CDP sector report ranks best in class for carbon-related metrics
Since the Paris Agreement set global climate regulation on a low-carbon trajectory, investors have trained a spotlight on high-emitting sectors such as oil and gas, extractives and transport. Yet other carbon-intensive sectors are also important and new analysis of the cement industry, released today, shows that reform of this sector will be essential both to the survival of its major companies and to achieving the successful implementation of the Paris Agreement.
The cement sector accounts for 5 percent of the world’s man-made emissions, more than countries such as Japan or Canada, and more than a sector like aviation. It is also a significant user of water. As part of its series of sector research reports for investors, CDP (formerly the Carbon Disclosure Project) has looked at how well cement companies are managing climate risk.
Concrete savings
The research shows there are compelling reasons for cement companies to reduce their climate-related business risks.
For example, improving kiln thermal energy efficiency can reduce companies’ energy expenditure, which usually comprises about a third of operating costs. Leading cement companies are also benefiting from cost benefits of burning alternative fuel sources in their kilns such as industrial waste or biomass.
Furthermore, by-products from other industries, such as coal plant fly ash or steel blast furnace slag can be blended into cement to make the final product less carbon-intensive, which reduces both costs and emissions.
Perhaps the most significant finding of the research is the potential impact a tightening regulatory regime on climate will have on the world’s biggest cement players. We find that if a modest carbon price of $10 per ton were widely brought in, the 12 biggest companies would risk $4.5 bn in lost earnings. That represents up to 114 percent of earnings before interest and tax (EBIT) for the worst performers.
To provide some context for quite how sensitive this makes the cement industry to a low-carbon regulatory regime, our analysis of 11 of the largest diversified mining companies finds that a $50 carbon price would, on average, put only around 15 percent of company EBIT at risk.
Which companies are managing the risks well?
European heavyweight LafargeHolcim and Indian firm Shree Cement are the companies that rank highest on carbon-related metrics.
Italian companies Italcementi and Cementir and Taiheiyo Cement of Japan rank lowest of those that disclose. Italcementi, which has the highest potential carbon-pricing cost exposure, is deemed to be obstructive toward climate regulations and is significantly off-track to meet its own emissions-reduction target.
Other companies that should raise a red flag with investors include Anhui Conch Cement (China), Siam Cement (Thailand), Dangote Cement (Nigeria) and Vulcan Materials (US), none of which responded to CDP to disclose their climate risk exposure and management. Given that these companies collectively represent more than $60 bn in market capitalization, we expect investors to raise this lack of transparency with them in future discussions.
Cement is an important part of the climate puzzle, and it is clear that all the companies – even those that rank highest – are susceptible to risks in a changing marketplace in the coming years without significant additional innovation to improve their carbon and water management.
Tarek Soliman is a senior analyst in investor research for CDP
