Chia Song Hwee, Deputy CEO, Temasek International spoke at the IMAS Digital Summit 2021 on 10 March.

Good afternoon, everyone!

Thanks so much for having me at your first ever Digital Summit.

Your themes and discussions for this event couldn’t be more pertinent to all of us in the investment management industry. One thing I would like to call out is that individually and collectively our institutions can and must play a proactive role in these themes and topics.

I will first set the context in terms of how the world is shaping up and then I will, in turn, share some thoughts on 4 topics, namely:

1) the investment landscape;
2) Industry 4.0;
3) cybersecurity; and lastly,
4) sustainability and climate change.

As I go through these topics, I hope to highlight the implications of the digitisation theme and more importantly, how we could achieve greater impact while fulfilling our respective mandates.

A Complex World

As you may have heard, we now live in a VUCA world. VUCA stands for Volatile, Uncertain, Complex, and Ambiguous. It was a term first used to describe the world after the end of the Cold War in the 1980s.

It is most apt today as we deal with the geopolitical events, climate change and other big structural changes in demographics and economics.

COVID-19 reinforces that. Everything we planned for in 2020 went out the window just a few months into the year! Climate change was the focus at the World Economic Forum, but as people flew home from Davos, the agenda shifted quickly to the pandemic, even before they landed.

Separately, the progress in technologies, both hard- and soft-ware, is enabling digitisation to disrupt businesses, industries and nations at scale and speed which is unsettling for many. Adding more to the VUCA world.

We must be prepared for more “black swan” events. And we’ll need to navigate more “unknown unknowns” in the decades ahead.

The Investment Landscape

First, let us look at the investment landscape.

It is one defined by low inflation, low interest rates, lower growth, and lower investment returns. Vastly different from a decade ago, where investors chased, and often achieved, high returns.

This landscape impacts how investors and asset owners like us allocate capital and construct portfolios.

There are rising geopolitical and trade tensions, increasing nationalism and protectionism. These trends risk disrupting operating models for companies and economies, creating even more uncertainties for investors like us.

The resulting uncertainties are worsened by the broad impact of COVID-19 on economies, political systems and unfortunately, communities as well.

It isn’t just traditional rivals like the US and China where these tensions play out. Just last week, Italy blocked a vaccine shipment bound for Australia. So, even friends can be collateral damage when a country seeks to protect its own interests.

We also see growing scrutiny of, and restrictions on, foreign investors, which may constrain investors’ options to invest and operate in various geographies. Capital becomes political – a topic of national security. You may wake up one day to realise that your capital, or even your investee companies, are no longer welcomed, adding risks and complexity to investment decisions.

Technology companies around the world have gained dominance. The “winner takes all” market is becoming common in a world that is digitising at unprecedented speed. Regulators have woken up and are pushing for new regimes –with a digital tax, rules on anti-trust, data localisation and, at its most radical, the breaking up of tech giants. Regulation risks in this segment have risen significantly, in what used to be a very safe zone.

Clearly, asset owners and managers have to rethink their approach to all these risks. I am sure, like Temasek, your focus is to create a forward looking and resilient portfolio; one that can withstand short term volatilities and uncertainties. One that
is shaped by longer term structural trends.

Equally important, collectively we could advocate for, and effect, better governance, transparency and behaviour: where capital of the good actors will be welcomed, and portfolios with strong ESG¹ DNA will continue to thrive.

While we can’t deal every situation, every change of regulation, and the unknown, we can certainly focus on the fundamentals of doing things right.

Industry 4.0

The second topic is Industry 4.0, which is transforming the way we live, work, and play. In the process, it is creating new opportunities for us.

Technologies such as artificial intelligence (AI), Internet of Things (IoT), blockchain, advanced robotics, and automation, are in full swing. The world is far more connected than it has ever been, especially with the development of smarter systems.

As we exploit the investment opportunities brought about by Industry 4.0, making the returns per our mandates, we should ask ourselves a few questions – do we have a Workforce 4.0 ready for Industry 4.0? Are people being reskilled and repositioned effectively? Should we invest in companies that ignore such needs?

But why are all these important? It is about ensuring long term sustainability of Industry 4.0. Otherwise, the social discords will undermine the progress and the full potential of what Industry 4.0 could bring.

Let me use a couple of examples to bring home the point. In the gig economy enabled by digitisation, we have issues about whether a participant is self-employed or an employee. This question alone led to street protests and court cases.

But if business owners and investors like us focus on long term sustainability of such businesses, we would have paid attention to safety, training, wellbeing and working conditions of the people. Then maybe, just maybe, the legal status of being self-employed or an employee could matter less.

Another example: Many of our portfolio companies have embarked on digital transformation journeys, including initiatives that embrace innovation and new technologies in the workplace.

Perhaps less obvious is the effort that these companies are making to ensure their workforces are upskilled to meet the requirements of this technology revolution.

Yes, some traditional jobs will disappear, so they are seeking to equip their people with skills to take on new opportunities created by this revolution.

Is Industry 4.0 relevant to the people working in Temasek, as an investment company? We strive to constantly transform, invest in tools and skills needed to harness the potential of technology.

In 2018, we identified AI and blockchain as emerging, innovative technologies that will fundamentally redefine the way we live our lives, and especially, the way we do business.

So, we formed two pilot groups, or we call Pods, to explore business ideas in both areas. These groups comprised cross-functional team members, trained in Agile approach, as a way for us to explore alternative ways of working in a non tech environment.

I’m glad to say both groups have made progress in the near-three years since. I will mention 2 examples relevant to the audience here. The first is our partnership with DBS and JP Morgan to develop a digital multi-currency payments network. This is a commercialisation effort out of the MAS’s Project Ubin, which I’m sure some of you are familiar with.

The second is our JV with Singapore Exchange to build Asia Pacific’s first, end-to-end purely digital infrastructure in the fixed income space.

We can’t stop the many drivers of disruption coming our way. If anything, COVID-19 has accelerated the digital transformation process. We were quick to adapt when we had no choice, both in our workplaces and in our behaviour as a consumer.

So, I am optimistic that the world will do well in the Industry 4.0 journey, especially when we work on not leaving people behind.

Cybersecurity

Next, I’d like to talk about cybersecurity.

As the digitisation trend continues, cybersecurity inevitably becomes a huge challenge and concern for many governments, companies, organisations, and even individuals.

How should we balance the need to embrace digital tools and technology, while ensuring that our data – and our customers’ – are well protected?

We see reports showing that cybercrime was up six-fold during COVID-19², and that it is expected to cost the global economy more than US$1 trillion this year.

Companies need to do more to fortify their cyber defence against data breaches, along with the reputational damage and financial costs that come with such incidents.

Other than companies being highly vulnerable to eye-popping fines due to breaches, cybersecurity rarely makes it to the Boardroom. In fact, cybersecurity is an existential and strategic risk that deserves the same attention as, say, safety matters for an airline.

As defenders, we know we have to get it right all the time; an attacker needs to be lucky once. But that is extremely hard, if not impossible, to do. The lack of funding, talents and knowhow are just a few reasons.

What if companies could come together and collaborate to address different aspects of cybersecurity risks. Perhaps with collective power we have a better chance of minimising and mitigating such risks.

As assets owners and investors, we could play a constructive role to encourage or facilitate such efforts. Just over a year ago, Temasek established a global cyber risk management company, called ISTARI, with the aim to build a network of capabilities that enables such collective power.

I want to leave you with one last thought on this topic. Could a business be so good at cybersecurity that it becomes a strategic differentiator against its competitors? Maybe a change in mindset to think constructively could be useful to all of us here in defence of cyber attacks.

Sustainability and Climate Change

Let me now talk about something that Temasek is very passionate about – the role of business and sustainable finance in achieving a better, more sustainable world.

When we think about our collective future, what do we want to create and leave behind, for future generations? The purpose of capital becomes increasingly important in defining the role of investors today.

To secure a sustainable future, the foremost global issue we must address is climate change.

Climate change is real. Global warming is impacting life on Earth, and endangering human lives. Data and science point to the urgency of reversing the harm done to our planet.

We all have a part to play in addressing it — governments, companies, investors and individuals. We can’t pass this off as someone else’s problem to solve.

Will deploying capital into solutions and innovations help us achieve a better and a more sustainable world?

I think so, but we must all focus on the long term sustainability of our business models. Rethink the way we do business; develop solutions that are less resource-intensive. Whether we invest, manufacture goods or provide services, the sustainability of our business model depends on healthy communities and a healthy planet.

Our approach must shift, from a focus on quarterly profits, to delivering sustainable value over the longer term.

For many businesses, we know to think of customers and shareholders. Increasingly, we must also think about people who are neither – a broader group of stakeholders. The contribution a business makes to its wider community is a key component of its sustainability.

Many companies are already on an ESG journey. In fact, 9 [of the 10] leading asset managers in the world have already incorporated ESG frameworks in their business, that include climate change.

Investors like us are stepping up to do our part in the carbon abatement process. We are putting capital to work in climate-based solutions, decarbonisation and other innovations to create value for our stakeholders, while doing good for our planet.

Globally, there are sectors that provide real opportunities for us to do this: food, water, waste, energy, materials, clean transportation, and urban development.

So where we can do well in those spaces, we aspire to do right and do good for our planet as well.

Private capital is not only about funding proven business models. It’s also about investing in promising, yet possibly unproven, technology solutions to global sustainability challenges.

We’ve seen what happened with novel foods, such as the Impossible Burger. When we first came across Impossible Foods in 2013, the cost of producing an Impossible Burger was more than 130 US dollars per kilogram. Within five years, through innovation, the cost came down to less than 9 US dollars per kilogram. Now, it’s half that again!

Yes, this is the pace of technological evolution, but not just technology alone. The pace of innovation is accelerated by the availability of capital.

I would like to briefly touch on another matter. Carbon taxes will come into force, but so will carbon credits. Innovations and technologies like blockchain are essential to enable markets and exchanges for carbon credit trading.

Market transparency and price discovery mechanisms are key to promote efficient allocation of resource and capital. This is clearly an exciting space, where most, if not all of us here, have the opportunity to participate and contribute.

Temasek is absolutely committed to doing our part for sustainability, and to tackle climate change.

As a firm, we achieved carbon neutrality last year. By 2030, we aim to halve the aggregate carbon emissions attributable to our portfolio, with a goal of reaching net zero by 2050. These are very bold commitments. Achieving them will be hard. However, they are necessary for our planet, for our community and for our livelihoods.

We’re working with others through multilateral groups, because partnering with other like-minded parties can help us achieve more together.

We have embedded ESG considerations in all our investment decision-making processes, along more traditional financial metrics.

We're also seeking to use sustainable finance as an enabler for change, and increasing our activities in impact investments.

Yes, the list of things to do is very long, and for sure, it will continue to grow. It has to be that way because of the challenges that lie ahead of us.

As partners in creating a sustainable future, we urge every individual, every business, to think about how you would want to shape the purpose and future of your capital to achieve a better, more sustainable world.

Greater Collaboration and a Shared Responsibility

Now, let me conclude by saying that disruptions on all fronts are unavoidable.

Rather than being forced to re-examine business models, I prefer to look at it this way: we all have an opportunity to embrace disruption, and not fear it. There are disruptors, and there are those who are disrupted. Which one would you rather be?

I hope the sessions at this event inspire and drive all of us to play a positive role in the future of capital – digital or not! Most importantly, thank you for being part of the conversation.

Thank you.

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¹ ESG being Environmental, Social and Governance
² https://purplesec.us/resources/cyber-security-statistics/