No results found. Please try again.

THIS MATERIAL IS A MARKETING COMMUNICATION.

ESG Sector Review: Industrial Capital Goods

Industrial capital goods include a range of products and services, including electrical equipment, construction machinery, engineering and industrial machinery, that are key to the global manufacturing supply chain. Technology advancements in this sector has been a key driver for manufacturing productivity and efficiency, since the dawn of the industrial revolution, and still is now.

What are the ESG considerations that come at play when it comes to the manufacturing process and product development of industrial capital goods? Demand is closely tied with industrial production - what is its role and how is it reacting to the demands of a “green” economy?

The ESG Context

Some of the World’s Biggest Ghg Emitters but a Key Part to Play in Decarbonisation

Heavy capital goods manufacturers are some of the world’s top emitters of greenhouse gasses (GHGs). They consume large amounts of energy powered by fossil fuels or electricity. A company’s energy consumption profile varies depending on the type of manufacturing activities involved. For example, a company that focuses on assembling typically uses more purchased electricity, as opposed to on-site fuel combustion, compared to a company that focuses on converting raw materials into finished products.

Industry manufacturers are incentivised to reduce their GHG emissions in order to lessen their operational energy costs, but also in the face of regulatory, customer and investor pressures to lower their environmental footprints. Looking beyond companies’ own operational activities, focus is increasingly placed on their Scope 3 emissions – those coming from upstream (outsourced) activities such as material sourcing and transportation – which is where the sector’s main ESG risks lie.1

We see some proactive machinery companies actively review their supplier’s carbon footprints and seek to implement recycling systems for machines at the end of their first useful life.2 For example, Larsen & Toubro Limited has started putting Environmental and Social Code of Conducts in supplier agreements.3 Another example is Techtronic Industries who has expanded their Product Repair and Refurbishing Program: in 2020, up to 808,000 products were repaired through service centres and almost 500,000 refurbished products were sold.4 Such circularity efforts can have a positive impact on the prices they can charge for their machines, as well as opening new avenues for profitable new services.

As we transition into a “net zero” world, industrial capital goods are enablers of this decarbonisation; the provision of sustainable and low-carbon machinery products will directly and indirectly influence the GHGs emitted from industrial processes. Consequently, we see priorities of product designs to shift accordingly to cater for the demands of a “green” economy and changes in customer preferences.

Automation and Digitalisation Changing the Landscape for Human Capital Management

Manufacturing involves repetitive and manual tasks, and is inherently dangerous. Automation could reduce injuries as well as improve operational efficiency.
- Marcus Chu, Investment Analyst (Mirae Asset)

Industrial manufacturing is a labour-intensive process, relying on a large workforce, that also exposes employees to injuries due to heavy machinery moving equipment, electrical hazards and others. Automation and digitalisation are key themes in the modern world that has and is projected to have significant impacts on jobs, impacts will be felt in the mid-2020s according to a PwC report.5

For example, it’s projected that by 2025, 10-15% of jobs in manufacturing, transportation and storage, and wholesale and retail trade will have high potential for automation. By 2035, the range of jobs with high automation potential will be closer to 35-50% for those sectors.6 It is also projected that four industry groupings—computers and electronic products; electrical equipment, appliances, and components; transportation equipment; and machinery—will account for around 75% of robotics installations during the next decade.7

Notwithstanding automation potentially substituting jobs in this sector, automation will boost manufacturing productivity; wider adoption of robots for example may increase output per worker to up to 30% over the medium term. 8 Automation will also result in savings in labour costs; the average manufacturing labour costs are expected to be 33% lower in South Korea and 18-25% lower in China, Germany, the United State and Japan in 2025 than they otherwise could have been.9

The ESG Road Ahead

Each industrial capital goods company is uniquely exposed to multiple end markets, and demand is closely tied to that of end markets. As end markets become disrupted due to the uncertainties of a decarbonising world, the disruptions are similarly felt by industrial capital goods companies.

Disruptions to industrial capital goods companies are primarily driven by changes to operational fuel consumption at end markets, also known as Scope 1 greenhouse gas emissions. For example, the transportation sector accounts for approximately 70% of global crude oil consumption, a fossil fuel whose demand will likely to fall as the world decarbonises.10 As demand for crude oil begins to decline, an entire value chain of machinery products and services exposed to the crude oil industry will be disrupted, including products like huge pumps and off-highway vehicles used in oil and gas extraction to the machinery used to run large-scale refineries.

As customers in end markets (some of which are emissions-intensive sectors like power generation, properties, transportation) work to meet their corporate carbon reduction targets and/or to support national carbon commitments, the need for low carbon equipment fleet will grow. This puts the industrial capital goods sector in a unique position to be enablers of the low carbon transition and a key part of the solution to decarbonisation. Priorities for the product design of machineries and equipment will change to place more focus on qualities such as energy efficiency and recyclability.

Moreover, decarbonisation trends such as electrification opens up new market opportunities for the industrial capital goods sector. A report from CDP (previously known as the Carbon Disclosure Project) alluded that electrification is the biggest opportunity for the sector, with products linked to micro-grids and energy storage with greatest potential and expected to see fast growing end markets.11 For example, total demand for energy storage is expected to grow to 125GW by 2030, requiring investment of around $103 billion.12

Industrial capital goods companies are increasingly involved in clean technology solutions particularly in the renewables space. For example, wind turbine generators are one of Riyue Heavy Industry’s main products, with wind power contributing approximately 80% of its operating revenue.13 For solar power, companies such as LONGi Green Energy Technology manufacture mono-crystalline silicon wafers for photovoltaics panels.14

Looking ahead, the dynamics and demands of a ‘green’ economy will have direct impacts on industrial capital goods companies. Whilst companies need to examine their existing businesses and markets to assess the potential impacts of market pressures in the 2020s and beyond driving towards greener products and services, new business opportunities will certainly arise for new technologies and business models. It is estimated that there could be a US$12 trillion opportunity for industrial capital goods companies through to 2050.15

AUTHORED BY
Holly So, CFA
ESG Specialist

Date
November 26, 2021

Category
Insights


1 Forbes, July 2018
2 Boston Consulting Group, October 2020
3 Larsen & Toubro Limited Integrated Report, 2020
4 Techtronic Industries, 2020
5 PwC, February 2018
6 The World Economic Forum, February 2019
7 Boston Consulting Group, September 2015
8 Boston Consulting Group, September 2015
9 Boston Consulting Group, September 2015
10 Boston Consulting Group, September 2015
11 CDP, July 2018
12 Bloomberg New Energy Finance (BNEF), July 2018
13 Futubull, November 2021
14 LONGi Solar, November 2021
15 Boston Consulting Group, October 2020

Disclaimer & Information for Investors

No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only.  It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.

The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements.  Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.

Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.

Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.

Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.

Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.

The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.

A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary.

The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.

Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.

Copyright 2021. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.

ADDRESS

  • Unit 1101, 11/F, Lee Garden Three, 1 Sunning Road, Hong Kong

TEL

  • 2295 1500

This website is intended for Hong Kong investors only. Your use of this website means you agree to our Terms of use. This website is strictly for information purposes only and does not constitute a representation that any investment strategy is suitable or appropriate for an investor’s individual circumstances. Further, this website should not be regarded by investors as a substitute for independent professional advice or the exercise of their own judgement. The contents of this website is prepared and maintained by Mirae Asset Global Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.