons per year.

The textile industry has also caught Gunung Capital’s eye. “Like steel, textiles are not easily replaceable in this world — everyone needs these materials for clothes,” says Fu. “However, there are so many textile companies that can become ‘stranded’ [more and more so in this era], if they do not change the way they make clothing and continue to produce a great amount of waste.”

This is also increasingly relevant for businesses in fashion, with developed markets such as the EU imposing strict rules on the fast fashion industry, compelling the producers in Asia that export to Europe to work towards more eco-friendly production methods.

Within the textile industry, Fu is not limiting himself to just the producers. “Increasingly, pre-owned goods make good business these days,” he points out. “We are currently evaluating a company that acts as a middleman in the distribution process of pre-owned goods from clothing labels, which encourages consumers to purchase second-hand clothes instead of new ones [such that there is less wastage created by the fashion industry].”

“The best part is, the company is endorsed by the labels of the pre-owned clothing they are distributing, so these brands don’t see them as competitors in any way; rather, they are partners instead” he adds, “this is because of the circular economy created, which ultimately benefits the businesses at both ends, and now the environment at large.”

Fu explains that one of Gunung Capital’s main roles in working with these companies is to help them to understand the problems of what is happening in the environmental space at a macro level so that they have a better working business plan moving forward. “This is in addition to applying what we have learned in wider manufacturing processes to help these companies reduce waste effectively and to be, on a whole, more ESG-friendly,” he says.

Other areas that interest Gunung Capital include food reproduction and climate technology systems. “We are also looking at companies that work with sustainability data and the licensing of it to better inform consumers the size of each product’s carbon footprint or for companies’ own tracking purposes to ensure they meet certain eco-licensing requirements in their business,” Fu adds.

When asked about the future direction of ESG projects at large, and what potential the space has in store, Fu says that while ESG investments may be on everyone’s minds, it is more vital to look towards distributing resources more equitably moving forward.

“For us at Gunung Capital, we like to look at sectors that are not easily replaced or less well-known,” Fu says. “Previously, there has been a lot of attention and resources devoted to mobility and transportation sectors, and I think it would be valuable to turn our focus to other areas that have not been invested in as much.”

“Many of us today talk about ESG as an important [aspect of what businesses should be looking towards or pursuing],” Fu adds. “I believe that this should not just be regarded as a theme, but as a language for the future.”

Photo: Gunung Capital

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