Beyond Covid-19: Towards a net-zero world

A YEAR on, we continue to see the world battle against Covid-19. It is the single biggest humanitarian crisis we have faced since World War II, as the pandemic ravages economies, and impacts countless lives and livelihoods.

However, we have also seen a resilience of human spirit that is remarkable. Developing vaccines used to take decades; but advances in science and ingenuity have delivered vaccines with a high level of efficacy in under a year. Now that same spirit must apply to distribute the vaccines, because the pandemic has taught us that nobody is safe till everybody is safe.

This past July, Temasek released its 2021 Temasek Review, themed around a simple message: Bounce Forward. As we emerge from the dark shadows of Covid-19, we cannot afford to bounce back to a pre-Covid world.

Instead, we need to bounce forward, to a more sustainable world, tackling bigger threats like climate change, by harnessing that innovation drive in science and technology, the pace of which has accelerated as a result of the pandemic. We need that indomitable human spirit to continue, so our resources, capabilities and efforts will be catalysts to develop solutions to the next global challenges.

CLIMATE CHANGE: AN EXISTENTIAL CHALLENGE

Evidence is now clear that if we don't address man-made contributors to global temperature rises urgently, we risk more lives, advance species extinction and irredeemably impact our biosecurity and, indeed, life on our planet.

There is a real need to focus on achieving a 'net- zero world' by 2050. That role cannot be led by governments alone. Businesses, communities, and individuals must play our part. For if we don't contain temperature rises, the impact will be far more deleterious than the pandemic; even more so for developing countries, which do not have the resources to deal with climate change.

We are currently living in the hottest decade on record. Despite a brief dip in carbon emissions due to the pandemic, the world is still heading for a temperature rise in excess of 3 degrees Celsius this century, which is beyond the 1.5 degrees Paris Agreement Goal. The Intergovernmental Panel on Climate Change also released a report stating that the current trajectory is that we will reach 1.5 degrees by 2040, in which case it is imperative that we act now with urgency.

ROLE OF CORPORATES AND PRIVATE CAPITAL

As the world modernises, the role of businesses, and of private capital, becomes more critical to drive large scale solutions to climate change.

I am heartened to see many companies pivoting and refocusing their business models towards solutions that achieve a greener world.

This is also a sign of how expectations of businesses are rapidly shifting. Every business is expected to be purpose-driven; to have a focus on its role as a corporate citizen in a much wider community of stakeholders than just its shareholders and customers - because businesses can only thrive when the communities around them thrive.

At Temasek, we are more than just an investor; we are a provider of catalytic capital. We deploy financial capital to stimulate innovation and growth; develop human capital to uplift capabilities and enhance potential; enable natural capital to foster sustainable solutions; and seed social capital to transform lives for a more inclusive and resilient world.

As we deploy capital, we constantly reshape our portfolio around four key structural trends that we see driving growth and solutions to global challenges, as we seek to deliver sustainable returns over the long term. These trends are digitisation, sustainable living, the future of consumption, and longer lifespans.

Some say maybe we should just invest in market indices, riding the waves of market growth when they come. However, investing in indices does not let us shape a portfolio around how we see the world in future years. Investors have begun to allocate capital to promising technologies in pursuit of decarbonisation solutions, seeking to contribute to the carbon abatement process and the reduction of its cost curve. Temasek is absolutely committed to this path.

BENEFITS FROM CLIMATE CHANGE MITIGATION

We have simulated the expected long-term returns pathways of our portfolio based on different scenarios across our portfolio over the next 20 years. Broadly, our Central Scenario models our baseline expectations of growth. We also model for other scenarios where growth may be impacted by external events, such as escalating trade tensions, geopolitical events, and climate change.

We have looked at two scenarios around climate change. The first is what we call 'low ambition' - few efforts made to address climate change. The second is 'high ambition', where the world is prepared to make hard decisions to achieve the goal of containing temperature increases within the Paris Agreement.

In the case of the 'low ambition' scenario, despite marginally better returns during the shorter term, the trade-off will be an unliveable planet within our lifetime, and commensurate lower returns further out to 20 years.

In a 'high ambition' climate change scenario, despite moderated returns in the medium term due to transition costs, the payoff will be a more liveable planet for all, and higher expected returns over the long term.

This is why, directionally, we choose to advocate, and invest in, 'high ambition' models that seek to mobilise solutions to climate change.

We lean in to work with companies in our portfolio, supporting their transformation of business models and abatement actions where it makes financial sense to do so, rather than simply divest them. Divestment of carbon-emitting businesses could easily allow us to show a lower carbon portfolio in a shorter period of time, but that does nothing to actually reduce emissions.

We work with the boards and management teams of our portfolio companies in their climate change mitigation and transition strategies and initiatives, so that they too can contribute to a better world and be more future-ready.

We see this approach consistent with being a purpose-driven organisation, a provider of catalytic capital, and a responsible steward of our portfolio and our communities. We share our vision for a more sustainable world because we believe businesses can and must play a thoughtful, constructive role in tackling this defining challenge.

We've seen what a pandemic can do to disrupt our business models, and how, as stewards of our companies, we've had to act boldly and nimbly to address what nature has thrown at us these past few years.

THE ROLE OF BOARDS

The leadership role that boards play in the context of the many challenges companies face in a pandemic and post-pandemic world cannot be undermined. Companies - especially publicly-listed ones - need to embrace environmental, social and governance (ESG) issues.

In this regard, I would highlight three issues. Firstly, the existential threat of climate change. Every company needs to have climate change adaptation, mitigation and transition strategies. This is not just a board risk management issue; it is imperative from the perspective of having a robust business model, so that companies will share value among their various stakeholders, including deriving long-term sustainable returns for their shareholders.

Secondly, the increasing prevalence of cyber attacks. Companies need robust cyber defence postures and capabilities. Cyber risks may be existential for many businesses - it is not just the financial loss arising from an attack but also the reputational risks associated with a cyber hack.

Boards and management teams have to put in place robust governance frameworks associated with cyber issues, and match that with the requisite capabilities that are fit for the risk level. This requires constant vigilance and attention from boards because companies are now entrusted with more data than ever before - from customers, suppliers, partners, and employees.

The bond of trust underpins a company's reputation, so ensuring data systems are well-protected, and capabilities exist to actively defend and respond to cyber threats, is a key board responsibility.

Lastly, but by no means the least, the future of Industry 4.0 should be human-centred and human led, which provides opportunities for directors to play leadership roles in readying companies, and their workforces, for the future.

Technology and digitisation are imperatives for every business, but as critical as they are, we get the best from our people by ensuring that they remain relevant and are supported to adapt.

This means continual workforce development - training for skilling, reskilling and upskilling. It also means being more inclusive in our workplace hiring: including older workers and those with disabilities, who can make valued contributions. We all have an obligation to put in place fair work practices and a safe environment for all employees.

Steps leaders take in this regard add to the strength of their human capital. They also build social capital, which itself contributes towards social cohesion and resilience in the communities in which they operate. That is an important outcome, because businesses can only thrive if the communities in which they operate also thrive.

CONCLUSION

With a focus on the challenges of today, companies - led by directors with a clear eye on the opportunities of the future and a strong sense of purpose in their roles - will be able to transcend the ups and downs of a changing global environment and chart a course, not just to survive, but to prosper.

Let's use the lessons of Covid-19 to become more resilient, and bounce forward.

• The writer is executive director and chief executive officer of Temasek International. This is an edited version of an article that was first published on the website of the SID Directors Conference 2021 by the Singapore Institute of Directors.