Machine makers are leading the way to low-carbon
With regulators and markets increasingly demanding the decarbonisation of high-emitting sectors, we are on the verge of a low-carbon industrial revolution. However, to get over the line the products and services supplied to these sectors need to transform.
The good news, according to our new investor research, is that the makers of capital goods – the companies supplying the machines, parts and equipment that keep big industry going – are starting to step up.
Transforming big industry
We analysed companies in the ‘electrical equipment’, ‘industrial conglomerates’ and ‘heavy machinery’ parts of the sector. The companies serve a wide set of end markets, and could all benefit from low-carbon technology trends.
We ranked the technologies of these companies as being either incremental, radical or transformative. Transformative technologies have the potential to disrupt existing markets, and include technologies such as micro-grids, hybrid renewables and behind-the-meter solutions.
Electrical equipment is leading the way here, with seven out of the eight companies developing technologies that we consider to be transformative. Schneider Electric, in particular, is well positioned through its innovative suite of products which includes micro-grids and energy storage solutions.
Industrial conglomerates are also innovating fast, producing technologies that could drive forward economic decarbonisation; however, the sub-sector still has high exposure to fossil fuels. Siemens emerges as the company with the most transformative set of products, including ‘internet of things’ platforms, electromobility and renewable technologies.
Heavy machinery is further behind. Regulation here has so far focused on air quality rather than carbon emissions and the end-markets served - such as agriculture and mining - are less prone to disruption. At the same time, heavy goods vehicles are still largely dependent on diesel, while innovative solutions are currently more focused around hybridisation, with full electrification some years away.
The low-carbon opportunity set
In terms of the biggest opportunity for the sector, electrification stands out in particular, 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 10GW now to 125GW by 2030), creating a potential investment opportunity of $103bn.
One innovation we are seeing by these companies is the development of parts for ‘smart factories’, which use artificial intelligence and real-time data to optimise productivity and efficiency across the value chain.
Another to look out for is in the development of precision agriculture, in which capital goods makers are helping supply farmers with technologies such as drones, satellites and mass-scale data collection, to increase productivity, improve water management and reduce their environmental impact.
The sector is innovating fast and coming up with a constant stream of new products and technologies. In our analysis of patents, Japanese companies perform well, with Mitsubishi Electric leading the pack – more than 60% of its high-quality patents focus on technologies related to automation, connectivity and digitalisation.
The need to measure and manage
While the sector is pushing on with green innovation, investment and research, it is not performing as well on environmental governance.
Indeed, while the capital goods sector is not intensive from direct (Scope 1) or indirect emissions (Scope 2), those produced through the value chain (Scope 3) are significant and account for over 90% of the sector’s total emissions. Despite the importance of Scope 3 to the sector, measurement and management of these emissions are not where it needs to be – Scope 3 disclosure lags behind other sectors, and only 32% of the companies we analysed have a Scope 3 emissions reduction target.
While we recognise Scope 3 emissions can be hard to pinpoint, these companies need to get better at understanding the emissions profile of their portfolio, if they are going to be able to offer technologies to support the decarbonisation of big industry. Those that do not start measuring and managing these emissions leave themselves exposed to risks and miss out on key opportunities from the changing demands and dynamics in the end markets they supply.
Carole Ferguson, Head of Investor Research, CDPCDP