Machine Makers Set To Drive A New Low-Carbon Industrial Revolution

Wind turbine blades at the Vestas blade factory in Denmark. Photographer: Chris Ratcliffe/Bloomberg

Some of the world’s biggest companies are the makers of capital goods – the machines, buildings and equipment that keep the global economy going. As a result, these heavy industry manufacturers are some of the world’s biggest emitters of greenhouse gases (GHGs).

And yet, because of the products that they make, which high-emitting sectors such as power generation, buildings and transport rely on, they can be part of the solution to climate change as well. That is exactly what many of them are doing, according to a new report “Bridging low carbon technologies” from environmental non-profit and investment research provider CDP.

CDP, formerly known as the Carbon Disclosure Project, says that innovation in the capital goods sector is driving a low-carbon industrial revolution by harnessing the trends of electrification, digitization and automation to open up new market opportunities in transformative and radical technologies in areas ranging from microgrids to machine autonomy and from energy storage to hybrid renewables.

Driving many of these opportunities are the targets set at the Paris Agreement in 2015, where more than 190 countries pledged to keep global warming below 2°C above pre-industrial levels. Countries all around the world, along with state, municipal and city governments, have introduced targets for cutting emissions and decarbonizing their economies.

The report analyzes companies in the “electrical equipment,” “industrial conglomerates” and “heavy machinery” parts of the sector, and highlights Schneider Electric, Vestas and CNH Industrial as leaders in their fields.

CDP says that electrification is the biggest opportunity for the capital goods sector, with microgrids and energy storage systems the technologies that have the greatest potential for green economic transformation. Total demand for energy storage is set to grow from 10GW today to 125GW by 2030, requiring investment of around $103 billion. Schneider, ABB, Mitsubishi Electric, Siemens and Honeywell lead the way on this, the group says.

Leading the way in terms of intellectual property is Japan’s Mitsubishi Electric, which filed the largest number of high quality patents with 657 (per 10,000 employees) between 2000 and 2017. More than 60% of these focus on technologies that relate to automation, connectivity and digitization.

The rapid growth of the renewable energy sector has been an important driver of profitability for several companies, with Vestas topping the ranking for hybrid renewables and large-scale digitization.

However, the heavy machinery sector has lagged companies in electrical equipment and the large industrial conglomerates when it comes to innovation, in part because the markets it serves, such as agriculture and mining are relatively conservative and slow-moving, while regulation has tended to focus on air quality rather than GHG emissions. Heavy goods vehicles remain largely dependent on diesel as a primary fuel, despite the efforts of companies such as Tesla, Volvo and Daimler to bring electric trucks to the market.

The main risks to the sector lie deep in the value chain, with more than 90% of the sector’s impact coming from Scope 3 emissions – those coming from activities such as the extraction and production of materials and fuels the companies buy, transport-related activities in vehicles they don’t own or control and other factors such as waste disposal and outsourced activities. However corporate disclosure and management of these emissions are poor, with less than a third of the companies analyzed having a scope 3 emissions reduction target.

“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. 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.”

But she said that even though many companies in the sector are demonstrating strong abilities to innovate, “it is disappointing to see that disclosure and management of emissions in the value chain are lagging. 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.”

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