Sembcorp gets greener, but brown still more golden

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??This week: Energy and urban development group Sembcorp Industries’ “Brown to Green” transition hit a milestone in the first half of 2023, with attributable renewables capacity surpassing conventional energy capacity for the first time.

The transition has been positive for Sembcorp from an environmental perspective, but from a profitability lens the shift has come at a cost to efficiency, as Business Times correspondent Janice Lim observed. Simply put, Sembcorp makes several times more money from each gigawatt of conventional energy capacity than from the same amount of renewable energy.

Sembcorp appears on track to hit its renewables target – set in 2021 – to reach at least 10GW of gross installed renewable capacity by 2025.

However, reaching its target for sustainable profits is less certain. Sembcorp’s ambition is to derive at least 70 per cent of its net profit from sustainable solutions – comprising renewable energy and integrated urban solutions (IUS) – by 2025. With just two and a half years to go, Sembcorp is not only far from its goal, but has been drifting farther. From a 40 per cent share of net profit in 2020, sustainable solutions’ contribution fell to 27 per cent in 2022 and remained at 27 per cent as at end-June 2023.

The problem for Sembcorp is that renewable capacity has not translated as efficiently into profit. In 2022, Sembcorp made about S$84,000 of net profit for every megawatt of conventional capacity. For renewables, each megawatt of capacity led to only S$30,000 of profit. From a profit perspective, each megawatt of conventional capacity is therefore worth more than two megawatts of renewable capacity.

Analysts expect Sembcorp to refresh its business and sustainability strategy in November this year. Two scenarios could occur:

• It seems unlikely that the company can retain the target of 70 per cent profit from sustainable solutions by 2025 without substantial changes to its portfolio. Sembcorp will probably have to lower the percentage target or push it to a later date, or scrap it altogether.
• Sembcorp might have to spend aggressively to grow renewable capacity, or it could struggle to replace the revenue lost from phased-out conventional capacity. That spending could come in the form of acquisitions, or additional capital expenditure to grow organically.

Transitioning from “brown to green” is naturally complex, and requires managing the needs of various stakeholders over different time horizons. Sembcorp’s next step come November will be critical to ascertaining how well it can tackle this transformation.

?? Top ESG reads:

1. GIC sustainability head Rachel Teo is leaving the sovereign wealth fund by the end of August, a little over a year after taking on the newly created role.
2. Shell has launched solar-powered electric vehicle charging stations at three locations in Singapore.
3. Asean’s sustainable finance taxonomy should provide for nuclear power as green technology, says the Centre for Strategic Energy and Resources.
4. Indonesia hopes to attract more investors by giving automakers two more years to qualify for electric vehicle incentives.
5. Beyond Meat cut its 2023 revenue forecast and missed second-quarter estimates as demand continues to slow for pricey plant-based meat products.

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