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.
We consider Environmental,
Social and Governance factors,
alongside other issues and risks,
when we make decisions.
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.
Our investment posture is to ride out such short term market volatility, and focus on generating sustainable long term returns.
Given the expected volatility, we manage our leverage and liquidity prudently for resilience and investment flexibility, even in times of extreme stress.
We adopt a long term view of
our investments, with the flexibility
to take concentrated positions.
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 adopt a long term view of
our investments, with the flexibility
to take concentrated positions.
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 |
We have no tolerance for risks
that could damage the reputation
and credibility of Temasek.
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.
We have no tolerance for risks
that could damage the reputation
and credibility of Temasek.
Formalised processes instil the discipline to consider various perspectives. 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.
We consider Environmental, Social and Governance factors, alongside other issues and risks, when we make decisions as an investor, institution and steward. 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 longer horizons.
We track and manage risks proactively, through economic and market cycles, including specific risks at asset level.
We do not manage our portfolio
to short term mark to market changes.
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 2020)
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.
We comply with the laws
and regulations of jurisdictions
where we have investments
or operations.
Our policy permits only personnel authorised by a board resolution
to enter into derivatives
transactions within tightly defined
scopes and limits.
Our global footprint, coupled with an ever-evolving legal and regulatory environment and increasing oversight by authorities, underscores the importance of robust compliance programmes. Our Legal & Regulatory department (LR) 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. LR also provides regular education and training on key policies and processes.
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.
Our policy permits only personnel authorised by a board resolution
to enter into derivatives
transactions within tightly defined
scopes and limits.
Our Temasek Code of Ethics and Conduct (T-Code) and its related policies 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 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 considers potential 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. 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 work.
During the COVID-19 outbreak, we provided staff care packages and protective equipment, such as masks and hand sanitisers, to all our staff around the world. We communicated regularly with them on developments, particularly with guidance on impact in their cities and countries, and we monitored the health conditions and general well-being of our staff daily.
Our Business Continuity and Technology teams supported Temasek staff all over the world to adapt to long periods of working from home. Considerable effort was made to ensure staff could remain effective working from home and also to ensure we communicated with them on a more regular basis to check their welfare and keep them updated on issues affecting the firm. The experience of almost the entire firm working from home at various points provides many interesting learnings for us. We are grateful for the support and commitment of all our people, who rallied to fulfil the requirements and keep contributing to the firm's work. Their willingness to work through challenges brought about by the sudden requirements to stay at home, and volunteering in large numbers to help support wider COVID-19 initiatives led by the firm, has been inspiring.
Last year, we also donated N95 masks to Australia, Thailand and Indonesia to support communities who were affected by forest fires and haze.
Discover More
