Investing with Tomorrow in Mind
We aim to build a resilient and forward-looking portfolio that delivers sustainable returns over the long term.
Sustainable Living Trend
Our investment activities are aligned to four structural trends that shape our long-term portfolio construction. We expect to increase our investments that are aligned with the Sustainable Living trend, investing into companies whose products and services seek to fulfil environmental and social objectives, as well as those that will benefit from sustainability tailwinds.
Structural Trends
Referencing global taxonomies and industry practices, we have refined our proprietary classification framework for investments that align with the Sustainable Living trend. This framework identifies sustainability-focused investments in businesses with products and services that contribute positively towards our long-term vision of net zero, nature positive, and inclusive growth. These investments include companies in real estate (e.g. Mapletree and CapitaLand), agri-food (e.g. DeHaat), and industrials (e.g. Ascend Elements). The framework also identifies climate transition investments in high-emitting sectors that are looking to transition to products and services that contribute positively to climate objectives. Climate transition investments include Sembcorp Industries and Topsoe.
We have engaged an independent third party to review the reasonableness of the classification framework, and to help benchmark against global taxonomies and industry practices.
As at 31 March 2024, our portfolio value of investments aligned with the Sustainable Living trend was S$44 billion, of which S$38 billion was sustainability-focused investments and S$6 billion was climate transition investments. During the year, we invested S$3 billion in Sustainable Living trend-aligned investments.
We deploy capital to catalyse solutions that can enable companies to transition to a more sustainable future. We tap on opportunities to invest in future growth sectors and business models, in key focus areas such as food, water, waste, energy, materials, clean transportation, and the built environment, and encourage enterprises to transform through efforts in innovation. We also innovate and scale through partnerships which enable us to achieve outcomes unattainable by an organisation acting in isolation.
Investing for Both Sustainability and Return Objectives at Temasek
Sustainable investing and return generation are two key objectives of virtually all asset owners today – and are central pillars in our T2030 strategy. While these two objectives’ importance is clear, how they interact with each other is potentially more complex. For some investors, strategies around sustainable investing and return generation can be quite siloed, with little clarity whether sustainable investing is return-additive, subtractive, or neutral.
At Temasek, we firmly believe that sustainability and returns over the long term can go hand in hand. To see how we can build a portfolio embodying both desirable Environmental, Social, and Governance (ESG) criteria and expected outperformance, and identify empirical evidence to support this, our Quantitative Strategy (QS) team analysed ESG metrics that investors would expect to be return-additive and found many to be consistent with outperformance. For example, within a given industry, lower greenhouse gas intensity (emissions relative to company revenue) was associated with future outperformance. Similarly, companies with lower water and waste intensity were found to deliver superior future returns versus their peers.
The QS team also found that certain social factors – such as measures of employee satisfaction, including lower turnover – were associated with future outperformance. Finally, in the governance area, the QS team identified that companies with more controversies subsequently underperformed versus peers with fewer controversies.
In summary, selected key ESG metrics from recognised data sources were empirically linked to future outperformance. The QS team’s research suggests that ESG metrics can help quantify intangible attributes of companies, such as employee satisfaction, management quality, and production efficiency, that may influence future returns but not be captured by traditional financial analysis.
One caveat here is that these historical relationships were observed in a controlled back-testing environment and need to be further evaluated via live portfolio performance. To this end, in 2024, Temasek deployed capital into an equity portfolio benchmarked to global equities, with the dual objective of superior sustainability metrics and outperformance versus the benchmark. This portfolio, rebalanced monthly, is sector- and country-neutral compared to the benchmark. It is overweight in stocks that are strong on ESG metrics that have been shown to identify outperformance.
The team continues to explore new ESG datasets to identify which sustainability characteristics are consistent with higher future returns, reinforcing Temasek’s conviction of the complementarity of our dual objectives of sustainability and return generation.
Deploying Capital Across Growth Stages
Companies with innovative solutions or business models that have the potential to deliver positive climate or sustainability outcomes have different funding requirements depending on their maturity stage. While early-stage companies may require capital to bring a prototype solution to commercial scale, growth stage companies may seek to drive market expansion or augment production capacity, and mature companies may plan to deepen market leadership or prepare to raise funds through public markets.
We invest across the stages through our global investment teams as a bottom-up direct equity investor, in line with our Sustainable Living trend. Recognising the criticality of capital availability across all these different stages, we look to complement what we are doing through strategic partnerships with like-minded investors and the establishment of dedicated investment platforms. This allows us to accelerate and scale the deployment of financial capital while joining up capabilities, critical knowledge, and support networks. Enabling successful climate and sustainability transitions across sectors requires new forms of collaboration and partnerships. This is especially true in Asia, where the need to decouple economic and social development from ever-increasing resource use is particularly pressing and barriers to access financial capital need to be overcome. Our various collaborations and partnerships enable us to activate the deployment of capital across various growth stages:
Venture stage
Temasek took part in a new fund, dubbed Select, under Breakthrough Energy Ventures to help late-stage clean-tech startups scale and build new facilities in key markets including Asia.
Growth stage
We partnered with BlackRock to establish Decarbonization Partners, which invests in late-stage venture capital and early-stage growth equity companies targeting de-risked technologies across clean energy, electrification, green materials, and a circular, digital economy. This platform has completed eight investments to date.
Late Growth and Mature/Established stage
Our investments in the Brookfield Global Transition Funds (BGTF I and BGTF II) allow us to support efforts to accelerate the global transition to a net zero carbon economy. BGTF I and II’s investment strategy is to expand clean energy production, provide decarbonisation solutions to transform carbon-intensive businesses, and scale proven decarbonisation solutions.
Catalysing the Clean Energy Transition
The rapid development and deployment of low-carbon hydrogen, in particular green hydrogen (derived from water electrolysis using renewable energy), can support the decarbonisation of industrial processes and mobility, among other uses. It is a clean alternative for chemical production and refining processes, and can be used as fuel in fuel cells for commercial trucking, as well as reduction agent in the iron and steel industry.
However, challenges remain. Besides being difficult to safely store and transport, producing green hydrogen is expensive, with today’s cost estimates ranging between approximately US$2.40 to US$12/kg to produce1. Significant efforts to drive cost down are required.
Temasek has taken an ecosystem and value chain approach in catalysing this space. We are deploying capital and creating partnerships to enable the scale-up of key technologies, accelerate commercial applications, and support research & development (R&D) efforts to bridge gaps in the value chain.
Enabling Scale-Up of Key Technologies Across the Hydrogen Value Chain
Electricity – particularly from renewable sources – is a key cost driver for green hydrogen. We invested in technologies to drive deployment of low-cost, stable renewable power. Examples include Caelux, a US-based perovskite solar technology company developing low-cost solar power, and Form Energy, an iron-air battery technology developer building cost-effective multi-day storage solutions to address intermittency of renewable energy.
We also invested in different electrolysers to suit a variety of operating requirements. For example, we invested in Topsoe, a global provider of catalysts and advanced technologies, that is currently developing the Solid Oxide Electrolyzer Cells technology. These electrolysers operate at high temperatures and are well-suited for integration with a variety of downstream processes. With such integration, green hydrogen can be utilised more efficiently, helping displace grey hydrogen in refinery uses and in steel manufacturing, in the production of green ammonia and methanol, as well as other applications.
Furthermore, we are invested in Electric Hydrogen, a US-based company specialising in the production of Proton Exchange Membrane (PEM) electrolysers. PEM electrolysers respond better to fluctuations in renewable energy than incumbent alkaline electrolysers and are more compact, thereby enabling a more rapid scale up with lower land requirements.
We also look to catalyse solutions for transport & storage, and power. For example, we invested in Amogy, a US-based technology company that offers miniaturised ammonia cracking systems and integrated ammonia-to-power solutions for maritime and distributed clean power applications.
Accelerating Commercial Application of Hydrogen
Beyond enabling solutions on the supply side, it is equally important to catalyse a clear demand signal for such hydrogen solutions. As an example, we invested in H2 Green Steel, a vertically integrated manufacturer of green steel that decarbonises the steel production process using green hydrogen. They are constructing their flagship green steel plant in Sweden which will produce steel with up to 95% less CO2 emissions as compared to conventional steel production.
Seeding Research & Development, and Innovations
Temasek partnered with the National University of Singapore to launch the Centre for Hydrogen Innovations (CHI), to accelerate R&D efforts and develop research talent in hydrogen. As the first of its kind in Southeast Asia, CHI aims to create technology solutions to make hydrogen commercially viable and position Singapore as a leader in the hydrogen economy.
1 Source: Bloomberg New Energy Finance (BNEF): Hydrogen Levelized Cost Update (2023)
Catalysing Climate Action
In recent years, we have accelerated efforts to achieve our climate targets through three key pathways:
Investing for a Low-Carbon Economy
We continue to step up investments that support the transition towards a low-carbon economy. These include solutions that seek to accelerate energy transition and decarbonisation across key sectors, be it through the advancement of hydrogen technologies, energy-efficient solutions, or alternative production processes in hard-to-abate sectors.
Encouraging Decarbonisation Efforts in Our Portfolio Companies
Our long-term investment horizon, which can span decades, puts us in a unique position to engage our portfolio companies on their business transformation and adoption of climate mitigation actions.
With our Climate Transition Readiness Framework, we regularly engage our major portfolio companies, especially those where we see the highest potential for impact, on their climate transition plans and decarbonisation journeys.
Enabling Carbon Markets Solutions
We continue to explore approaches that support decarbonisation while conserving or restoring natural systems. We view voluntary carbon markets as an important lever in enabling nature-based and technology-based solutions.
GenZero, an investment platform we established in 2022 to accelerate decarbonisation globally, has built up a diversified portfolio by actively deploying capital across nature-based solutions, technology-based solutions, and carbon ecosystem enablers. In particular, nature-based solutions form a critical lever to protect, sustainably manage, and restore natural ecosystems to address climate change and other challenges such as biodiversity loss.
Examples of GenZero’s investments include a land restoration project in Ghana, sustainable aviation fuel-related technology companies such as Velocys, carbon removal technology companies like CarboCulture, and a carbon marketplace and exchange, Climate Impact X (CIX). GenZero has also seen further validation of its investment in CIX with Mizuho Financial Group coming on board as an additional lead investor to scale the voluntary carbon credits market in Asia.
Investing for Nature Impact
We take an integrated approach to seize investment opportunities that deliver positive climate and nature impacts, alongside sustainable financial returns.
We have invested in water conservation and the circular economy which help address some of the key underlying drivers of the nature crisis, namely direct extraction of natural resources and pollution. For example, our investment in the Emerald Global Water Impact Fund underscores our commitment to support the development of technologies that address water conservation, strengthen solutions for sustainable and resilient cities, improve resource efficiency, enable adaptions for climate change, reduce health risks, and stimulate innovation and economic growth.
To support the transition to a circular economy, we invested, for example, in Fairmat, which aims to build a closed-loop ecosystem that keeps valuable materials out of landfills and in the heart of product design.
Investing for Inclusive Growth
Guided by our commitment towards sustainable and inclusive growth, we established a dedicated Impact Investing team in 2021 with a mandate to generate positive impact for underserved communities in emerging markets in Africa, Asia, and Latin America, whilst also achieving sustainable returns over the long term.
Our investments in impact funds and businesses aim to address basic needs, improve livelihoods, and build resilience of underserved communities. Our strategy comprises three core pillars:
Over the year, we committed to the LeapFrog Climate Fund and ABC Impact’s Fund II. We have also invested in other impact funds managed by Elevar Equity, Quona Capital, and AXA IM Alternatives. For direct and co-investments, we invested in SarvaGram, a company providing financial and productivity enhancing solutions to rural households in India.
We also collaborate with portfolio companies to drive impact and create value. Our efforts include collaborating on strategy, enhancing impact practices, and introducing portfolio companies to partners in our network for further synergies.
Our proprietary Impact Measurement and Management framework is used to assess all potential impact investments. The framework guides our decision-making process and enables us to measure impact in a systematic way. Post-investment, we work with our impact investees to establish a set of metrics tied to the specific impact outcomes they aim to achieve.
We contribute to efforts which catalyse the impact investing ecosystem through thought leadership and capability building initiatives in Asia and beyond.
In 2022, Temasek supported the Global Impact Investing Network’s Impact Lab, an industry initiative to create analytic tools including impact performance benchmarks. Temasek Trust also established the Centre for Impact Investing and Practices (CIIP) that year, a non-profit entity that aims to advance impact investing knowledge and practices in Asia and beyond. In 2023, Temasek and CIIP organised the inaugural Impact Investing Roundtable, which convened leading impact investing professionals for further collaboration and knowledge sharing.
Loans from SarvaGram has helped a Kirana store owner, in Pune, India, to expand her business.
The world is facing pressing social and environmental challenges and impact investing has the potential to unlock capital to address such challenges. We will invest in leading impact fund managers with a strong sense of purpose and proven track record to support businesses that positively contribute to people and planet.
