In the drive towards net zero, the most effective way asset owners can reduce the carbon intensity of their portfolios is to simply cut out exposure to fossil fuels. It is an easy and quick way to prove sustainability, but selling assets to third parties simply reduces the asset owner’s carbon emissions with little impact on climate change.
For state-owned investors with large strategic legacy assets, exclusion is not necessarily an option. Abu Dhabi’s Mubadala Investment Co. (MIC) and Singapore’s Temasek are among those seeking to reduce the carbon in their portfolios while maintaining their ownership of carbon emitters. Rather than selling assets and making them someone else’s problem, the SOIs are looking instead at transforming the businesses.
Mubadala: Reducing Carbon Intensity of Emitting Industries
In its latest sustainability report, MIC’s oil and gas subsidiary Mubadala Petroleum announced this week that it had reduced greenhouse gas emissions by 25% over the past three years with a 4% reduction in 2020 alone. As part of its commitment to energy transition to lower carbon emissions, it has adopted a 62% gas weighted portfolio – natural gas being lower carbon intensity than oil.
Mansoor Mohamed Al Hamed, CEO, Mubadala Petroleum, said: “Sustainability has always been central to our approach, but in 2020, when the world faced unprecedented challenges due to the COVID-19 pandemic, our corporate values and focus on sustainability were critical in enabling our resilience. This report highlights the significant progress we are making on key focus areas such as emissions and lowering our environmental footprint, while also supporting the energy transition.”
At the same time, MIC has focused on impact investment through Masdar. Its renewables subsidiary is pushing into frontier markets in the Commonwealth of Independent States – Kazakhstan, Uzbekistan and Ukraine – to develop their massive clean energy potential in solar and wind. MIC also plans to invest up to GBP5 billion in the UK is set to include clean energy and infrastructure components and Masdar is likely to step in, as it stamps its mark on renewables investment across the world.
In the home market, MIC is spearheading the development of a green hydrogen economy. The Abu Dhabi Hydrogen Alliance brings together Mubadala, the increasingly active Abu Dhabi Developmental Holding Company (ADQ) and national oil company ADNOC to “establish Abu Dhabi as a trusted leader of low-carbon green and blue hydrogen in emerging international markets.” The alliance is seeking to extend the use of hydrogen as an energy source in utilities, transportation and industry.
Masdar’s interest in the hydrogen economy – touted as an important source of energy and to produce ammonia and methanol while reducing carbon emissions – chimes well with policies supporting carbon capture, utilization and storage (CCUS) drive, which could provide blue hydrogen as a low carbon energy source. Blue hydrogen is derived from natural gas through the process of steam methane reforming. The carbon dioxide emissions produced are then captured and stored underground using CCUS, a carbon negative solution that leaves nearly pure hydrogen. The sector is at an early stage of development and major challenges lie ahead, but MIC’s involvement suggests a long-term commitment to low carbon – albeit without setting explicit targets on the quantity of carbon reduction and stating how success could be measured.
Temasek: Assisting the Decarbonization “Journey”
Temasek has also looked to transformation of assets like Singapore Airlines and oil rig supplier Sembcorp Marine rather than exclusion in its goal of halving net carbon emissions of its portfolio by 2030. The Singaporean state-owned investor has not set hard carbon targets for its portfolio companies, preferring instead to support them in their decarbonization.
In a move that seems incongruous with climate change objectives, Temasek has thrown financial lifelines to its carbon emitting enterprises in an effort to keep them afloat. Singapore Airlines was given a lifeline by Temasek which injected a total of nearly US$13 billion in new equity and convertible bonds. In June 2021, Startree Investments, a wholly owned subsidiary of Temasek, committed to subscribing up to 67% of a S$1.5 billion (US$1.1 billion) rights issue for Sembcorp as it battles market challenges wrought by the coronavirus pandemic. Temasek is also the largest shareholder in Keppel Corp, which is looking to merge its offshore and maritime assets with Sembcorp in an effort to consolidate and survive.
The transportation assets have done nothing to help the state investor’s carbon ambitions. Temasek’s 2021 annual report notes that its carbon emissions have risen by more than a third to 30 million tonnes over the past decade – a figure it aims to bring down to 11 million in net terms by 2030 and net zero by 2050. It has adopted a “a three-pronged approach”: investing in climate-aligned opportunities; enabling carbon negative solutions; and encouraging decarbonization efforts in businesses. This strategy is accompanied by the bold step of carbon pricing, to internalize the economic and social costs of carbon emissions and guide investment decisions, with an initial internal carbon price of US$42 per tCO2 – a price that is set to increase over the coming decade.
“We never said we will not invest in an emitter of carbon - as long as this emitter is on a journey, a path and we can be helpful in terms of how we can shift them,” Nagi Hamiyeh, Temasek International’s joint head of investments, said in an interview with Bloomberg last month.
Indeed, Temasek appears to be putting its money where its mouth is. In April, Singapore’s Maritime Ports Authority signed a memorandum of understanding with Singapore’s Temasek to explore decarbonization opportunities with the state investor and companies in its portfolio. Sembcorp also pledged S$10 million to establish a Singapore maritime decarbonization centre that will fund maritime decarbonization research and technology development projects, including reducing emissions in port operations and shipping and exploring low carbon ship fuels.
In the bid for net zero, carbon negative technologies are also being explored. As a voracious venture capital investor, Temasek is funneling liquidity to firms with innovative solutions to climate change and food security.
Like MIC, it is taking a close look at CCUS and the hydrogen economy. Last month, it entered into a definitive agreement with Nanofilm Technologies to create Sydrogen Energy, which will market parts used in the production of fuel cells and electrolyser systems in hydrogen production. Nanofilm claims that its solutions can drastically cut the cost and improve the durability of technology that is necessary for the development of the hydrogen economy.
Agtech is another focus of Temasek’s sustainability agenda. Singapore itself has a vibrant agritech start-up ecosystem as the island nation’s government seeks to strengthen its food resilience and achieving its “30 by 30” goal – which is to produce 30% of its nutritional needs locally by 2030, up from less than 10% in 2020. Temasek’s investments in agritech has ranged from startups to public companies and included alternative proteins, vertical farming and biotech.
Temasek was one of four leading state-owned investors that threw their weight behind the Brookfield Global Transition Fund last month to invest in clean energy and bolster the Paris climate commitment of net zero by 2050. Temasek and Canadian public pension fund OTPP came on board as founding partners, committing “significant capital” in the fund as well as planning to invest alongside it. Two other Canadian PPFs – PSP Investments and IMCO – have also committed as “meaningful” investors in the fund, which has an initial close of US$7 billion, with a hard cap of US$12.5 billion. The huge financial commitments indicate the weight Temasek is giving to energy transition in the drive towards net zero. The fund will invest in scaling up renewables and transforming carbon-intensive businesses.