250 years ago, innovations in industrial machinery, energy technology and manufacturing helped fuel the Industrial Revolution.
Today, as the world faces up to the environmental challenges brought about by that very revolution, we look at the role capital goods producers could play in sparking a second industrial revolution, this time with low carbon technology at its heart.
The ‘capital goods sector’ is a blanket term for companies that produce the goods and services that enable other companies in the global economy to produce their own goods.
Interestingly, while the sector itself ranks low in terms of direct emissions, it supplies some of the world’s highest emitting industries, so could hold the key to unlocking the low-carbon transition.
Over 90% of this sector’s emissions are ‘Scope 3’, meaning that they happen indirectly, mainly occurring further down the value chain through the use of goods that have already been sold, for example when an agricultural business uses heavy machinery built by the capital goods sector.
Meeting the challenge of the green industrial revolution
CDP’s latest report, Bridging Low Carbon Technologies, looks at 22 of the world’s largest Capital Goods companies across Electrical Equipment, Industrial Conglomerates and Heavy Machinery.
It finds that the leaders in these sub-sectors are already taking advantage of trends in low carbon technology, responding proactively to increasing regulation and harnessing innovative technologies that could transform energy markets. Top performers in their sub-sectors are Schneider, Vestas and CNH Industrial, with a number of other companies performing well in product innovation.
Capitalizing on low carbon technologies
However, while sector leaders are performing well, there is still room for the sector to capitalize on the transition to a low carbon economy. One example is electrification, which represents the biggest opportunity for the sector. Products linked to micro-grids, energy storage, renewables generation and connectivity are all expected to see accelerating growth in the coming years.
Demand for energy storage, for example, is predicted to grow from 10 gigawatts to 125 gigawatts by 2030, opening up an investment opportunity estimated at US$103bn.
While still at an early stage, automation represents another key trend that the sector can take advantage of, enabling technologies such as precision agriculture and autonomous vehicles to drive the efficiency gains that will be crucial to the low carbon transition.
Meanwhile, advances in digitalization could drive the disruption of traditional power generation systems through decentralized smart solutions, opening up US$64bn in revenue according to Bloomberg New Energy Finance.
These innovations not only have the potential to alter the carbon profiles of the industries they serve, helping build low carbon technology into the very DNA of the global economy, but also offer substantial rewards to those companies willing to push the envelope and innovate.
Scope 3: A Key Challenge for Capital Goods
While the transition presents a significant opportunity for the sector, failing to act will bring untold risks.
Under a third of the 22 companies analyzed report having a Scope 3 emissions reductions target. Companies that do not measure these emissions run the risk of being caught flat footed as both regulators and their end markets increase demand for low carbon technologies and more detailed information on the environmental impact of purchases.
The role of investors
While the capital goods sector has made good progress so far, the sector as a whole stands on the verge of a low carbon industrial revolution. How can capital goods companies be encouraged to take the leap and embrace the transition to low carbon?
One answer to this question is investors. For investors, the sector offers an opportunity to invest in new low carbon technologies where demand is set to grow, and the chance to place themselves front and center of the green industrial revolution.
However, to ensure that these companies can capitalize on the transition, investors also need to be on the lookout for those companies that are not managing their exposure to end markets such as fossil fuel power generation, where demand is forecasted to fall over the coming decades. And perhaps most importantly, investors need to be encouraging boards to build their climate expertise, pre-empt regulation and manage their Scope 3 emissions.