Sembcorp: Carbon footprint arbitrage of a lifetime

15 minute read

Sembcorp's sale of thermal coal power in India shifts operational exposure to financial exposure and should not lead to a de-consolidation of carbon exposure. Public-to-private transactions that shift fossil ‘assets’ into private hands are a key theme in global sustainable finance and pose several important questions around investors’ role as providers of capital.

Singaporean infrastructure/energy owner Sembcorp is a particularly relevant example, also with implications for the sustainability-linked bond (SLB) market. The company is seeking to sell its subsidiary Sembcorp Energy India Limited (SEIL) with a 2GW thermal coal capacity to an Omani private consortium.

Sembcorp appears to argue that the transaction allows it to immediately de-consolidate the thermal coal assets’ carbon footprint and reduce its overall carbon intensity. The transaction will be funded by Sembcorp through a deferred payment (in kind) note, with payments coming due in 15 to 24 years, and Sembcorp will retain substantial liabilities of SEIL as well as operational influence.

Our view is that the coal generation/carbon footprint of SEIL should not be de-consolidated from Sembcorp’s footprint until full payment for the transaction has come through.

The key argument for this is that Sembcorp is simply shifting operation emissions into financed emissions through the transaction structure, with minimal real emissions reductions.