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.
We have integrated an Environmental, Social, and Governance (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 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 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 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, according to which 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’s meetings.
This broader framework is supported by various tools that help us in the day-to-day investment decision-making. One example is a restricted industries list that defines which business activities fall beyond the scope of our investment focus based on considerations around obligations under Singapore laws and regulations, including those arising from international treaties and UN sanctions or our assessment of the broader implications of the products or services on society. Another 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.
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.
At Temasek, we integrate ESG into the core of our investments, from pre-investment due diligence to post-investment engagement. As a long-term investor, this goes hand in hand with ensuring the long-term resiliency and future-proofing of our portfolio.
– Kyung-Ah Park, Head, ESG Investment Management, Managing Director, Sustainability, Temasek
Navigating the ESG Complexities in an Investment Decision: A Case Study
Video gaming has experienced significant growth in recent years with hundreds of millions of players globally engaging in various digital platforms and games on a daily basis. Gaming can have positive and negative effects in the areas of social interactions, cognition, and mental agility. Gaming can be an effective way to improve critical thinking, problem solving skills, and peer engagement. At the same time, there are social and health risks associated with prolonged exposure to gaming, including repetitive stress or overuse injuries as well as gaming addiction.
We gained a more nuanced understanding of the various ESG topics material to the industry as we evaluated an investment in an online videogame platform, which allows users to create games and to play games created by users. The business model of the company enables developers to earn a share of the platform’s revenue based on the number of visits and engagement their games receive.
Beyond traditional issues associated with online video gaming, such as the potential for gaming addiction, data privacy and protection, energy consumption, and fair and ethical business practices, the community-driven approach of the platform posed additional risks to online safety (and child safety in particular given the audience of the platform), including offensive or harmful content, cyberbullying, and scams being generated or propagated by users.
We conducted extensive diligence to understand the potential risks as well as the maturity and robustness of the company’s policies, practices, and safeguards against them. This included interviews with senior executives across key functions, discussions with experts, and research and insights leveraging data science approaches. In our dialogue with the company’s management, we discussed the findings of our diligence and established a shared understanding of the critical mitigants to foster a safe and secure environment for all players, including: content moderation, parental controls, platform restrictions, IP protection, and data privacy and practices. The maturity of the company’s practices as well as the level of resources the company devotes to stay ahead on these issues, the proactive innovation approach they deploy to continuously improve their practices, as well as their constructive partnerships with law enforcement agencies and child safety advocacy groups, provided us with comfort to proceed with the investment.
Working through these various aspects allowed us to acquire substantial knowledge on best industry practices and critical safeguards. We continue to leverage these insights in our post-investment monitoring and engagement. Furthermore, we have harnessed and translated these insights into an internal guideline on online safety which will further inform our ongoing diligence efforts as we evaluate digital businesses.
