Carole Ferguson of CDP says Schneider Electric, Mitsubishi Electric, Vestas and Siemens are among the capital goods firms that are contributing most to the low-carbon transition

Some of the world’s most influential companies are in the capital goods sector. These are the businesses that make the machines, parts and equipment that many high-emitting industries rely on. It’s encouraging, therefore, that capital goods makers are starting to step up to the challenge of limiting global warming to below two degrees, as set out in the Paris Agreement.

At CDP, which is an environmental non-profit and investment research provider, we recently published research showing that companies such as Mitsubishi Electric, Schneider Electric and Siemens are harnessing low-carbon trends and investing in technologies that have the potential to transform how big industries operate, and the emissions they account for.

Capital goods companies provide a range of products and services to industries like power generation, transport and construction. The sector is made up of a number of sub-sectors, including electrical equipment, industrial conglomerates and heavy machinery.

The path to a low-carbon economy will require industrial conglomerates to make some significant changes

Electrical goods companies in particular are in prime position to drive forward the low-carbon industrial revolution. They have the most resilient business models of the companies analyzed, combining high margins, short-cycle products and exposure to high growth markets, all of which protect them from market disruption.

Schneider Electric has set the gold standard when it comes to capitalizing on changing market demands. Indeed, Schneider is well positioned to drive systemic changes in energy systems through its innovative suite of products that include microgrids and energy storage solutions. Schneider has also done well integrating climate change into its business strategy with good board-level climate expertise, and is among the few analyzed companies that have committed to the Science Based Targets initiative.

The path to a low-carbon economy will require industrial conglomerates to make some significant changes. One of the biggest challenges for this group is that they continue to have high exposure to fossil fuels, with about one-third of revenues still derived from fossil fuel power and oil and gas. In spite of this, industrial conglomerates are starting to pick up the pace on other fronts and are producing technologies that could drive forward economic decarbonization (Vestas, Siemens and Honeywell rank highest here).

One of the biggest challenges for this industry is its high exposure to fossil fuels. (Credit: Kodda/Shutterstock)

Denmark’s Vestas has set the bar high with climate governance, boasting the best climate-related board expertise and risk-management, the best supplier engagement, and second-best CO2 reduction target. The wind systems manufacturer is also well positioned to capitalize on growth markets with 100% of the business in renewables.

Siemens’ product suite is the most transformative of the industrial conglomerates companies, with ‘internet of things’ platforms, electromobility and energy storage all in its repertoire. Siemens is also heavily exposed to growth markets, with more than half of its revenues coming from renewables, building technologies, energy transmission and distribution, as well as industrial digitalization and automation.

The road to decarbonization could prove a bumpier ride for the heavy machinery sub-sector. This is mainly because the end markets they supply – such as farming and mining – tend to be more traditional, and heavy goods vehicles are still largely dependent on diesel. That said, transformative technologies in the form of electrification, hybridization and autonomy are on the horizon and could gain momentum over the coming years.

Capital goods makers have to up their games on disclosing Scope 3 emissions

Leading the sector is CNH Industrial and Kubota. CNH Industrial has unlocked innovation and is leading the way with a wide range of electric machinery products and advanced automation. Kubota is diversified across multiple end markets and geographies, so has greater business resilience than its peers.

While capital goods makers are stepping up on innovation and low-carbon solutions, they are not going far enough when it comes to measuring and managing their total environmental impact. The sector doesn’t have high Scope 1 (directly produced) or Scope 2 emissions (indirect from energy use), but over 90% are Scope 3 (occurring further down the value chain) and governance of these emissions is lagging.

Indeed, for a sector so aligned with low-carbon revenues, corporate disclosure and management of Scope 3 emissions is poor, and less than a third of the companies analyzed have a Scope 3 emissions reduction target. If capital goods companies are going to be able to manage risks and take advantage of rising demand for low-carbon technologies, they need to up their game on disclosing and managing these emissions.

Carole Ferguson: 'New regulation should drive better disclosure.'

Regulation will have a key part to play in driving change here, and we expect to see more coming through from the end markets in years to come. New regulation should drive better disclosure and encourage improvements in efficiency and emissions reduction, as happened when carmakers started being regulated on fleet emissions.

Capital goods companies should get on top of these challenges now, to avoid risks coming through the value chain, but also to take advantage of the significant opportunities they have to support big industry on decarbonization. There is still a big gap between where many sectors are and where they need to be, and capital goods companies are well placed to bridge that gap.

Carole Ferguson is head of investor research at CDP

Main picture credit: Olivier Le Moal/Shutterstock
CDP  manufacturing  Science Based Targets  Schneider Electric  Siemens 

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