Innovation in the capital goods sector is driving a low-carbon industrial revolution, according to a new report from CDP. Released today, Bridging low-carbon technologies finds that demand for transformative technologies such as electrification, digitization and automation are growing significantly.
Energy storage systems alone could represent an investment opportunity worth $103 billion by 2030, as overall demand is set to grow from current levels of 10 to 125 gigawatts (GW) over that time frame. It’s no surprise then that CDP’s report identifies electrification as the biggest opportunity for the capital goods sector, with microgrids and energy storage systems ranked as the technologies with the greatest potential for green economic transformation.
Capital goods companies are identifying and investing in these transformative and radical technologies, as well as others such as hybrid renewables. CDP found Schneider Electric, ABB, Mitsubishi Electric, Siemens and Honeywell seem to be leading the way on this.
These were among the 22 companies CDP assessed for the report. Capital goods companies provide the products and solutions that major high-emitting sectors such as power generation, buildings and transport rely on. The report focused on firms in the ‘electrical equipment’, ‘industrial conglomerates’ and ‘heavy machinery’ parts of the sector. Overall, Schneider Electric, Vestas and CNH Industrial were identified as leaders in their fields.
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“We are on the verge of a low-carbon industrial revolution. Regulators and markets are demanding the decarbonization of high emitting sectors and the industrial corporations at the end of the chain are looking to their suppliers to find innovative new solutions and equipment. The good news is that the capital goods sector is starting to meet this challenge,” said Carole Ferguson, Head of Investor Research at CDP.
“From hardware to software, decentralization to digitalization, industrial suppliers are finding solutions that build low carbon into the DNA of big industry,” Ferguson continued. “Energy storage is a great example of this - the rapid price decline for renewable power is driving an estimated twelve-fold increase in demand for energy storage, catalyzing even faster integration of renewable technologies for both centralised grids and distributed generation.”
The main transition risk for the sector is managing emissions down the value chain. Scope 3 accounts for over 90 percent of the sector’s emissions, however corporate disclosure and management of these emissions are poor. Less than a third of the companies analyzed have a scope 3 emissions reduction target.
“Despite the innovation demonstrated by many of these companies, it is disappointing to see that disclosure and management of emissions in the value chain are lagging,” said Ferguson. “While these scope 3 emissions can be difficult to pinpoint, they are of huge importance to the capital goods sector given the wide markets these companies supply. Those companies that do not measure these emissions leave themselves exposed to risks and miss out on key opportunities from changing demands and regulation in the end markets they serve.”
The CDP report assessed companies across four key areas aligned with the recommendations from Mark Carney’s Task Force on Climate-related Financial Disclosures (TCFD). As the TCFD recommendations become mainstream, investors will increasingly expect capital goods companies to disclose how they are adjusting their business models to manage transition risks, while taking advantage of the opportunity to generate revenue from the global transition to a low-carbon economy.
Schneider Electric, Mitsubishi Electric and ABB lead the 8 electrical equipment companies’ ranking. Schneider earned the top spot in the transition risks and climate governance and strategy categories, but ranked second to Mitsubishi on transition opportunities. Mitsubishi Electric has filed the largest number of high quality patents with 657 (per 10,000 employees) between 2000 and 2017. More than 60 percent of them focus on technologies that relate to automation, connectivity and digitalization.
Vestas, Siemens and Honeywell topped the ranking of 7 industrial conglomerates companies assessed. Vestas’ leadership in hybrid renewables and large-scale digitalization provides a prime example of how renewable energy has become an important profitability driver for several companies in the sector. Meanwhile, Siemens is leading in microgrid projects.
Heavy machinery lags electrical equipment and industrial conglomerates on innovation. Regulation of this sub-sector has so far focused on air quality rather than CO2 emissions and the end-markets served (e.g. agriculture, mining) are relatively traditional. At the same time, heavy goods vehicles are still largely dependent on diesel as a primary fuel. CNH Industrial, Kubota, and Hitachi Construction Machinery were the top 3 of the 7 heavy machinery companies assessed.
Several other firms – electrical equipment firm Ametek Inc.; industrial conglomerates companies CK Hutchison Holdings Ltd and CITIC Limited; and heavy machinery manufacturers Caterpillar Inc. and MAN SE – did not respond to CDP’s 2017 climate change questionnaire and could not be included in the report.