One of Singapore’s best-performing stocks this year — an energy company backed by state investor Temasek Holdings Pte — is under fire for trying to avoid higher interest payments to bondholders that kick in if the company fails to meet emissions targets.
In order to reduce its official carbon footprint, Sembcorp Industries Ltd. sold two coal-fired power plants to an Omani group for $1.5 billion. The company told shareholders that the sale would lower its greenhouse gas emissions intensity by 38%, more than enough to dodge the penalties attached to the company’s sustainability-linked bonds.
But the firm financed the sale of the assets with a 15-year loan and retains “substantial” liabilities and “operational influence,” over the business, according to a report by Anthropocene Fixed Income Institute, a London-based think tank. That effectively makes Sembcorp a shadow bank for the coal industry, Anthropocene argues, and the carbon footprint of the coal plants shouldn’t be removed until the loan is fully repaid.
Sembcorp, in which Temasek holds a 49% stake, has two outstanding sustainability-linked bonds totaling S$975 million ($697 million). Under the performance targets, the company has to pay an extra 25 basis points in interest if it failed to meet the emissions intensity targets.
The sale of the coal plants is “purely a greenwashing exercise,” said Kelvin Law, an associate professor of accounting at Singapore’s Nanyang Technological University. “It’s the same facilities, same group of employees, same polluting activities, just under a different name.”
Payments are due in up to 24 years, and Sembcorp has the option of waiving the entire payment. Such conditions are unusual, but shareholders approved the transaction on Tuesday. “They didn’t have much choice,” Law said. “If the shareholders don’t let the company do it, the interest rate could go up.”
“It’s window-dressing so they can meet the sustainability targets and not pay a higher interest rate,” he added. “I have to admit, it’s a pretty innovative form of greenwashing.”
For Sembcorp, the deal underpins its “brown to green transformation” and helps reduce its emissions intensity, the company said in a statement. “Our commitments to our stakeholders, including our bondholders, are very clear and are not subject to interpretation.”
Sustainability-linked bonds are a new and rapidly growing type of ESG debt. Because the interest payments rise and fall based on the issuer meeting emissions targets over time, proponents say they encourage better environmental practices, compared with debt pegged to a specific project that may or may not reduce future pollution.
But detractors say SLBs have become yet another way for companies to secure cheaper financing -- and an enhanced reputation -- with minimal effort to deliver on climate goals.
“That Sembcorp is offloading its carbon emissions through an accounting transaction to meet SLB targets is unlikely to be what investors intended,” Cedric Rimaud, co-author of the Anthropocene report, said in an interview. “It’s not a real reduction in emissions, and it damages the credibility of SLBs.”
The firm aims to eventually generate 70% of its profit from sustainable solutions, up from 40% in 2020, and reach net zero by 2050. The company has also pledged to not finance new coal-fired energy assets.
The deal also underscores the struggle of divesting from coal assets amid a globally shrinking pool of capital for carbon-heavy projects. Sembcorp said in an Oct. 22 circular to shareholders that it had offered buyers the option of an all-cash transaction, deferred payment notes, or a combination of the two “given the limited availability of funding.” All bidders opted for some form of loan from Sembcorp, the company said.
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