Focusing on Climate Change

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

The Board Risk & Sustainability Committee (RSC) was established in January 2022 to enhance focus on opportunities and risks arising from sustainability trends, including climate change, and other financial, reputational, operational and cyber risks.

The RSC supports the Board in its oversight responsibilities by reviewing, among other things, our portfolio risk appetite and profile, material Environmental, Social and Governance (ESG) matters, risk management and sustainability frameworks and policies, as well as key public statements relating to risk, sustainability and ESG. The RSC coordinates with other standing Committees of the Board, where relevant, in its oversight of risk and sustainability matters, such as the Audit Committee and the Leadership Development & Compensation Committee. 

At the management level, the 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.

The Senior Divestment and Investment Committee (SDIC) takes into account climate-related risks and opportunities as they decide on investments and divestments and make other decisions to manage and shape our portfolio.

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

To read more on our governance framework, please see Corporate Governance.

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 assess the impact of climate change on the economy and individual businesses. In this context, we consider two dimensions: 1) physical risk, both chronic (longer-term effects e.g. on productivity) and acute (extreme weather events); and 2) transition risk, which includes 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 responses 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.

Our baseline features a climate scenario of Medium Ambition, which assumes an acceleration in global commitment towards mitigation efforts by 2025 that limits warming to around 1.8°c from pre-industrial levels. More specifically, this scenario references the Inevitable Policy Response’s Forecast Policy Scenario (IPR FPS), a high conviction policy-based forecast that takes into consideration various key factors such as political readiness and societal momentum of countries.  

Given the inherent uncertainty around the trajectory of the global geopolitical, macroeconomic backdrop and returns, in T-GEM we simulate our 20-year expected returns under different alternate scenarios. We model two alternate climate scenarios:

1. Low Ambition, with zero transition impact upfront but high physical costs expected in the longer-term as a result, referencing the Network for Greening the Financial System (NGFS) Hot House World scenario with 90th percentile physical damages;
2. High Ambition, with much higher near-term transition costs but as a result sees lower longer-term physical costs relative to the baseline, referencing the NGFS Net Zero scenario.

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, refreshing our scenarios and gaining insights through regular engagement with leading experts in this field. 

The table below summarises the scenarios:

There are inherent risks whenever we invest, divest, or hold our assets, and wherever we operate. Therefore, 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. 

To minimise operational risks, we embed risk management in our systems and processes. These include our approval authority delegation, company policies, standard operating procedures and risk reporting to our Board.

Formalised processes instill the discipline to consider various perspectives, including ESG risks. These include climate risks, both transition and physical, as an integral part of these processes.

We have introduced an expanded approach to include climate analysis in our ESG integration framework. The analysis is mandatory for all new investments that are evaluated by our Investment Committee. It examines climate impact from several perspectives: 

• Potential investee company’s contribution to climate change through its carbon footprint; 
• Impact of climate change from physical and transition risk perspectives; and
• Any potential new opportunities arising from technology innovations as well as evolving customer needs. 

We also apply an internal carbon price, currently US$50 per tonne of carbon dioxide equivalent (tCO₂e) in our investment evaluations to account for the potential exposure of an investment to transition risk.

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.

The climate-related risks and opportunities associated with our business as an investment company can be divided into i) emissions attributable to our operations (Scope 1, Scope 2 and Scope 3, excluding our investment portfolio); and ii) emissions attributable to our portfolio.

i) Emissions Attributable to Our Operations

We set and achieved our target of carbon neutrality as a company in 2020, and have maintained this status.

Annual Environmental Footprint

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. Over the longer term, we will continue to explore opportunities to source electricity from renewable energy sources, review the need for business travel closely, as well as leverage technology such as teleconferencing as we seek to reduce our emissions footprint. Our residual emissions are offset through purchase and retirement of carbon credits from voluntary carbon markets. 
 

For a detailed breakdown, please click here to view the sustainability indicators of our operations.

ii) Emissions Attributable to Our Portfolio

With respect to our portfolio, we target to reduce the net carbon emissions to half the 2010 levels by 2030, with the ambition to achieve net zero carbon emissions by 2050.

Towards Net Zero

We use the following portfolio emission metrics in line with international standards, such as the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) for Asset Owners as well as the Greenhouse Gas (GHG) Protocols:

Our portfolio emissions encompass Temasek’s direct investments in listed and unlisted equities. Our investment positions in private equity funds, credit and other assets are excluded.

The portfolio emissions reported include Scope 1 and Scope 2 emissions of the underlying companies based on the latest available data sets.

We use a combination of company reported emissions data and modelling approaches to establish our portfolio emissions based on our proportionate shares (i.e. ownership interests) in the assets.

We adopt the following hierarchy in data sources as we establish our portfolio emissions. The hierarchy takes into account data availability and timeliness of reported data, using company reported data where available:

1. Company reported data: GHG emissions data that is reported by the company, either directly to Temasek or made available through S&P Global Sustainable1.

2. Company-specific estimates: GHG emissions for each company modelled or estimated by Temasek or S&P Global Sustainable1 using relevant industry level carbon intensity or carbon efficiency averages as proxies (GHG emissions normalised by revenue/ market capitalisation/ other relevant operational unit of measurement). In case industry averages do not provide a meaningful proxy for the company, carbon intensity or efficiency data of the company or its comparable peers may be used instead.

PricewaterhouseCoopers LLP, an independent third party, has undertaken a limited assurance engagement on the selected portfolio emission metrics for financial year ended 31 March 2022. Their assurance report can be found here.

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

We engage our major portfolio companies regularly on their climate transition plans as part of our efforts to achieve a decarbonised and carbon efficient portfolio. In our engagements with portfolio companies, we share our expectations around setting climate targets in line with science, drawing up compelling transition plans and providing relevant disclosures in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). To address the topic of physical climate risk, we have partnered a leading re-insurance provider to provide portfolio companies with a better understanding of their exposure to physical climate risks, while enabling us to have a better grasp on these risks at the portfolio level.

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 Green Finance Industry Task force under the Monetary Authority of Singapore's Financial Centre Advisory Panel, the World Economic Forum (WEF), the Focusing Capital on the Long Term Initiative and the Sustainability Accounting Standards Board (SASB).