Embedding ESG as Part of Our Investment Process
Generating sustainable returns over the long term depends on stable, well-functioning, and well-governed social, environmental, and economic systems. The decisions we take today, as an asset owner, will impact future generations.
Environmental, Social, and Governance (ESG) risk is included in the Investment Risk pillar of Temasek’s Organisational Risk Management Framework. We have integrated an ESG framework across our investment process from pre-investment due diligence to post-investment engagement. This enables us to better manage material risks and engage our portfolio companies to advance ESG practices in order to strengthen portfolio resilience and alignment with our sustainability objectives.
We believe companies that recognise the importance of ESG factors and manage them effectively are better positioned to navigate risks and generate sustainable value over the long term. Thus, we evaluate sustainability-related risks and opportunities across our investments through the lens of our ESG framework, which also integrates climate change and supports our net portfolio carbon emissions target.
Our ESG framework centers around the idea of continuous improvement. ESG integration helps us identify material issues that can affect the companies’ performance and impact the environment, the workforce, and societies at large — be it through the products and services they offer or through the practices they apply in their operations.
It is designed to help:
- expand opportunity sets in businesses that generate positive environmental or social impacts through their products or services;
- advance ESG practices through pre-investment ESG due diligence and post-investment engagement with portfolio companies;
- manage exposure to companies that have the potential to cause negative environmental or social externalities;
- avoid investing into companies in restricted industries.
Our approach is rooted in our broader governance model, where we hold the boards and management of our portfolio companies accountable for the activities of their companies, but do not direct their day-to-day business decisions or operations. We protect our interest by exercising our shareholder rights, including voting at shareholder meetings.
This broader framework is supported by various tools that help us in the day-to-day investment decision making.
One example is a set of internal guidelines that specify the conditions and necessary safeguards for investments in sectors and business activities with more inherent risks of negative impacts on the environment, workforce, or society. Another example is our growing collection of sector- and issue-based ESG guidelines that lay out key due diligence questions to better understand a company’s ESG performance, as well as industry best practices to benchmark investment targets.
Similarly, we leverage tools such as our Climate Transition Readiness Framework and ESG Value Creation Playbook to support our post-investment engagement efforts. Through this process, we encourage portfolio companies to understand and manage climate- and sustainability-related risks, focus on continuously improving operational practices and, where possible, seize opportunities to build competitive advantage, for example, by expanding business involvement in sustainability-focused products or services.
During the year, our approach to identifying and managing ESG risks, including climate-related risks, remained consistent with previous reporting periods.
Pre-Investment ESG Due Diligence
The ESG analysis forms an integral part of the overall investment analysis for all our investment proposals.
During deal evaluation, our investment teams employ a broad-based research approach to assess material company-level ESG considerations, performance against peers in the respective industry, as well as forward-looking sustainability trends that are likely to affect the business and its competitive positioning.
Each investment is first evaluated against a set of core ESG topics such as climate change, social compliance, and general ESG governance. These topics are deemed universal and fundamental for us to obtain a baseline understanding of the company’s ESG awareness and practices. In addition, investment teams will also assess materiality-based ESG topics depending on the company’s sector and business model, leveraging our sector- and issue-based ESG guidelines. Key insights and findings are incorporated into the overall investment assessment for review and approval by the relevant investment committees.
We have dedicated in-house ESG professionals to support our investment teams on ESG due diligence. Where appropriate, we also engage external ESG advisors or technical specialists to deep dive into issues of concern and map out corresponding post-investment action plans.
ESG Diligence and Engagement in Practice: A Case Study
The online food service and delivery industry in India has emerged as a high-growth sector, presenting long-term opportunities amid rapid urbanisation and increasing disposable incomes. One investment opportunity we evaluated in 2024 was for a fast-growing food platform company that operates over 10 online-first food brands through its network of over 300 kitchens.
The company employs a highly differentiated central kitchen model and demonstrates robust kitchen sales growth and improved operating margins. Its core brands also enjoy superior customer awareness and local support. However, we recognised that the industry itself faces unique challenges, particularly in maintaining food safety and quality at scale in a diverse and complex market like India.
The food service industry is subject to a range of material food safety risks that can have severe consequences for both consumers and businesses. These risks include contamination during the sourcing of food ingredients and from improper food handling and storage, poor hygiene practices, and degradation of food quality during delivery. Comprehensive quality management practices across the entire operational value chain are essential to ensure the delivery of safe and hygienic food products to consumers. Substandard practices in any area could potentially lead to food safety incidents, resulting in harm to customer health, financial losses, and long-lasting reputational damage to the company and its investors.
Recognising the materiality of food safety risks and the technical complexity of food safety practices in the industry, we conducted comprehensive ESG due diligence. To ensure a thorough assessment, we enlisted the support of a third-party ESG consultant with strong expertise in food safety evaluation. Supported by the consultant, we conducted a detailed review of the company’s food safety management systems, including its policies and protocols. On-site inspections of selected central kitchens were conducted to verify the company’s practices. To provide a broader perspective, the consultant performed a peer benchmarking analysis which provided valuable insights into industry best practices.
Our due diligence revealed that the company had implemented a food safety management system, with kitchens certified to Hazard Analysis Critical Control Point standards. Standard Operating Procedures (SOPs) were in place to guide kitchen staff, and the company conducted annual audits for every kitchen, which were supplemented by ongoing monitoring during daily operations. However, our site visits uncovered instances of potential food contamination and instances of non-compliance with regulations. These findings highlighted the need to further enhance discipline in standardising kitchen operations and improve the implementation of SOPs.
With respect to supply chain management, the company has established a set of measures to ensure food quality and safety. These include certification checks, reviews of safety policies and procedures, and quality assurance audits at key supplier facilities. Nevertheless, we noted that further formalisation of these processes, particularly the integration of environmental and social factors into supplier evaluation, would help the company enhance its overall food safety performance.
Upon identifying these key gaps, we held detailed discussions with the company’s management. This dialogue ensured that the management was fully aware of our concerns and provided the management with an opportunity to offer additional context or information as needed. We then documented our ESG due diligence findings, along with our proposed post-investment actions, in the investment committee memo.
Our ESG due diligence process proved invaluable in identifying key risks in a highly technical industry, enabling us to make a more informed investment decision. This thorough assessment not only highlighted areas of concern but also established a foundation for ongoing collaboration with the company to enhance its food safety practices.
Following our investment, we have been actively partnering with the company to develop a comprehensive 100-day ESG Action Plan. Through this plan, we aim to develop and implement specific corrective actions designed to address the gaps identified during our initial due diligence and outline a roadmap for continuous improvement in the company’s ESG practices, guided by our governance model.
In-Depth Focus on Climate
Given the potential short- and long-term impacts across industries and the severity of these impacts, climate change is a material consideration in all our investments. Therefore, our ESG framework mandates climate analysis for all new investments that are evaluated by the relevant investment committees, examining the following issues:
- Potential portfolio company’s contribution to climate change through its carbon footprint;
- Effects of climate change on the company’s operations or commercial prospects, arising from physical and transition risks;
- Any potential new opportunities arising from technology innovations, government regulations, and evolving customer needs.
As part of our transition risk analysis, we consider how the prospective portfolio company might be impacted by policy, legal, technology, and market changes associated with the transition to a low-carbon economy, taking into account the product portfolio and the company’s strategic positioning. An internal carbon price (ICP) is applied to each investment to better assess the potential climate transition impact.
In addition, we utilise a range of point-in-time and forward-looking metrics and approaches, including:
Carbon Metrics
- Total Carbon Emissions
Absolute greenhouse gas (GHG) emissions (Scope 1 and Scope 2), expressed in tCO2e. - Carbon Intensity
Absolute GHG emissions (Scope 1 and Scope 2) per million dollars of market value, expressed in tCO2e/S$M market value. - Carbon Efficiency
Absolute GHG emissions (Scope 1 and Scope 2) per million dollars of revenue, expressed in tCO2e/S$M revenue. - Carbon Spread
Proprietary metric which reflects our ICP modelled as a spread on top of our risk-adjusted cost of capital, thereby acting as a trigger for deeper analysis into the investee’s climate transition and decarbonisation plans.
Climate Value Impact Assessments
We estimate the potential impact on equity value of individual assets under specific climate scenarios using a third-party climate modelling tool. We take into consideration factors such as company emissions, price elasticity, and cost pass-through.
We also review the company's potential exposure to physical climate risks, including acute and chronic climate hazards. We assess potential impacts of these risks on the company’s physical assets, operations, and, where relevant, critical supply chains. We do so by taking into account existing or planned mitigation efforts.
As part of our efforts to build long-term resilience across the portfolio and also drive opportunities for value creation, we assess potential climate-related opportunities, such as the development of new products and services, expanding access to new markets, enhancing supply chain efficiencies and resilience, and driving resource efficiencies and cost savings.
Social Baseline Risk Assessment
Following a successful pilot in 2024, social baseline risk assessment has been formally integrated into our pre-investment ESG due diligence processes. This includes a set of core social business practices that we encourage investment targets and portfolio companies to adopt in their own operations, supply chains, and stakeholder interactions. The topics involved include human rights and labour practices, inclusive workplaces, talent management, product quality and safety, data privacy and security, and supply chain responsibility.
Going forward, all new direct investments will be assessed against these standard social practices. We will conduct more in-depth evaluations when practice gaps are identified. We continue to scale our capability to assess social issues through the roll-out of topic-specific due diligence guidelines and training for our investment teams.
We will progressively deepen our engagement with portfolio companies on their social practices, tailoring our approach based on their material issues and respective levels of maturity, as guided by our governance model.
Material Nature Considerations
We evaluate material nature-related risks for companies in sectors that are highly dependent on nature, or have the potential to significantly impact nature. We are enhancing our pre-investment ESG due diligence and post-investment engagement processes to understand, mitigate, and adapt to nature-related risks more systematically, while unlocking nature-related opportunities. To this end, we are particularly focused on biodiversity, water, as well as other natural resource use, alongside waste and pollution. We continue to develop our institutional capacity while expanding our due diligence guidelines and toolkits to cover sectors with material dependencies and impacts in these areas.
Biodiversity Risk Assessment Tool
We developed a biodiversity risk assessment tool to identify physical assets located within proximity to Key Biodiversity Areas and Protected Areas1. This allows us to understand interfaces with ecologically sensitive locations in our new and existing investments. Companies with business locations in proximity to ecologically sensitive areas may have significant dependencies and impacts, and may face elevated biodiversity risks. Where we believe a company presents significant biodiversity risks, we will conduct a more in-depth assessment to determine the nature and severity of the risk.
Governance Considerations
Good corporate governance is fundamental to a well-managed company and demonstrates trustworthiness and resilience. It is also an indicator of a company’s commitment to conduct business with integrity in a sustainable manner. As part of our due diligence process, we consider the policies and procedures companies have established and implemented to govern their organisation and to ensure transparency and accountability in corporate activities. We also seek to understand a company’s oversight on ESG issues including climate, where material, as well as its efforts to prevent ESG incidents and to remain up to date and compliant with changing regulations.
1 Key Biodiversity Areas and Protected Areas reflect areas of biodiversity importance. Protected Areas, based on the World Database on Protected Areas (WDPA), includes marine and terrestrial protected areas and are clearly defined geographical spaces, recognised, dedicated, and managed through legal or other effective means, to achieve the long-term conservation of nature with associated ecosystem services and cultural values. Key Biodiversity Areas are sites that contribute significantly to the global persistence of biodiversity.
Portfolio Monitoring
We track and monitor sustainability-related risks and performance at the portfolio and investment level through the following activities:
ESG Risk Monitoring
We provide annual updates to the Board and senior management on key ESG risk areas including our involvement in industries with heightened ESG exposures, external ESG ratings across our listed portfolio as a data point from an outside-in perspective, ESG incidents and controversies, key performance indicators (including portfolio carbon emissions and carbon metrics), and material ESG issues.
In addition, we utilise a third-party climate modelling tool to monitor climate-related risk at the asset level for our listed portfolio and significant unlisted holdings. We evaluate exposure under certain scenarios and pathways that are consistent with those used in our portfolio level scenario analysis. Where critical risks are identified, they are escalated on a case-by-case basis as required.
Carbon Budget
We have set GHG emissions budgets for each sector and each market investment team to ensure that teams are managing their respective investments’ contribution towards the overall portfolio emissions target.
Portfolio Carbon Analytics and Reporting Tool
We created and utilise an in-house measurement, reporting, and analytics tool with sector and market dashboards to help relevant functional teams track and monitor carbon emissions for their investment portfolio.
