THE ability of Singapore Airlines : C6L 0% (SIA) to decarbonise its operations would be crucial for Temasek to hit its net-zero targets, said Dilhan Pillay, chief executive officer of the state investment company.

“Much depends on the airline,” he said, when asked whether Temasek, which owns 55 per cent of SIA, is on track to halving its 2010 level of emissions by 2030. This means its total portfolio emissions have to be cut to 11 million tonnes by 2030, from the current 27 million tonnes. The state investor is also targeting to be net-zero by 2050.

Pillay was speaking to reporters on Tuesday (Jul 11), upon the release of Temasek’s annual financial performance for the financial year ended Mar 31.

Unlike other carbon-intensive sectors, which may have various avenues to decarbonise, the only way SIA can reduce its carbon emissions is by switching from fossil fuel to sustainable aviation fuel (SAF), said Pillay. (SAFs are made from sustainable feedstock materials such as forestry and agricultural waste and used cooking oil.)

The state investor’s future investments will be increasingly in low-carbon intensive companies. It had in 2016 identified four long-term structural trends – digitisation, sustainable living, future of consumption and longer lifespans. Since then, it has been raising its portfolio allocation in these low-carbon emitting opportunities.

Pillay, referring to other carbon-intensive portfolio companies, said power-generation companies can decarbonise by changing their energy mix and incorporating more renewable-energy sources. Emissions for the built-environment sector can be reduced when greener solutions to the production of steel and cement become available.

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“But for aviation, which we all depend on for trade, connectivity for leisure, etc, the only way to reduce emissions in the long term is sustainable aviation fuel. And then you have to look at things like the feedstock, the process, etc. So it’s not a simple thing to do,” he said.

“The good thing about it is the airline is very focused on this.”

The resumption of air travel has accounted for a large part of the increase in Temasek’s total portfolio emissions, he added.

Carbon emissions for FY2023 rose to 27 million tonnes of carbon dioxide (CO2) equivalent, from 26 million tonnes in the previous financial year. This is still lower than the pre-Covid level of emissions in FY2020, when emissions were at 30 million tonnes.

Pillay noted that SIA is utilising only 79 per cent of its fleet capacity and has not returned to its pre-pandemic levels of operation.

Besides engaging with the carrier on the use of sustainable aviation fuel, part of the S$15 billion lifeline Temasek threw to SIA at the height of the Covid-19 crisis was for the purposes of renewing its fleet, which is now 25 to 30 per cent more fuel-efficient.

Rohit Sipahimalani, chief investment officer of Temasek, said that the carbon intensity of SIA has actually gone down.

This is in line with an overall slight reduction in the weighted average carbon intensity across Temasek’s portfolio, which stands at 116 tonnes of CO2 equivalent per S$1 million of revenue in FY2023, down from 119 tonnes in the previous FY.

Pillay also announced during Temasek’s annual review that sustainability and climate change will be elevated to a core pillar under its wider 2030 investment strategy. Before this, sustainability and climate change was an add-on consideration that Temasek paid attention to, rather than a core pillar.

The elevation reflects a gradual evolution in Temasek’s approach. It had included sustainability and climate change when it started formulating its 2030 strategy in 2019.

Temasek utilises an environmental, social and governance (ESG) framework to assess its current and potential investments.

“And if we identify key ESG risks and there’s no pathway to resolving them, we will not invest,” said Pillay. “Anyone who has long-term interests in assets and businesses bears the tail risk of the businesses that fail to mitigate, adapt and transition.

“Companies that fail to act face higher spreads on financial instruments, we bear increased premiums for insurance or may well have uninsurable stranded assets, resulting in potentially lower valuations, effecting a higher cost of capital in the asset pricing model.”

Temasek’s stance is that it will not divest from nor exclude carbon-intensive companies. It prefers instead to work alongside such companies on their decarbonisation journeys. This stance means, however, that in a bid to reach its net-zero targets, it needs to increase its investments in climate-aligned sectors and solutions that reduce carbon emissions.

Its portfolio exposure to the four long-term growth opportunities – digitisation, sustainable living, future of consumption and longer lifespans – stands at 31 per cent this year, an increase from 13 per cent in 2016.

Temasek did not reveal the exact portfolio allocation for the segment on sustainable living, which now accounts for the smallest portion of the four areas. It also declined to reveal whether it has set a target on how much it intends to increase its allocation towards this segment.

However, deputy CEO of Temasek Chia Song Hwee said it would be the fastest-growing portion of the company’s portfolio.

He noted the lack of a playbook for navigating investors and companies on their decarbonisation journey: “We really have to go figure it out ourselves, develop capabilities, build knowledge, what is important, what is not, to be able to then engage our portfolio more actively, and to be able to speak with some credibility.”

Pillay said that Temasek actively engages its portfolio companies on their decarbonisation plans, and that some of them are “significantly ahead”.

Given that these companies make up 40 per cent of Temasek’s portfolio, their being able to be ahead of the game, or to keep up with the game, is not only critical for their own success, but also Temasek’s, he said.

Chia added that Temasek, as majority shareholder in many of these companies, has not had to exercise its shareholder rights by voting against these companies’ management at their annual general meetings.

“The fact of the matter is the world is heading in that direction, right? So everybody had better get on the train, because otherwise, it will seriously impact your business going forward,” he added.