7 August 2018
“We expect to see more regulation coming through from the end markets especially on energy efficiency, and this should drive innovation and improve the emissions of the sector…”
Carole Ferguson, Head of Investor Research at CDP, provides insight on the role of industry in helping to meet the goals of the Paris Agreement. She highlights the race of the capital goods sector to lower carbon emissions and just how much power large companies have in creating change. Tim Nixon, Managing Editor, Thomson Reuters Sustainability
Meeting the goals of the Paris Agreement to keep global warming below 2 degrees celsius will be a complex process, requiring players at many levels to commit and innovate. While national governments have an essential role to play in creating a regulatory framework to enable this transition, the private sector will have to do much of the heavy lifting in terms of innovation and business model change.
One sector, capital goods, could hold significant influence when it comes to lowering emissions and meeting these goals. Capital goods companies provide the products and services that major high-emitting sectors such as power generation, buildings and transport rely on, and have the potential to transform the emissions profile of these end markets.
Last week, environmental non-profit CDP examined 22 capital goods companies to assess their role in driving forward low carbon innovation and growth. The research looked at how these companies are harnessing trends such as electrification, digitalization and automation to help meet the goals of the Paris Agreement.
Electrification ranks as the biggest opportunity for the sector, with microgrids and energy storage systems identified as the technologies that could have the greatest impact on green economic transformation. Indeed, the overall demand for energy storage is set to grow twelve-fold in 12 years (from 10 gigawatts now to 125GW by 2030), creating a potential investment opportunity of $103bn.
Which capital goods companies are winning the race on low carbon?
The capital goods sector is wide-ranging and diverse, but we focused our research on the electrical equipment, industrial conglomerates and heavy machinery sub-sectors, as they serve a broad set of end markets and could all benefit from low carbon technology trends.
Electrical goods companies are positioned well based on their diverse product range, high margins and R&D investment. The majority of these companies offer some form of transformative technology which has the potential to transform the way the market operates, such as microgrids and behind-the-meter solutions. The top four ranking companies in this group – Schneider, ABB, Mitsubishi Electric and Eaton – all offer technologies which are transformative, positioning them well for long term sustainable growth and protecting them from disruption in end markets.
The number and quality of patents filed is another useful metric to look at, with Mitsubishi Electric leading the pack here. The company filed 657 high quality patents (per 10,000 employees) between 2000 and 2017, and more than 60 percent of these focus on technologies that relate to automation, connectivity and digitalization.
Industrial conglomerates face a slightly trickier challenge because of their exposure to fossil fuel energy, with around a third of revenues derived from fossil-fuel power and oil & gas. That said, all the companies we looked at are producing technologies which are key to enabling decarbonization trends. Leaders such as Vestas, Siemens and Honeywell currently have the business mix with the largest growth potential, driven by renewable energy, building efficiency systems and digitalization technologies.
Heavy machinery faces the most challenging transition. For these companies, regulation has so far focused on air quality rather than carbon emissions while the end-markets – such as agriculture and mining – are relatively traditional. At the same time, heavy goods vehicles are still largely dependent on diesel, and innovative solutions are currently more focused around hybridization, with full electrification some years away. Autonomy is gaining momentum, in the form of autonomous driving, streamlining of operations (e.g. precision agriculture, platooning) and driving significant efficiencies, however these ideas are still at a very early stage.
Leading the heavy machinery group are CNH Industrial, Kubota and Hitachi Construction. While CHN Industrial has the largest portfolio of low-carbon products, Hitachi ranks first for the total number of patents filed, with 56 percent focusing on technologies relating to the electrification of heavy machinery.
How far can big industry get us?
The real challenge for the sector as a whole is that although its Scope 1 (directly produced) and Scope 2 (indirect from energy use) emissions are relatively low, over 90 percent of its emissions are Scope 3, which are those created in the use of sold products and services.
This mirrors the emissions profile of the autos sector, but unlike the autos sector where fleet emissions (Scope 3 emissions) are regulated, corporate disclosure and management of Scope 3 emissions is relatively poor. The wide array of products and a combination of intermediate and finished goods makes the measuring of Scope 3 emissions more challenging. Leading companies have taken up the challenge and are setting Scope 3 emissions reduction targets, but only a third of companies analyzed have done so.
However, change may be on the horizon. We expect to see more regulation coming through from the end markets especially on energy efficiency, and this should drive innovation and improve the emissions of the sector, as happened when carmakers started being regulated on fleet emissions.
Capital goods companies need to be prepared. Those that have a structured approach to doing life cycle analysis, supplier engagement and measuring and managing of Scope 3 emissions will be the real winners in the opportunities offered by their changing end markets.