The latest Intergovernmental Panel on Climate Change (IPCC) report makes it clear: we need rapid, equitable and inclusive decarbonisation of global systems to ensure a climate-safe – and climate-just – future by the end of the century.
The IPCC report also offers hope. It highlights the power of low-carbon technologies in the net zero transition – renewable energy, for example, is already cost-competitive with fossil fuels – and points out how investment, paired with strategic collaboration and enabling policy, is key to implementing decarbonisation solutions at speed and scale.
Sustainability: the greatest growth proposition of the 21st century
The investment proposition for sustainable development makes sense. As Dr Steve Howard, Vice Chair of Sustainability at Temasek, emphasises: “Sustainability is the greatest growth proposition of the 21st century. There are no returns on a dead planet.”
Despite slightly underperforming traditional funds in 2022, sustainability-linked funds continue to be in high demand, and environmental, social & governance (ESG) investing alone is expected to almost double from US$18.4tn in 2021 to US$33.9tn by 2026.
“Sustainability is a fundamental megatrend that’s reshaping the business and investment landscape, as companies and investors work together towards big global sustainability goals. With 8bn people and the material intensity of the global economy, we need to take action right now. Most plastics have gone into the ocean over the past 10 years, and it took all of human history to produce the first trillion tonnes of steel, cement and concrete, but the next trillion will come by 2040,” says Dr Howard.
Temasek is one example of a global investment firm using the collective strength of its portfolio and network to catalyse positive social and environmental impact as well as delivering financial returns. The company’s purpose statement speaks to its commitment to keep working towards a better tomorrow “so every generation prospers”.
“We are a trend-aligned investor, that’s how we are approaching sustainability, with the understanding that it is going to reshape everything. All sectors – food, energy, mobility and the built environment – are undergoing radical transformations,” says Dr Howard. “We need to drive speed and scale, but I’m optimistic about the progress we’ve all made so far. We need to stop taking a short-term view. The evidence is clear that the global economy does best when it aggressively tackles climate change. Our collective future will be defined by our ability to look beyond short-term profits, especially in the near term.”
To meet its net zero emissions target across its portfolio by 2050 and drive climate action, Temasek is focusing its efforts on three key pathways to decarbonisation:
- Investing in climate-aligned opportunities
- Enabling carbon-negative solutions
- Encouraging decarbonisation efforts in businesses
Pathway #1: Investing in climate-aligned opportunities
The sectors that account for the majority of global GHGs (greenhouse gases), including energy, food and transportation, also offer the most exciting opportunities for rapid decarbonisation and radical systems change. A core theme of Temasek’s investment strategy revolves around Sustainable Living, which has a pervasive impact across sectors, as well as on the business models of emerging and established enterprises. “There are seven key areas – water, waste, food, energy, clean transportation, materials and the built environment – that we focus our energies and efforts on when we look at investing into sustainable solutions,” says Dr Howard.
Some examples of Temasek’s investments in Sustainable Living include an end-to-end agritech platform for fish and shrimp farmers; a company developing technology designed to extend the shelf-life for fresh produce; and a company specialising in carbon emissions reduction technology, including green hydrogen, green ammonia, green methanol, blue hydrogen, circular plastic and renewable fuels.
“Either disruptions are already happening at scale, such as in energy, where you can see renewables dominating electricity generation, or innovations are rapidly advancing, such as smart, optimised agriculture or alternative proteins that will radically reshape our food systems,” says Dr Howard.
Pathway #2: Enabling carbon-negative solutions
Partnership and cross-sector collaboration are fundamental to achieving net zero GHGs by 2050.
“You need radical collaboration and new capabilities, not just what you've got inhouse. You do need partnerships and dedicated platforms to look at unlocking the investment opportunities in the medium to long term,” says Dr Howard.
In 2021, Temasek entered into a $500mn strategic partnership with LeapFrog, one of the longest-established impact investing firms. “We believe in the potential of impact investing to unlock capital to address the critical social and environmental challenges that the world is facing,” says Dr Howard. “Our partnership with LeapFrog will provide capital to anchor their future funds, and underscores Temasek’s commitment to investing for impact to shape a better world for our communities.”
Temasek has also teamed up with BlackRock to create a platform focusing on investments that advance decarbonisation solutions. The two companies collectively committed to invest in late-stage venture capital and early-growth private equity companies that specifically focus on carbon reduction.
“Some investors only look at how they reduce the carbon intensity of their portfolio, which is important, but this is much more about value creation, new investment opportunities and business innovation,” notes Dr Howard. “You can observe thousands of companies, led by passionate founders and entrepreneurs who are super excited about solving a problem. The large incumbents in the finance sector need to capture the fire and energy of those founders and entrepreneurs.”
Pathway #3: Encouraging decarbonisation in businesses
Whether due to regulatory pressures, financial drivers or consumer demand, many companies and multinationals with global supply chains have now set net zero commitments. But according to Climate Action100’s
“No serious player in business or finance denies that climate and sustainability are material issues now, but it can be hard to transition, especially if deep changes to your business model or heavy capital are required,” says Dr Howard. “We can’t let perfect be the enemy of good. I am optimistic about where we go from here and how we can help these hard-to-abate sectors move forward.”
As part of its own sustainability journey, Temasek actively supports the business model transformation and carbon abatement actions of its portfolio companies. The investment company acts as a catalyst for change, bringing together relevant stakeholders and committing capital to support critical R&D in the transition to net zero. They also lean in to work with their portfolio companies where it makes financial sense to do so, rather than divesting, as the latter does nothing to reduce the world’s emissions.
“Private capital can play a catalytic role in accelerating sustainable solutions to create a positive impact that is greater than the sum of its parts, but it takes a real commitment to overcome the huge challenges and to focus on the opportunities,” says Dr Howard.
A spotlight on nature and people
At the heart of Temasek’s investment approach is people, and they cannot be left out of the climate change – or nature-loss – conversation. It is now common knowledge that the communities and countries who contribute the least to climate change will bear the brunt of its impacts, and that wealth inequality and carbon inequality are deeply interlinked.
“We have to focus on just transitions, and work to provide people and communities with the relevant skills and opportunities as industries undergo rapid change,” says Dr Howard. “It’s not about creating jobs in one part of the world and destroying jobs in another. We need to bring our global community together to reverse the decline in nature, and that involves all stakeholders.”
An area in which Temasek sees both growth and decarbonisation potential is nature-based climate solutions (NBS) such as reforestation or mangrove protection projects. The company has funded research led by the National University of Singapore’s Centre for Nature-based Climate Solutions to understand how, for example, blue carbon – or carbon captured via ocean-based initiatives – can mitigate climate change in south-east Asia. This research will develop a knowledge database of blue carbon stocks in the region and a toolkit for better monitoring, reporting and verification.
“All of us have roles to play to create a virtuous cycle, whether individuals, governments, academia, businesses or investors,” says Dr Howard. “It’s essentially an ambition loop. When everyone leans in and makes larger commitments, formulating bigger plans and taking bolder actions, that’s where we can collectively create value, drive innovation and lead the changes we need.”
