Investor
How We Manage Risks
There are inherent risks whenever we invest, divest, or hold our assets, and wherever we operate.
We adopt a long term view of our investments, with the flexibility to take concentrated positions. We invest across all stages of a business life cycle, from early stage and/or unlisted, to large or listed assets. We do not have predefined concentration limits, or targets for investing by asset class, country, sector, theme or single name.
Our long investment horizon means we have a portfolio of predominantly equities, including unlisted assets and private equity funds, designed to deliver higher risk-adjusted returns over the long term.
Consequently, our portfolio is expected to have higher year-to-year volatility of annual returns, with higher risks of negative returns in any one year.
We adopt a long term view of our investments, with the flexibility to take concentrated positions.
Our investment posture is to ride out such short term market volatility, and focus on generating sustainable returns over the long term.
We adopt a long term view of our investments, with the flexibility to take concentrated positions.
Given the expected volatility, we manage our leverage and liquidity prudently for resilience and investment flexibility, even in times of extreme stress.
Our investment posture is coupled with a culture of risk awareness and balanced risk taking. This applies to both our investment activities and institutional capabilities. Our risk sharing compensation philosophy puts the institution above the individual, emphasises long term over short term, and aligns the interests of our staff with those of our shareholder.
We have no tolerance for risks that could damage the reputation and credibility of Temasek.
We have no tolerance for risks that could damage the reputation and credibility of Temasek.
Organisational Risk Management Framework
Our Organisational Risk Management Framework includes Risk Return Appetite Statements (RRAS) which set out various levels of risks tolerance, from reputational risk, to liquidity risk and sustained loss of overall portfolio value over prolonged periods.
| RRAS 1 | We have no tolerance for risks that could damage Temasek’s reputation and credibility |
|---|---|
| RRAS 2 | We focus on performance over the long term |
| RRAS 3 | We have flexibility to take concentrated positions |
| RRAS 4 | We maintain a resilient balance sheet |
| RRAS 5 | We evaluate the potential for sustained loss of overall portfolio value over prolonged periods and use different scenarios to test our resilience |
To minimise operational risks, we embed risk management in our systems and processes. These include our approval authority delegation, company policies, standard operating procedures and risk reporting to our Board.
Formalised processes instil the discipline to consider various perspectives, including ESG risks.
Formalised processes instil the discipline to consider various perspectives, including Environmental, Social and Governance (ESG) risks. These include climate risks, both transition and physical, as an integral part of these processes. For example, we now apply an internal carbon price of US$42 per tonne of carbon dioxide equivalent (tCO2e) in our investment evaluations in order to account for the potential exposure of an investment to transition risk.
Formalised processes instil the discipline to consider various perspectives, including ESG risks.
Investment proposals to our investment committee are submitted under a two-key system, for instance by both market and sector teams. Depending on the size or risk significance, these proposals may be escalated to our Executive Committee or Board for final decision. Functional teams provide additional specialist perspectives and independent reviews. Country and sector risks are factored into our risk-adjusted cost of capital for each investment. Our valuation discipline is based on our view on intrinsic value over varying investment horizons.
We track and manage risks proactively, through economic and market cycles, including specific risks at asset level.
We assess the sustained impact of various risk scenarios on the intrinsic value of our investments. The aggregate of these changes provides an estimate of the portfolio level variation in present value and future income in each scenario.
We do not manage our portfolio to short term mark to market changes.
As illustrated in the below diagram, fundamental earnings impact is our estimate of sustained loss. This is different from trough impact, which includes mark to market effects due to short term increases in risk aversion. We do not manage our portfolio to short term mark to market changes.
Illustration of Fundamental Earnings Impact
Based on our assessments of any likely sustained loss, consistent with our intrinsic value discipline, we may manage the risks as follows:
- Divest, hold or protect the individual investment impacted;
- Change the portfolio composition for the long run;
- Take actions to protect the portfolio.
In addition to scenario-based stress tests, we also monitor general market risk indicators such as the CBOE Volatility Index (VIX).
VIX Trend (March 2005 to March 2021)
Legal & Regulatory
We comply with all obligations under Singapore laws and regulations, including those arising from international treaties and UN sanctions. We also comply with the laws and regulations of jurisdictions where we have investments or operations.
Our global footprint, coupled with an ever-evolving legal and regulatory environment and increasing oversight by authorities, underscores the importance of robust compliance programmes.
We comply with the laws and regulations of jurisdictions where we have investments or operations.
Our Legal & Regulatory (LR) department ensures that policies, processes and systems are appropriately designed, consistent with applicable laws, and aligned with Board directives. For instance, our policy on derivative transactions permits only personnel authorised by a board resolution to enter into such transactions within tightly-defined scopes and limits on behalf of specific designated entities.
We comply with the laws and regulations of jurisdictions where we have investments or operations.
LR monitors regulatory reporting compliance through securities tracking systems. Regulatory requirements and monitoring systems are continually reviewed and updated to reflect changes in laws and regulations.
We encourage and facilitate the development of a sound corporate culture that incentivises good staff behaviour. High ethical standards and compliance with applicable laws and regulations are expected in the pursuit of our business interests. Specific attention is directed at governance, incentive systems and training.
Our policy permits only personnel authorised by a board resolution to enter into derivatives transactions within tightly-defined scopes and limits.
At the core of this is our Temasek Code of Ethics and Conduct (T-Code) and its related policies that guide our Board directors and staff in their daily dealings and conduct. With integrity as a key overarching principle, T-Code policies cover areas such as anti-bribery, whistle-blowing, management of confidential information, and prohibition against insider trading. Our annual staff bonus plans include T-Code compliance requirements.
Business Continuity and Incident Management
We are committed to continuously improve the way we manage business continuity risks.
Our contingency management framework ensures business continuity and manages incidents arising from safety, physical security, cybersecurity, and other threats. The framework takes into account the potential impact of emerging risks and new responses enabled by technological advancements. We monitor security, safety and health situations around the world daily when emergencies occur. This allows us to support our staff wherever they are based.
We conducted response exercises regularly over the year to ensure that our contingency plans remain effective, relevant, and adequate, including responses to failure of critical infrastructure and cyber-related risks. We constantly work on improving our capabilities to ensure that critical business functions can resume functioning in a timely manner during times of emergencies. This is to minimise disruption to our work and operations.
Since the start of the COVID-19 outbreak, our Business Continuity and Technology teams have been supporting Temasek staff all over the world to adapt to long periods of working from home. Efforts were made to ensure staff remain effective working from home and to ensure their physical and psychological well-being through regular touchpoints. We provided care packages which included essential supplies such as masks, health supplements, wellness equipment, and additional IT equipment to all our employees around the world. We communicated regularly with them on developments, particularly with specific guidance on the COVID-19 impact in their locations.
We continue to work with our ecosystem partners, including our portfolio companies and various government agencies, to support the local responses to the COVID-19 outbreak and to protect and safeguard our people and affected communities, both locally and overseas. Our staff have also stepped forward to volunteer in large numbers to support wider COVID-19 initiatives led by the firm, including assisting with swabbing exercises at foreign worker dormitories in Singapore.
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