A decarbonization model that concretely values transition risk for cement

Cement is a key ingredient in concrete, the most used building material in the world. It is literally the stuff on which modern society is built. It is also carbon intensive to produce, emitting around 8% of the world’s carbon emissions.¹
Despite high emissions its strength, versatility and low cost cements the industry’s growth for decades to come. That makes the Sector Decarbonization Pathway (SDP) model an essential tool for systematically assessing cement companies’ transition readiness.

The SDP model tracks the current and future decarbonization trajectories of companies against science-backed benchmarks, their capex in emissions-reducing technologies as well as the impact of future market dynamics and policy. Combined, they help us define a more concrete picture of how companies’ financial performance will evolve in the decades ahead as decarbonization trends intensify. Results help investors value transition risk of cement makers and adapt their portfolios according to their risk-return objectives.

The model uses the Transition Pathway Initiative (TPI) Below 2 °C Pathway as the industry decarbonization benchmark.² The TPI Pathway charts the year-by-year reductions which the cement sector must make in order to ensure global temperatures stay well below the 2 °C limit by 2050. In addition, a year-by-year company decarbonization trajectory was created by combining the company’s past carbon emissions performance with future emission targets the company has voluntarily set (see Figure 1). Gaps between company decarbonization targets and the benchmark correlate to transition risk. The larger the gap, the bigger the risk.

Using pathways to measure the gaps between company pathways and benchmark targets is just one part of assessing transition risk; but it doesn’t tell the full story. For this reason, we analyze companies’ future capital expenditures toward carbon-reducing technologies to get a more robust read on their true intentions. Although many decarbonizing technologies are under development, at present, only four are commercially ready. These include:

• Substituting decarbonated raw materials for clinker production³

• Increasing the use of low-carbon materials to reduce clinker content in cement

• Burning more biomass and lower-emission fuels to heat clinker kilns

• Upgrading manufacturing plants with energy-efficient equipment
  

Geography and local market variables, mean not all companies can fully realize emission reductions from these technologies. For example, quality substitute materials and fuels are not available in all markets, unfairly limiting the emission-reduction capacity of some developing regions. Moreover, many early adopters in developed markets have already maximized gains from plant upgrades, leaving less potential to be exploited. More importantly, the solutions listed can only reduce cement’s total emissions by 30-35%.⁴ Carbon capture utilization and storage (CCUS) are expected to further cut emissions by 30-36%. However, CCUS infrastructure, transport and storage is still immature and costly. It will take years of focused financing and continued built-out before it will be a workable solution for emission-reductions.

Companies may set ambitious targets but whether they are truly committed and financially capable of fulfilling those targets will be revealed by the capex assessment. Our capex decarbonization metric calculates the difference between a company’s reported capex and the capex needed to reduce carbon intensities to the levels required by the benchmark.⁵ Negative gaps between actual and benchmark-required capex show companies are not investing enough and are expected to miss targets. Adopting technologies may also result in higher ongoing operational expenditure (e.g., transport and long-term carbon storage). In addition to credibility, capex and opex assessments offer a way of evaluating just how costly it will be to align with the industry benchmark and reduce its transition risk.

Our model would be incomplete without assessing the impact of carbon regulation on the expected costs of cement companies. At present, we only explicitly calculate the impact of the EU Emission Trading System (ETS) as it is the most developed and certain in terms of scope and roll-out. We calculate the expected carbon prices that companies face using its current exposure to EU markets (% of sales) and its total emissions in the ETS scope (net of free allowances). These input parameters can be modified to perform sensitivity analysis and validate the robustness of the estimated regulatory carbon costs.

The SDP for cement is an ideal tool for investors who want to allocate capital to transition leaders rather than divesting completely from hard-to-abate sectors. The SDP model reliably quantifies and assesses the current and future decarbonization performance of cement producers and can be used to predict cement’s future winners and likely losers as the net-zero transition gains momentum. The model’s analysis feeds into cement companies’ decarbonization and climate scores and helps inform fundamental analysis and portfolio management decisions of Robeco’s investment teams across asset classes.

Beyond portfolio management, Robeco’s Active Ownership team uses SDP analyses to stress the risks and opportunities related to their decarbonization performance and push for strategic change across industries and within companies.

Cement is just one of many high-emission sectors that must be decarbonized to reach net-zero targets. To help investors navigate these changes, Robeco has created a series of sector decarbonization pathways to measure how companies are adapting and the financial impact of their transition strategy. As net zero moves closer, we expect regulations, costs, and transition risks to intensify across industries, making sector decarbonization pathway data a critical input for all investment mandates, not just those which are climate focused.

Footnotes

¹IEA, Cement Industry, Breakthrough Agenda Report, 2023. https://www.iea.org/reports/breakthrough-agenda-report-2023/cement
²The Transition Pathway Initiative (TPI) was selected from among many decarbonization frameworks including SBTi, IEA, CEMBUREAU. It includes only Scope 1 emissions that result directly from a company’s own operations. Though Scope 2 and 3 emissions in cement are significant, they are also complicated to quantify and limit the ability to do peer group and benchmark comparisons. In addition, all decarbonization pathways measure net emissions intensities per ton of cementitious product rather than the companies’ absolute emissions, the reporting standard recommended by the Global Cement and Concrete Association.
³Clinker is made from fusing limestone and clay at extremely high temperatures (1450°C) in furnaces (‘kilns’). Clinker is then grinded into a fine powder and active ingredients are added to produce cement. Clinker production is responsible for 90% of cement manufacturing’s CO2 emissions.
⁴Efficiency gains in design and construction of buildings and infrastructure projects can help reduce emissions in buildings and construction by another 20-22%, but these emissions are not in scope for cement manufacturers.
⁵This calculation considers a cement maker’s current asset mix, production volumes and overall capacity, operating geographies, efficiency of installed abatement technologies (e.g., alternative fuels use), and other variables that may influence demand, production volumes, and growth in emissions intensities.