Engineering companies and their potential for reducing carbon emissions
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Britain’s commitment to a net-zero carbon economy by 2050 raises the stakes for companies - especially those that account for the lion's share of carbon emissions. Confusion remains over how much engineering companies need to do to survive the coming years. We looked at some of the largest companies and their innovation potential.
Public awareness of how much carbon dioxide corporations blow into the air is on the rise, leaving firms big and small with less space to hide. Experts predict that corporations can expect greater scrutiny on the subject in the future as investors, markets and consumers demand more accountability.
Hugh Jones, managing director at the Carbon Trust, told E&T that earlier this year, the Trust commissioned a YouGov survey of more than 9,000 consumers across the USA, UK, Italy, Canada, Spain, the Netherlands and Sweden. A majority of two-thirds (66 per cent) of consumers confirmed they would feel more positive about companies that could demonstrate their efforts toward reducing the carbon footprint of their products.
Global corporations are responsible for the heaviest share of emissions, which increasingly places them in the crosshair of environmentalists, journalists and industry regulators. A 2017 report by Carbon Disclosure Project (CDP), a UK-based organisation helping companies to disclose the environmental impact of major corporations, claimed that only about 100 active fossil fuel producers - including ExxonMobil, Shell, BHP Billiton and Gazprom - can be linked to 71 per cent of industrial greenhouse gas emissions since 1988. Crucially, this also included the subsequent use of fossil fuels being sold on to other companies.
Professor Cameron Hepburn, lead researcher on the Oxford Martin Programme on the post-carbon transition at Oxford Martin School, told E&T that corporates are increasingly asked to take responsibility for the scope one, two and three emissions, where 'scope three' includes the emissions arising from the full lifecycle use of the product. "For instance, consumers are increasingly expecting oil companies to not merely reduce the emissions involved in refining petroleum, but to address the emissions used by their products in cars and other motor transport".
Corporations may be blessed or cursed depending on where they have their operation and headquarters. In more active nations, such as the UK, where the government passed legislation, committing the country to becoming the first net-zero carbon economy in 2050, corporations based here are expected to bear the brunt of regulators perhaps more than elsewhere.
Corporations in the engineering sector, with some known names with a nasty track record on carbon emissions, are expected to come under heavy fire if they can't come up with innovative low-carbon solutions.
The measure is not just how much they can cut emissions. Increasingly, they will be judged and valued - including on stock exchanges around the world - by their present research and development portfolio on low-carbon emission solutions and the anticipated added-value from extracting market-related advantages, experts confirm.
How well companies are prepared for the next chapter - namely, the coming decade up to 2030 - remains something of a mystery.
Analysing companies' R&D intellectual property is one way of understanding how progressive corporations really are. This is a chance for Carbon Delta, a young environmental fintech startup from Zurich, to add its intelligence to the debate. The company uses its analysis on corporations' low-carbon patents to identify and analyse the climate change resilience of publicly traded companies and to judge their future valuation.
Patents would serve as a proxy for how prepared those firms really are, as Phanos Hadjikyriakou, senior product manager at Carbon Delta explains: "It's not the perfect indication of innovation but it allows us to approximate which companies are preparing to transition to the low carbon economy".
How well engineering and manufacturing firms are equipped is presented in the risk and opportunity scores presented by Carbon Delta.
The findings of the collaborative analysis between E&T and Carbon Delta suggests that both the manufacturing and the utility sectors could have sigfnificant hidden value: an estimated $4,263,560m in uncovered green revenue potential until 2030.
In recent years, it has been the energy sector that has expanded its proportion of emissions for which it is responsible. By reaching a pace of growth faster since 2011, new emissions were observed to shoot through the roof, most recently. Problems remain unsolved so far. The sector's R&D is concerned with temperature fluctuations, which could further increment the peril of utilisation attached to fossil fuels if not resolved.
While the energy sector witnessed some of the sharpest increases in carbon emissions over the past five decades, Carbon Delta’s figures show that the utility sector corporations also have the largest potential to gain in value if corporations play their cards right and withstand the risks and leverage the opportunities that low-carbon intellectual properties bear.
Logically, companies are expected to seek ways to unleash the value and open the low-carbon treasure box. Sadly, Carbon Delta's figures also suggest that some of the largest firms remain stubbornly blind to the potential.
Scrutinising the engineering sectors in more depth, E&T’s investigation asked Carbon Delta to run their risk and opportunity models on 21 publicly listed corporations in the areas of heavy and high-tech manufacturing, iron/steel/petroleum refining and electricity utility.
It is a representative sample and includes names that are largest among their own subsectors. The analysis was then concerned with how much additional value each company is predicted to gain in the coming 10 years. More low-carbon patents mean more opportunities, while a more challenging regulatory environment is negatively associated with a future valuation.
The winner among the small collection of sector-specific companies - with a future valuation enhancement potential of 77 per cent - was General Electric (GE), the heavy manufacturing giant. One in five - 4,624 out of 23,207 - of its patents are concerned with low-carbon relevant R&D. Most weighty areas include patents for wind, planes, automobiles and combustion technology, as the breakdown shows.
In a statement to E&T, GE said that its innovation strategy circles around the three Ds - decarbonisation, digitisation and decentralisation - and that the company is committed to supporting the growth of renewable power with the world's most advanced onshore and offshore platforms, Cypress and Haliade X. Investments would flow in new storage, software and grid technologies. Also, power generation is to be cleaned up, upgraded to become more efficient and more flexible.
Edward Collins, project lead for lobbying and corporate influence at not-for-profit organisation Influencemap (IM) explains that companies like GE are somewhat of an 'anomaly' in terms of their climate change lobbying activities.
"[GE] has quite a schizophrenic position," Collins said and it is in transition in terms of its lobbying towards renewable energy policy and targets since the Paris Agreement, communicating positively about decarbonising the global economy. However, GE also continues to support a long-term role for coal in the energy mix. This position is seemingly based on the availability of carbon capture and storage (CCS) and other technologies to reduce the associated greenhouse gas emissions. "This position is obviously concerning, given last year's special report by the IPCC on 1.5°C warming".
Despite this, GE would do better performing under InfluenceMap's (IM) system than many of the other companies that IM analyses and scores on their climate-change and carbon emission lobbying activities.
One issue for corporations like GE, which from the outside appear keen on innovating and looking for new business in renewables and other low-carbon businesses, is continued membership of powerful trade associations that are actively lobbying against these interests, Collins explains.
GE would retain its membership of groups like the US Chamber of Commerce, the National Association of Manufacturers and the American Petroleum Institute. "These very powerful groups have successfully championed deregulation of US climate policy in recent years and included revoking US membership to the Paris Agreement, as well as pushing for the repeal of regulations such as the Clean Power Plan or methane emission reduction standards," he said.
Another example would be how Australian minerals sector trade groups still represent coal interests. The Minerals Council of Australia (MCA) and the Queensland Resources Council (QCR) are two very influential groups that have effectively captured and undermined the political process on climate change, whilst promoting an energy mix dependent on coal. BHP, Glencore and Rio Tinto are all members of the MCA & QCR, although Rio Tinto has recently threatened to leave over this issue, Collins says.
Other companies on Carbon Delta's list include Rolls-Royce, which is closely following GE's potential. It is promised 36 per cent in additional value. It has fewer patents than GE, but is anticipated to gain much more than it risks losing under the 2°C scenario modeled by Carbon Delta.
Figures on two of the fiercest oil and gas competitors, Royal Dutch Shell PLC and BP, show that Royal Dutch Shell sits in a better position than its rival. BP, with 135 low-carbon patents can expect a 7.2 per cent reduction of its valuation by 2050. Royal Dutch Shell, on the other hand, has the potential to shine with 392 patents, more than double the amount of BP, which grants it a 3.1 per cent increase in valuation under Carbon Delta’s model.
Hadjikyriakou explains that BP is subject to a higher level of risks than Shell. It owns less potential in terms of opportunities under the scenario because they have a smaller number of patents, but also simply less valuable patents. Similar companies such as Exxon Mobil and Chevron fall somewhere inbetween the scores found for Shell and BP.
Hadjikyriakou explains that despite companies - which seem to be ready to work towards new green technologies - appear already innovative, even if BP comes out worse than Shell. They are probably already in a better position than rival oil extraction companies that did not file any low carbon patents at all.
With an anticipated drop by more than one-third in present value, British–Swiss multinational mining company Glencore was found to have the weakest profile among the collection of companies. Out of the seven patents the company owns, four were considered the low-carbon class. According to the company’s sustainability report last year, its carbon emissions intensity shrunk by 7.2 per cent. Despite allegedly ambitious targets, the sum of the rest of the CO2 emissions and other emissions by Glencore would account for 0.6 per cent of the global total and would be seven times larger than the CO2 emissions for Switzerland, Carbon Delta found.
"Glencore's direct and indirect emissions are a considerable amount, even on a global scale. These types of companies will necessarily need to adapt their businesses in a future low-carbon economy in which the global temperature rise stays below 2°C, in order to stay profitable. These are exactly the types of companies that should be investing in low-carbon technologies for the future", Hadjikyriakou told E&T.
On the lobbying side, Collins explains that last October their analysis found Glencore to be one of the few companies that increased its strategic opposition to climate and energy legislation developed to meet the goals of the Paris Agreement since 2015. It ranks as one of the worst companies among Carbon Delta's engineering sectors list.
Since IM's analysis, Glencore has been found to have 'secretly' bankrolled the PR campaign promoting coal energy called 'Project Caesar', says Collins.
Earlier this year, Glencore made a number of commitments to climate-concerned investors regarding its position on coal, as well as its climate lobbying activities. Despite these commitments, Collins says his organisation "has yet to detect a clear change in Glencore's climate lobbying practices".
In April, when Glencore’s 2018 annual report was published, it reiterated its strong position on coal. Glencore continues to promote coal as a “key input” for the industry in South Asia until at least 2040, Collins says. This appears to be in conflict with the IPCC's 2018 recommendation that to limit severe climate damages, coal investment must be stopped by 2030 and completely phased out by 2050.
In Australia, via various trade organisations, Glencore continued to lobby pro-coal stances over the course of the 2019 Australian elections. There, it criticised the Labor Party for not backing the Adani coal mine - which many activists protested against - as well as other coal projects, prior to the election.
Not all companies follow a positive trend between IM's climate change lobbying activity analysis and future company potential under Carbon Delta's model.
Caterpillar, the American Fortune 100 firm that designs, develops, engineers, manufactures machinery, engines and more besides actually does quite badly under IM's lobbying scoring, but gains value under Carbon Delta's risk and opportunity model.
"They have a pretty strong lobby for coal and are not very keen on regulation. Primarily, lobbying ground is the US. As they do not have a very aggressive position in that context, it is perhaps no surprise that it turns out so poorly", Collins says.
In Carbon Delta's list, Caterpillar ranks nearly at par with BAE Systems and may expect 7.2 per cent increase in valuation.
A more granular global industry breakdown by Carbon Delta reveals that cement, iron & steel manufacturing, petroleum refining, and electricity and heat (esp gas and oil) are top of their own sector and bear all remarkable potential for improvements. Companies that can dominate in these sectors in introducing new technologies to cut emission could be among the big winners over the coming decade.
While opportunities exist, more people than ever before demand answers on issues connected to the careless treatment of the environment. Latest polling figures issued by YouGov indicated that the share of respondents naming the environment as the top national concern has never been as high. It currently ranks third, after 'Health' and 'Brexit'. Comparing changes to the baseline drawn for July of 2016 (see line chart) shows how quickly the topic moved up the respondents' agendas earlier this year.
Whether more corporations will get the message now that the UK Government has openly declared its determination to tackle carbon emissions is still unclear. What is clear, according to Hugh Jones from the Carbon Trust, is that factors such as investor pressure, regulation, changes in consumer demand and the plummeting costs of low-carbon technologies are making low-carbon solutions more attractive to large corporations, along with the reputational benefits that can come from taking demonstrable action on climate change.
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