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Beyond Renewables, Low-Carbon Investing Eyes Energy Efficiency

24 March 2021
4 min read
Roy Maslen| Chief Investment Officer—Australian Equities
Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Low Carbon Strategy
Sammy Suzuki, CFA| Head—Emerging Markets Equities

Across the industrial sector, low-carbon investing naturally leans toward renewable energy opportunities, like wind and solar power. But it can go beyond just renewables, and more industrial companies are taking the extra step to lower emissions with efficient energy technologies and by more accurately measuring their carbon footprint.

Investing in companies committed to low carbon emissions is both environmentally helpful and potentially rewarding. Most steps by companies to shrink a carbon footprint involve reducing current or future emissions by focusing on managing and reduction. But the clock is ticking toward a global net-zero carbon goal by 2050. And a small but growing number of companies are widening the scope of their decarbonization focus to include emissions savings and prevention, especially in their building facilities, which alone are responsible for 40% of all global CO2 emissions.

Incentives Grow for Companies to Save and Prevent Carbon Emissions

Although few companies gauge carbon-emissions savings now, we think the number will quickly grow. Sales growth will increasingly become tightly hinged on whether a company can accelerate the delivery or adoption of savings targets, especially with global governments and the private sector more united than ever behind the cause.

Some 200 countries now support the Paris Agreement and its aggressive goals to address global warming. New policies to deliver on the Paris Agreement and fight climate change are constant catalysts for higher public spending to help countries and businesses comply and to create demand for smarter public works, office parks and factories, to name a few. The European Green Deal, for example, will boost annual investment in energy systems and related infrastructure by an estimated €175–€300 billion (US$208–$357), and some US$2.2 trillion in low-carbon initiative spending is expected across emerging-market countries in the next two decades.

We believe this highly incentivizes more private-sector solutions for energy management, which will continue to unfurl in areas historically not known for it, such as transportation, industrials and building structures. And with just 1% of buildings even close to the Paris Agreement’s net-zero emissions target, demand for upgrades and renovations will grow exponentially in the next decade.

Scope 4 Emissions Help Gauge a True Carbon Footprint

From the service sector to heavy industrials, most businesses produce carbon, either directly or somewhere along their value chain. Carbon-output levels and types vary; however, we believe in factoring in the impact of CO2 emissions on the bottom line, also known as price on carbon.

As a core fundamental, price on carbon is most accurate when all types, or scopes, of CO2 get equal scrutiny. Generally, Scopes 1 and 2 emissions, respectively, are produced directly from a facility and indirectly from its energy consumption. In addition, certain Scope 3 emissions are important to consider in stock valuations, such as when evaluating a coal miner, and the emissions released when its customers burn the coal they produced.

For all the right reasons, more companies are measuring and improving these telling metrics. This includes industrials, where the number of firms that rely on science-based emissions targets topped 500 in 2020 and likely will more than double in 2021, compared with about 15 just five years earlier (Display top). The sector’s green revenues—which measure a company’s exposure to products and services that are environmentally friendly—now average about 50% (Display bottom).

Going Green: Decarbonization Gains Ground Across Industrial Sector
Industrial firms with clear emissions targets may top 1,000 in 2021 and more companies tie their revenues to sustainability.

As of March 15, 2021
*Annualized
Source: Science Based Target Initiative, Société Générale and AllianceBernstein (AB)

One increasingly relevant metric is still not widely adopted, but should be—Scope 4 emissions, which entail energy savings generated for third parties. Scope 4 reporting methodology remains more nuanced, but it generally pinpoints a company’s emissions output savings or all-out avoidance. And while Scope 4 emissions are not generally incorporated into valuation processes, they can be a key contributor to a company’s decarbonization and profitability goals, thus very attractive to active low-carbon investors.

Schneider Electric is one example of Scope 4 in action—contributing to lower carbon emissions by helping others reduce theirs. Schneider develops smart power grids and digitized buildings, which use technology and data centers to optimize electricity and water usage, to help customers save or avoid carbon production, conserve water and minimize waste. They conservatively estimate saving 89 million metric tons of CO2 for customers in 2019 alone. Similarly, Legrand and Signify, which make energy-efficient networked lighting systems, also are successful early adopters of helping clients manage Scope 4 emissions.

As more businesses get help with saving or avoiding emission output, higher transparency is sure to follow, much to the benefit of active low-carbon investors. Just a handful of companies disclose Scope 4 today. Volvo—with its strong foothold in the electric-vehicle market—and industrial conglomerate Siemens are among the Scope 4 pioneers.

Few companies, let alone industrials, know their true carbon footprint. But in an increasingly environmentally aware investment world, they should all prioritize and master it, in our opinion. As they do, investors must pay closer attention to how Scope 4 emissions affect a company’s overall output targets to draw a more accurate picture of its long-term competitiveness and return potential.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.


About the Authors

Roy Maslen was appointed Chief Investment Officer of Australian Equities in 2012, and has been managing Australian equity portfolios at AB since 2005. Previously, he served as co-CIO and director of Research. Prior to joining the firm in June 2003, Maslen was an associate principal with McKinsey & Company. During his seven years at McKinsey, he worked in Australia, Europe and North America. Before that, Maslen spent four years with Rolls-Royce Aerospace as a manufacturing strategy researcher. He holds an MEng from the University of Cambridge, where he was sponsored by Shell UK as an engineer, as well as a PhD in manufacturing strategy from the University of Cambridge. Location: Sydney

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Low Carbon Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business. He was a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: New York