Singapore’s sovereign wealth fund Temasek has made the first reduction in portfolio emissions against climate targets it set four years ago.
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In 2020, the company pledged to halve the emissions of its S$389 billion (US$288 billion) portfolio by 2030 and to achieve net zero emissions by 2050. In its inaugural sustainability report, the company revealed a 1 million metric tonne carbon dioxide equivalent (tCO2e), or 5 per cent, drop in total emissions over the last year, against 2010 levels.
The decline was primarily driven by the portfolio firm Sembcorp Industries’ divestment of its Indian coal power business – a move that a think tank called the “carbon footprint arbitrage of a lifetime” when it was first announced in 2022.
Stockholm-based watchdog Anthropocene Fixed Income Institute (AFII) argued that the transaction was “simply shifting operational emissions into financed emissions through the transaction structure”, allowing Sembcorp to reduce its carbon footprint on paper before full payment for the sale had come through.
At a media briefing for its sustainability report published on Tuesday, Temasek addressed AFII’s critique of the controversial Sembcorp deal.
“While we fully acknowledge all the criticism around whether there has been just a shift in boundaries and so forth, the other way to look at it is that Sembcorp really developed their brown-to-green strategy two years ago,” said Franziska Zimmermann, director for sustainability and climate change strategy at Temasek.
“That was a decisive strategic decision for the company to focus their future business activity on the renewable energy space. So the assets that it has divested from were just simply no longer part of its strategy,” she said.
The wealth fund’s net reduction in portfolio emissions – which could also be attributed to the decarbonisation efforts of other investees and changes to its portfolio composition – were diminished by a rise in Singapore Airlines (SIA)’s emissions, as global air travel continues to recover post-pandemic, and the expansion of the emissions reporting boundaries of some portfolio companies.
Temasek’s total portfolio emissions exclude Scope 3 emissions associated with its investment portfolio and positions in private equity funds, credit and other assets. Source: Temasek’s Sustainability Report 2024
Temasek’s own operating emissions increased year-over-year to 19,078 tCO2e, mainly driven by emissions generated from business travel, which nearly doubled compared to the year ending 31 March 2023, though it remains below pre-pandemic levels.
When asked how carbon credits would factor into meeting their net zero targets, Kyung-Ah Park, Temasek’s head of ESG investment management and managing director of sustainability, said it has chosen not to offset its portfolio emissions and instead would focus on engaging big emitters to decarbonise and scale up green solutions, such as supporting SIA’s initial sustainable aviation fuel (SAF) pilot before the airline set a target to use 5 per cent of SAF for all flights departing the city-state by 2030.
So far, the investor has engaged 19 major portfolio companies representing 94 per cent of its total portfolio emissions, of which 11 have set net zero targets by 2050.
However, Park said that Temasek uses high-quality carbon credits to offset residual institutional emissions after “doing the hard work of using the carbon mitigation hierarchy of trying not to consume as much, making [operations] much more efficient and using renewable energy where we can.”
No fossil fuel exclusion policy
In response to an Eco-Business query, Park confirmed that Temasek has not put in place any coal, oil and gas exclusion policies as “we don’t want it to be black and white.”
“If we think that in certain cases we can bring certainty and additionality to the [green] transition, and turbocharge a real economy impact and in the process of going from brown to green capture value, then we will invest in those types of companies,” she said.
“Having said that, because of our safeguards and due diligence, and because of our focus on carbon exposure and the transition, the reality is we don’t do a lot of investment in oil, gas and coal.”
A downturn in the offshore energy sector in recent years led to the merger of Singapore conglomerate Keppel’s offshore rig unit and Sembcorp Marine – two of the world’s largest oil rig builders, both of which Temasek was the largest shareholder in – last February. The state investor continues to hold the largest stake in the merged entity, which is aiming to pivot to offshore renewables and solutions for new energy sources like hydrogen and ammonia.
Last month, Temasek also announced its planned divestment of the Singaporean liquefied natural gas (LNG) and natural gas firm Pavilion Energy – which it established in 2013 – to oil and gas major Shell, which is expected to be completed by the first quarter of 2025.
However, Rohit Sipahimalani, Temasek’s chief investment officer, told Eco-Business that “the decision to divest Pavilion Energy to Shell was based purely on commercial considerations”.
“We believe that Shell is well positioned to grow Pavilion’s business and strengthen its global LNG hub in Singapore. Carbon emissions reductions were not a driving factor in the divestment,” said Sipahimalani, who added that Pavilion’s current annual carbon emissions amount to 33,500 tCO2e, which is less than 0.5 per cent of Temasek’s interim 2030 portfolio decarbonisation target.
Temasek has not ruled out financing early coal phase-out projects, which the city-state’s sustainable finance taxonomy allows for under a separate set of criteria.
At the briefing, Sipahimalani shared that Temasek’s planned acquisition of Australian power generator and retailer Origin Energy, which fell through December, would have resulted in the early decommissioning of Australia’s biggest coal-fired power station and its replacement with renewables.
He clarified that if Temasek invests in early coal retirement projects in the future, it would report emissions associated with such projects separately from its total portfolio emissions.
The reason for carving out these emissions is so that Temasek’s employees are not disincentivised from investing in the transition of high-emitting industries – which might result in initial spikes in portfolio emissions – given their compensation is tied to achieving the firm’s climate targets, said Sipahimalani.
Temasek also unveiled that its green and transition-themed investments, or so-called “sustainability living trend” bucket, currently makes up 12 per cent of total net portfolio value.
Of the S$44 billion (US$32.6 billion) in sustainability living trend-aligned investments to date, S$38 billion (US$28.1 billion) has gone to sustainability-focused investments and S$6 billion (US$4.4 billion) to climate transition investments. Its chief investment officer Rohit Sipahimalani said that “among all our trends, the smallest part of our portfolio, but it’s the fastest growing.” Source: Temasek Sustainability Report 2024
Raising the internal carbon price
In April, Temasek increased its internal carbon price to US$65 per tonne of CO2e – 30 per cent up from the previous figure of US$50 per tonne in 2023 and more than triple Singapore’s current carbon tax of S$25 (US$18.5) per tonne for large polluters
The price is not only used to evaluate potential investments, but also applies to employee business travel. Sipahimalani added that the carbon cost of Temasek’s investments are also subtracted from management incentives, which are derived from how well they make returns on their invested capital.
“Whatever is deducted is then deferred to be distributed only when we achieve our goals for 2030,” he said.
Sipahimalani said that the carbon price is reviewed every two years and will progressively increase to US$100 per tonne by 2030, pegged to estimates recommended by organisations like the International Energy Agency and United Nations Principles for Responsible Investment’s Inevitable Policy Response.
“Two years later, if at that point in time we find that the estimates for 2030 are determined to be US$120, we may have to [raise the carbon price] faster.”
Correction note: Paragraphs 22 and 24 have been edited to reflect that Temasek’s sustainability-aligned investments make up 12 per cent of its total portfolio emissions and that the internal carbon price was raised from US$50 per tonne last year.
