From Our Chairman

We live in a volatile, uncertain, complex, and ambiguous world. 2022 has been the most challenging year for markets over the last decade. It started with optimism, with the clouds of the pandemic clearing, but shocks on multiple fronts soon followed.

We are seeing unprecedented rate hikes by central banks, sticky inflation, contemporaneous declines in equity and bond markets, and banking stresses in the US. This is happening even as the effect of earlier events — the global pandemic, the Russia-Ukraine war, and supply chain disruptions — continue to be felt. We are also seeing new trends such as the emergence of generative Artificial Intelligence, with implications across the political, social, and economic spheres. This is taking place against a backdrop of restrictive macro policy, lower growth, and a highly polarised geopolitical environment. At the same time, climate change remains an existential threat and time is running out to address it.

These challenges underscore the need for dialogue and understanding between nations, and for the public and private sectors to work together. Companies and governments can no longer sit on the sidelines. All of us must play an active role in solving shared global challenges as businesses cannot succeed unless societies thrive.

Having a strong and clear purpose enables companies to stay true to their course. Temasek’s Purpose — So Every Generation Prospers — is our North Star. Our Purpose is embedded in everything we do and ensures we do our part to build a better, more inclusive, and sustainable world.

Portfolio Performance

Navigating Uncertainty

The global economy remains fragile. Geopolitical tensions have continued to intensify on several fronts such as US-China tensions and the effects of the Russia-Ukraine war. Monetary policy remains tight globally as inflation stays elevated, although that has started to moderate which should result in central banks slowing down the pace of tightening. Global growth is likely to slow down. Recession risks are looming in key developed markets, which could be exacerbated by a culmination of shocks. These include the earlier banking stress that resulted in a slowdown in loan growth, particularly in the US.

In the US, the labour market has remained relatively tight. Hence, underlying inflationary pressures remain high. The Federal Reserve is therefore expected to keep monetary policy at current restrictive levels for longer. We are now seeing clearer signs of a more meaningful economic slowdown. This is due to the lagged impact on the economy from the Fed’s aggressive pace of monetary policy tightening since 2022 and tighter credit conditions following issues with regional banks. This also raises the risk of a recession later this year. However, should a recession happen, healthy private sector balance sheets suggest less need for households and corporates to reduce debt, which should help minimise the length and negative impact of a recession.

The Eurozone experienced a growth boost as gas prices fell on the back of an unusually warm winter. However, the material tightening in credit conditions which has continued to worsen are headwinds to growth. We therefore expect a slowdown in the Eurozone in 2023. Nevertheless, we believe opportunities can be found in quality investments that can withstand economic downturns, and sectors that will see an acceleration in capital spending due to business transformation and the green transition.

China’s top leadership has set a goal of around 5% economic growth for 2023, which appears achievable as the domestic economy reopens after COVID-19 restrictions. Services and consumption are expected to drive growth, fuelled by pent-up demand in the initial phase of the recovery. However, uncertainties remain on the sustained strength of the recovery in terms of job market improvement and income growth. A slowdown in foreign direct investments into the Chinese economy over the last few years has impacted economic growth. The government’s policy support is likely more modest than previous years, given the conservative growth target that is likely to be met, while high leverage limits the possibility of more aggressive policy easing.

In the near term, Singapore faces slowing global growth and elevated inflation against a challenging macro backdrop. While China’s reopening could provide some support, the Singapore economy is geared more towards domestic demand in developed markets, which are likely to experience a recession. Adding to the complexity, geopolitical tensions have risen, although Singapore could stand to benefit from diversification of supply chains around the region, both in the near and medium term.

Preparing for the Future

The world is changing rapidly and we are preparing for the road ahead. To this end, in 2019, Temasek developed our T2030 strategy — our 10-year roadmap to guide our strategic planning, capability building, and institutional development initiatives.

During the year, the merger of Sembcorp Marine and Keppel Offshore & Marine was completed, leading to the formation of Seatrium, a global player in offshore renewables, new energy, and cleaner offshore and marine solutions. We took part in SATS’ S$0.8 billion rights issue to partially fund the strategic acquisition of Worldwide Flight Services, which will transform SATS from a regional into a global air cargo handling platform. Olam Group completed the US$1.24 billion sale of a substantial minority stake in Olam Agri to Saudi Agricultural and Livestock Investment Company (SALIC) and Olam Agri entered into a strategic supply and cooperation agreement with SALIC. The transaction unlocks significant value for shareholders and accelerates Olam Agri’s growth.

With FTX, as alleged by prosecutors and as admitted by key executives at FTX and its affiliates, there was fraudulent conduct intentionally hidden from investors, including Temasek. Nevertheless, we are disappointed with the outcome of our investment, and the negative impact on our reputation.

An independent team has conducted an internal review of the investment and the findings were directly presented to the Board Risk & Sustainability Committee and to our Board. Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced.

Striving for a Sustainable World

We live in a time where humanity and businesses are being challenged in unprecedented ways through the confluence of Environmental, Social, and Governance (ESG) issues. These disproportionately impact the most vulnerable and add to complexities. Our long term stability and success against such a backdrop depend on thriving societies and cohesive, resilient communities. Our stewardship role means that we have a responsibility to protect our planet, as well as uplift communities by contributing towards a more equitable and inclusive future. As part of our ESG considerations, we also expect our portfolio companies to abide by sound corporate governance and to act ethically always.

Climate change is arguably the biggest crisis of our lifetime, and the pathway to limit warming to 1.5 degrees Celsius (1.5°C) is fraught with many difficulties. The positive momentum for the transition to net zero created at the United Nations’ COP26 conference in 2021 has been temporarily curtailed by geopolitical events, notably the Russia-Ukraine war. Countries have to now balance between the twin strategic interests of energy security and climate change.

However, although these events have reignited demand for coal and other fossil-based energy in the short term, they have concurrently spurred the push for green alternatives and an accelerated energy transition to address energy security and affordability. What is clear is the need for both developed and emerging markets to step up diversification of the energy mix — from renewables to nuclear energy — to bolster energy security while reducing carbon emissions. Greater funding is also needed to develop, commercialise, and scale carbon sequestration and technology-enabled decarbonisation solutions, to ultimately accelerate the transition of the real economy from grey to green.

Over the year, we accelerated our efforts to invest in climate-aligned opportunities, to enable carbon negative solutions and to encourage decarbonisation efforts in businesses. We have stepped up investments to scale innovative green solutions, and leaned in to accelerate the transition of incumbent companies. For example, we are part of a consortium led by Brookfield Renewable Partners that signed a binding agreement to acquire Origin Energy’s Energy Markets business, an Australian integrated power generator and energy retailer. The acquisition will accelerate decarbonisation of the energy grid, retire coal generation responsibly, and enable the energy transition in Australia.

Expanding our Footprint

To better access investment and partnership opportunities, and enhance our stakeholder engagements in Europe, we announced plans to open an office in Paris. This will complement our London and Brussels offices to strengthen Temasek’s network in Europe, extend our global footprint, and grow our talent pool across both the European Union and the broader Europe, Middle East, and Africa region. Our new Paris office will bring our total number of office locations to 13 across 9 countries.

Our Purpose — So Every Generation Prospers

In last year’s message, I shared that the Temasek team collectively defined our Purpose in the statement “So Every Generation Prospers”. Our Purpose serves as a single, unifying pledge that encapsulates who we are, and why we do what we do.

In Appreciation

I am proud of our Temasek team for staying resilient in an extremely challenging year. They have shown incredible adaptability and stayed true to our Purpose.

As always, our international and regional advisors have been generous with their insights and advice. I thank Sir Jeremy Farrar, who retired from our Temasek International Panel (TIP) on 31 January 2023 upon assuming the role of Chief Scientist of the World Health Organization. We have benefitted greatly from his guidance and insights, particularly during the COVID-19 pandemic, and wish him well in his new role. I welcome Robert Ng, Chairman of Sino Group, and Axel Weber, former Chairman of UBS Group AG, to the TIP. Robert had served on our Board for seven years before retiring on 1 October 2021, prior to taking up his new role with us. We look forward to tapping into their insights and advice in the coming years.

I am deeply appreciative for my fellow Directors’ counsel, perspectives, and guidance that have enabled us to navigate a complex world.

I am grateful to Teo Ming Kian who retired from our Board on 30 September 2022, after 16 years of service. We are pleased that he has taken on the role of Board Director of Temasek Trust. Robert Zoellick has also retired from our Board on 30 June 2023 after 10 years of service. I am happy to share that he has assumed the roles of non-executive Chairman, Americas of Temasek International and Chairman of the Temasek Americas Advisory Panel from 1 July 2023. Ajay Banga also stepped down from our Board on 30 April 2023 in view of his nomination as the World Bank Group President. I wish him well in his new role. We thank them for their contributions to our strategies and Board deliberations over the years.

Whilst the road ahead looks uncertain, we always embrace the mindset that every challenge brings with it new opportunities. By staying committed to doing well, doing right, doing good, and staying true to our Purpose, we are confident that Temasek will contribute to help every generation prosper.

LIM BOON HENG

Chairman

July 2023