Fund Investing

Companies such as Siemens and Peugeot are managing carbon risk more effectively by reducing the reliance of their products and services on fossil fuels
By Jon Hale | 05/02/19

Last week we looked at why investors should look closely at how climate change impacts investment returns.

About the Author
Jon Hale, Ph.D., CFA, is the head of sustainability research for Morningstar.

Companies managing carbon risk more effectively are reducing the reliance of their products and services on fossil fuels and placing a greater emphasis on developing ‘greener’ products and services. The management assessment includes carbon-reduction and overall environmental management policies and systems, considers a company’s track record of reducing carbon intensity. This analysis also includes carbon-reduction goals for products, design and development of sustainable products.

Here are some global examples from energy-intensive industries:

Siemens is a German industrial conglomerate and its diversified business lines range from healthcare to factory equipment to power generation, including wind. Siemens’ carbon-risk exposure comes from its products and services – carbon-emitting motors, for example. But it earns excellent management scores for the technologies it offers that are advancing a low-carbon economy. These include operating power grids for renewable energy power plants and providing offshore wind turbines, including deep-sea solutions. Siemens also builds power equipment that helps companies improves energy efficiency. Examples include turbo machinery, such as high-performance, low- emission gas turbines. Siemens is also working with Airbus to power large airplanes on electricity by 2020. The company has targeted carbon neutrality in its operations by 2030, the first global industrial player to set such a target.

Alcoa (AA) is an aluminium company based in the United States. Though Alcoa is a carbon intensive business, it has a strong greenhouse gas reduction program in place. From a 2015 baseline, the company is targeting emissions reduction of 15% by 2025 and 20% by 2030. Alcoa’s presence in Iceland provides it with reliable access to renewable geothermal energy. In late 2016, Alcoa launched a sustainable product line called Sustana, which uses recycled aluminium and releases 75%–90% less carbon than the industry average.

Next, consider a pair of companies in the same sub-industry: automobiles. Only integrated oil and gas and coal have higher carbon-risk exposure and poorer carbon risk ratings than auto-makers. Although Peugeot and Fiat Chrysler are mainstream auto makers, Sustainalytics assesses the former as Medium risk and the latter as High risk. Peugeot is less carbon-intensive than Fiat Chrysler in both its operations and its products and services. It is also doing a far better job of managing its carbon-risk exposure.

Electric utilities is a sub-industry facing even more carbon risk than automobiles. Red Electrica, which owns and operates the Spanish electric transmission system, faces Low carbon risk. By contrast, Kyushu Electric Power, a Japanese utility serving the country’s southwest region, earns a High risk rating.

According to Sustainalytics, Red Electrica has incorporated renewables into its energy mix. The company has launched a greenhouse gas (GHG) reduction program, and the carbon intensity of its business is trending downward. Meanwhile, Kyushu Electric Power is heavily dependent on coal, and has a weak GHG-reduction program in place, according to Sustainalytics.

One of the world’s largest integrated oil and gas companies, Total faces High risk according to Sustainalytics’ assessment, but it avoids the Severe risk rating carried by sub-industry peers ExxonMobil, PetroChina, Rosneft, or Occidental. Total faces significant exposure to carbon regulations and climate change-driven market shifts. The fact that half of Total’s reserves are in lower-carbon natural gas lowers its exposure to carbon risk, as does its decision to shelve some of its oil sands assets due to rising costs. Total discloses GHG targets and strives for energy efficiency, boosting its Management Score.

Don’t miss out on communications from Morningstar Canada! Sign up for our specialised newsletters, get early notice of our events, and get access to exclusive promotional content. Manage your subscriptions here.
Video Reports
More...
Click here to view all