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Focusing on Climate Change

As a generational investor, Temasek understands the importance of climate-related financial information in ascertaining the risks associated with climate change to our portfolio. This information guides our efforts to support the transition to a low carbon economy.

We believe that climate-related risks and opportunities can be material for many companies, and we encourage them to make use of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) when assessing climate-related risks and to include relevant information in their annual disclosures.

As an asset owner, active investor and shareholder committed to delivering sustainable value over the long term, we have publicly expressed our support for the recommendations issued by the TCFD and continuously work to enhance our practices and disclosures as well as those of our portfolio companies.

1 Figures are based on estimates for Scope 1 and 2 emissions.
2 Carbon dioxide equivalent (CO2e) is a standard unit used to compare emissions from different types of greenhouse gases.

These are Temasek’s climate-related disclosures in areas of: Governance; Strategy; Risk Management; Metrics & Targets; and Engagement with Our Portfolio & Stakeholders.  

Governance

Climate-related considerations are embedded in Temasek’s governance structures.

Our Board has oversight of financial and systemic risks arising from climate change which can impact the value of our portfolio over the long term and the well-being of our institution, and approves our Environmental, Social and Governance (ESG) policy.

Our Strategy, Portfolio and Risk Committee (SPRC) oversees our ESG policy and the integration of ESG considerations, including climate change, in the firm’s strategy, investment, risk and operational management processes.

Our Senior Divestment and Investment Committee (SDIC) takes into account climate-related risks and opportunities as they make decisions to manage and shape our portfolio.

Management periodically updates SPRC and the Board on the climate-related risk exposure of our portfolio and seek their endorsement for our climate-related strategies.

Strategy

As a generational investor, we recognise that there is an urgent need for solutions that support sustainable, longer and more fulfilling lives, while protecting the natural environment. We have been investing in structural trends driven by transformational technologies, sustainable living, longer lifespans, and changing consumption patterns as incomes grow, and lives are uplifted. Going forward, we will increasingly reshape our portfolio in line with these trends.

In line with our longer term portfolio strategy, we are in the process of better understanding the impact of climate change on the economy and individual businesses. In this context, we consider two dimensions: 1) physical risk, which is the impact of the environment on physical assets and productivity; and 2) transition risk, which is the risk of an abrupt devaluation of assets due to regulations that facilitate the shift to a greener economy.

Given the nascent nature of this field and the uncertain path ahead, we adopt a scenario-based approach to ascertain the potential impact of different temperature pathways. In our analysis, we cater for varying response from corporates, governments and households to mitigate climate-related risk. By doing so, this enhances the dynamism of our approach.

We incorporate the climate scenario analysis, alongside other macroeconomic or geopolitical events, within our Temasek Geometric Expected Return Model (T-GEM), which uses a scenario-based approach to simulate our 20-year long term expected returns.

We use a Medium Ambition climate scenario in our baseline, which assumes all countries follow through with the key commitments adopted in the Paris Agreement. More specifically, we apply the Shared Socioeconomic Pathway 2 (SSP2) with RCP (Representative Concentration Pathway) 4.5.

Given the inherent uncertainty of the global trajectory and returns, in T-GEM, we simulate our 20-year expected returns under different alternate scenarios. We model two alternate scenarios: 1) one of Low Ambition, with zero transition impact but high physical costs expected in the longer term; and 2) one of High Ambition, with much higher nearer term transition costs to avert or reduce the longer term physical costs.

The table below summarises the scenarios:

Name

Scenario

Description

Temperature increase
(by 2100)

Low Ambition

SSP2-Baseline

Business as usual (BAU) scenario reflecting only existing climate policies and predicted technology cost trends, with no further policy changes.

4.0°C

Medium Ambition

SSP2-45

Incorporates the likely effects of announced policies, including the Nationally Determined Contributions (NDCs) adopted as part of the Paris Agreement.

2.6°C

High Ambition

SSP2-26, FPS

Assumes late policy action to limit global warming below 2°C. There is a temperature overshoot in mid-century, and reliance on negative emissions technologies.

1.7°C

We expect this to be an iterative process as we gain further insights into climate science, regulatory developments and actions from various key stakeholders. Therefore, we seek to evolve and enhance our analysis moving forward, through regular engagement with leading experts in this field.

Risk Management

Identification, assessment and management of climate-related risks form an integral part of overall risk assessment for new investments that we make, and across our portfolio. Over the long term, an understanding of climate-related risks will be embedded in our systems and processes.

The evaluation of ESG risks, including analysing a company’s emissions profile in absolute and relative terms, its physical and transition risks and climate transition strategies, is part of our overall investment analysis and is taken into account by the SDIC when it makes investment decisions.

Depending on the size or risk significance, these proposals may be escalated to our Executive Committee or Board for a final decision. Functional teams, including the Sustainability team and Risk Management Unit, provide additional specialist perspectives to SDIC and to the Executive Committee or Board.

For the success of our portfolio over the long term, we continuously track and manage climate-related risks to our portfolio, including at the individual asset level. We periodically update our overall ESG / climate-related risk exposure of our portfolio to Senior Management and our Board.

To read more on our Risk Management approach, please see Managing Risk.

 

Metrics & Targets

The climate-related risks and opportunities associated with our business as an investment company can be divided into 1) risks and opportunities in the context of our operations (Scope 1, 2 and part of Scope 3*); and 2) risks and opportunities relating to our portfolio (Part of Scope 3). 

  1. We measure total emissions as well as carbon intensity (carbon emissions / employees) from our operations, and we aim to reduce emissions both in absolute and relative terms. With respect to the risks and opportunities in the context of our operations, electricity consumption across our offices and business travel activities constitute a significant part of our emissions. In the longer term, we are exploring opportunities to source electricity from renewable energy sources. Unavoidable emissions are offset through purchase and retirement of carbon credits from voluntary carbon markets.

  2. With respect to emissions relating to our portfolio, we are working with an internationally recognised consultant to review the total attributable carbon emissions, carbon intensity, carbon efficiency of our listed equities portfolio, using weighted average carbon intensity as the metric. We acknowledge the inherent limitations around data quality, consistency, availability, timeliness and comparability of emissions data. As greenhouse gas emissions reporting becomes more developed over time, we hope that improved data sets will help us refine methodologies and modelling approaches used. For our portfolio of unlisted equities, where emissions data is not commonly available or accessible, we focus on gaining a better understanding of the companies in high emissions industries and use relevant modelling approaches to estimate portfolio emissions.

We have committed to carbon neutrality in our own operations by 2020 and achieved this target by 31 March 2020 through the purchase and retirement of carbon credits from the voluntary carbon markets.

With respect to our portfolio, we aim to halve the net emissions of our investment portfolio by 2030.

*Scopes 1/2/3 as defined by the GHG Protocol: Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Engagement of Our Portfolio & Stakeholders

Climate change, including the identification and proactive management of associated risks and opportunities is one of the focus areas of our external engagement.

In 2019, we engaged the leadership as well as the operational teams of our Singapore-based portfolio companies on issues relating to climate change, shared knowledge around carbon measurement and expressed our expectation to understand their exposure to climate-related risks and opportunities.

Through our Ecosperity platform, we invite globally leading climate scientists, experts on natural resource management as well as climate-related financial disclosures to provide insights on relevant topics, such as physical climate risks, carbon emissions associated with the food value chain, carbon pricing as well as approaches to carbon offsetting to the broader business community.  

Temasek is also an active participant in local and global dialogues that relate to environmental disclosures and is a member of the World Economic Forum (WEF) and the Sustainability Accounting Standards Board (SASB). 

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