ESG considerations do not constrain Temasek or its portfolio companies, says sustainability MD

Integrating environmental, social and governance (ESG) considerations into Temasek’s investment process does not mean that the state investor misses out on attractive opportunities in hard-to-abate sectors (sectors that find it hard to lower their greenhouse gas emissions).

Nor does it mean that its portfolio companies end up being less competitive in the region.

On the contrary, ESG factors are included as they can drive commercial returns and improve risk management, said Temasek’s managing director of sustainability Park Kyung-ah in a recent interview with The Business Times, following the release of the investor’s inaugural sustainability report for the year ended Mar 31, 2024.

Temasek’s sustainability report details, for the first time, how it embeds ESG considerations in its entire investment process. This ranges from conducting due diligence on companies at the pre-investment phase to portfolio monitoring and engagement post-investment.

In addition to having a list of restricted industries, Temasek also has a set of internal guidelines that specify the conditions and extra safeguards that need to be taken if it is looking to invest in a business that has a higher risk of negatively affecting the environment or society.

However, Park said that these extra provisions do not constrain Temasek’s investment scope. The restricted list is based on considerations around obligations under Singapore’s laws and regulations, including those arising from international treaties and sanctions by the United Nations. This includes weapons of mass destruction, as well as illegal drugs and narcotics.

The additional safeguards also do not prevent Temasek from investing into carbon-intensive sectors. The state investor has long maintained that it is sector-neutral and would prefer working with its carbon-intensive portfolio companies on their decarbonisation journey, rather than to divest or exclude these companies.

The guidelines, however, help Temasek to be more “intentional” with such investments, said Park. There would have to be greater certainty and additionality in making investments that could negatively impact the environment.

“So they become a sharper lens and focus for us, and (we are) much more intentional in terms of the safeguards we are taking,” she added.

As for its portfolio companies, pushing them to capture the “tailwinds” around sustainability would mean there is significant opportunity for growth, noted Park.

One example is Sembcorp Industries, which has pivoted to be a renewable energy company, and is now aiming to grow its renewable energy capacity from 14.4 gigawatts (GW) currently to 25 GW by 2028.

ESG practices also drive companies’ bottom line, by getting them to be more efficient in energy and water usage, and enable them to tap into capital markets as more investors are increasingly having such mandates, said Park.

Nature- and social-related considerations

Temasek does not just focus on climate-related risks and opportunities in its ESG assessment processes. The investor has also incorporated nature- and social-related considerations as well.

For example, its sustainability report stated that the investor had developed a set of expectations in 2023 on how potential investments and portfolio companies should look at social issues, including human rights and labour practices, diversity and inclusion matters and supply chain responsibility. It then evaluated potential investments against these expectations.

It has also embarked on its nature road map where companies are evaluated on their nature-related dependencies and impacts. Temasek is trying to more systematically identify and quantify material nature-related risks and incorporate nature-based scenarios alongside climate scenarios.

Though nature- and social-related considerations are not integrated within its investment process as extensively as climate-related ones currently, Temasek’s intention is to “elevate these practices much like it does with climate; and then, over time, being much more intentional as well in terms of how it allocates its investments”, said Park.

Nature- and social-related factors are also included in Temasek’s sustainability classification framework, which the state investor applied across its investment portfolio for the first time in this inaugural sustainability report.

Investments are considered sustainable not only for companies with products and services that have the potential to address the climate crisis, but also for those that are nature-positive and contribute to inclusive growth.

The portfolio value of this bucket of investments currently stands at S$38 billion. Another S$6 billion are classified as climate transition investments, which refer to high-emitting sectors that are finding ways to transition its business model to be more low-carbon, In total, Temasek’s portfolio value of investments aligned with sustainability stood at S$44 billion in the 2024 financial year.

At present, sustainability-aligned investments currently make up just 12 per cent of Temasek’s total portfolio value of S$389 billion, including institutional assets and liabilities, indicating that there is room for growth.

While ideally, its entire portfolio should be made up of sustainable investments, the reality is that there will be some sectors that just would not be able to pivot their entire business to become green or nature-positive, noted Park.

But, at the very minimum, these companies should be improving their ESG practices, she added.

“That’s regardless of whether you’re a brown company (or) a green company; whether you’re in the financial sector, (or) whether you’re in the energy sector. And so, we are on a path where we want to engage and improve the ESG practices. And ideally, more and more companies’ ESG practices continue to improve. And those really become the sustainability leaders and become resilient and capture more sustainable returns as well,” she concluded.

Source: Business Times © SPH Media Limited. Permission required for reproduction.

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