Sembcorp’s green profits don’t come easy

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??This week: Sembcorp Industries will more than double its investment into its “Brown to Green” business transition over the next five years, based on a refreshed strategic plan. Yet, even that may not be enough for the industrial group to hit a looming 2025 target to make 70 per cent of its profit from sustainable solutions.

It’s not just that the company has yet to convert its recently acquired renewable energy capacity into profitability at a fast enough pace. Sembcorp’s updated strategy also locks the company into natural gas as a transition fuel, which will make it challenging for the industrial group to sharply lower its exposure to fossil fuels in the near and medium term.

On Nov 6, Sembcorp unveiled a more ambitious set of decarbonisation targets after it appeared on track to beat its earlier goals ahead of schedule.

The company had said in 2021 that it would aim for 10 gigawatts (GW) of gross installed renewable energy capacity by 2025. As of end-September 2023, Sembcorp already had 8.7 GW of capacity already in hand or announced as being acquired. With the 2025 target likely to be met, Sembcorp now wants to more than double that figure to 25 GW of renewable capacity by 2028.

On Scope 1 and 2 – emissions generated directly and through power consumption – emissions intensity, Sembcorp in 2021 had set a target of 0.4 tonnes of carbon dioxide equivalent per megawatt hour (tCO2e/MWh) by 2025. After Sembcorp sold its coal-fired power plant in India, its nine-month emissions intensity was already 0.29 tCO2e/MWh, with the full-year forecast at 0.3 tCO2e/MWh. The company is now gunning to halve that to 0.15 tCO2e/MWh by 2028.

Sembcorp had also set a target in 2021 to almost treble land sales under its sustainable urban developments business to 500 hectares by 2025 from 172 ha in 2020. But that business has hardly grown, with full-year sales in 2022 still at 172 ha and nine-month sales to end-Sep 2023 at 120 ha. Sembcorp said it is reviewing its strategy and appointing a new chief executive for this segment.

Two other notable targets were left unchanged. First, Sembcorp is still aiming to derive 70 per cent of net profit – before corporate costs, deferred payment note income and exceptional items – from its renewable energy and sustainable urban development businesses by 2025. Second, Sembcorp remains committed to reducing absolute greenhouse gas emissions to 2.7 million tonnes by 2030 and to net zero by 2050.

The profitability target was challenging before this week, it remains challenging even with the new commitments. In 2020, when Sembcorp’s renewable capacity was just 2.6 GW, sustainable solutions contributed 40 per cent of profit. As Sembcorp’s renewable capacity has more than trebled to the current 8.7 GW, sustainable solutions’ share of profit has fallen to 27 per cent.

There is significant uncertainty whether Sembcorp’s plan to grow renewable capacity to three times its current level by 2028 is enough, especially given that the 70 per cent profit target has a 2025 date of reckoning. Sembcorp’s profit-to-capacity ratio is also poorer in renewables than in conventional energy. In 2022, the company made about S$84,000 in net profit for each megawatt of non-renewable capacity, compared with S$30,000 for renewables. Sembcorp may need to not only increase its renewable capacity, but also find ways to squeeze more out of every megawatt of electricity it produces.

Furthermore, Sembcorp’s refreshed strategy solidifies natural gas as a transition fuel that will help fund the decarbonisation process. Net profit from gas and related services is projected to decline at a compounded annual rate of only 2 per cent, which will make it harder for renewables to overtake this business.

One wildcard is the integrated urban solutions business. In the first six months of 2023, the business contributed S$48 million, or 29 per cent, of sustainable solutions’ S$165 million net profit. If Sembcorp can grow that slice to two or three times its current level, as was originally intended, that could be a significant contributor to its sustainable solutions portfolio.

?? Top ESG reads:

1. Ravi Menon, the Monetary Authority of Singapore’s outgoing managing director, says the regulator is exploring adding provisions on corporate culture to the Code of Corporate Governance.
2. Companies that are subject to Singapore’s carbon tax can’t use credits generated domestically to offset their taxable emissions, says the ministry in charge.
3. Most Apac fund managers haven’t made any changes to their sustainability policies in the last year, says law firm Morrison Foerster.
4. Indonesia won’t achieve its goal of 23 per cent renewable energy by 2025, President Joko Widodo said as he launched South-east Asia’s largest floating solar plant.
5. Banks might start reporting on the projected emissions reductions of their portfolios to better reflect their impact in helping clients to decarbonise.

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