Each investor must consider its mandate and what it is supposed to deliver. In the case of investment company Temasek Holdings, the mandate of long-term sustainable returns must include environmental, social and governance (ESG) considerations, says Dilhan Pillay Sandrasegara, executive director and CEO of Temasek Holdings and Temasek International.
However, greening the business models of investee companies will take time, especially for businesses in hard-to-abate sectors like aviation, power generation and the built environment, he adds.
Keeping these assets on Temasek’s balance sheet may weigh against its sustainability commitments, but Pillay believes there are long-term benefits.
“The gestation that it takes to deliver the result you’re looking for in terms of return on investment — if you have a three, five or seven-year timeframe, it’s very hard to do the things we’re thinking about, because the timeframe to retool a business model to deliver a transition doesn’t equate with what has to be done,” says Pillay on a panel at the Bloomberg New Economy Forum on Nov 16.
Temasek has pledged to halve the net carbon emissions of its portfolio by 2030 and achieve net zero by 2050. In July, Temasek raised its internal carbon price to US$50 per tonne of carbon dioxide equivalent (tCO2e) from US$42, while announcing plans to gradually raise this figure to US$100 by the end of this decade.
Sustainability reporting remains fragmented today, and Pillay stressed the need for harmonisation among these frameworks. “We need to have a taxonomy that works all around. It will take some time and for now, we’ll have to muddle through this issue. Each country will have to deal with what it sees as its biggest issue and how it can come up with the right outcome.”
While a common standard will allow for comparability of data, scoring companies and countries against a fixed set of metrics is unfair, he adds. “For example, people will be concerned about metrics in some of the emerging markets at this point. How are they going to get on the energy transition when they have to deal with uplifting communities and rural populations? How would you tell someone in India or Vietnam, or elsewhere: ‘You can't use coal-fired plants.’ How are you going to get electricity to villages if you don't have alternatives on a cost-effective basis?”
Not all data can be expressed quantitatively, and Pillay points to the interlinkages between the environmental and social pillars of sustainability. “Quite frankly, I'm actually not a fan of metrics when it comes to [social factors]. I have this internal discussion and my ESG folks love metrics; they talk about the sustainable bond framework, putting metrics there because bots are reading it and not human beings.”
However, the figures are meaningless without explanation. “If you put that number there, you should explain the stats so people know what you’re doing, and that what you’re doing is correct. They have a right to criticise if they don’t think you’re doing it correctly.”
Thus, intentionality is the most important factor when discussing the social issues of business, says Pillay. “We focus a lot on the impact of climate, which is important, but we also have to consider the impact of communities and how they come together. If you don't think about what’s got to happen to uplift communities, especially those in emerging markets, which are subject to the vagaries of climate change, I think that’s a big issue.”
Above all, businesses must be successful in order to enact a change in the world, says Pillay. “They have to run their business to do well, in order to generate the cash flow to do what's right. Now, that's not easy to do. But it's a journey to figure out how they're going to execute that plan according to the business they’re in.”
He adds: “You can only catalyse action when you can show the benefit that you're bringing to the ecosystem. Otherwise, you can go through all the other chapters [but] you're not going to have the outcome that you want to get; you’re not gonna get the outcome that you put your capital at risk for.”
Following news that Temasek will write down over US$200 million ($274 million) into cryptocurrency firm FTX before its implosion, the company says it currently has no direct exposure in cryptocurrencies and that its investment in FTX was not an investment into cryptocurrencies.
In a Nov 17 statement, Temasek says its investment in FTX provided it with “protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk”.