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Manish Shakdwipee

Manish Shakdwipee

Executive Director, MSCI Research

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Investment Risks in Carbon-Dependent Industries

Source: UNEP Emissions Gap Report (2018) Chapter 3: 'The Emissions Gap' by Gunnar Luderer, Joeri Rogelj, Michel den Elzen and Jiang Kejun.


Institutional investors looking to reduce carbon-related risks in their portfolios have mostly focused on the carbon-intensive industries whose businesses are directly threatened by any increased regulatory pressures or market factors that could accelerate the transition to a low-carbon economy. But carbon-intensive businesses are only part of the picture. There are many other carbon-dependent industries which are affected by the business cycles of such industries. Institutional investors may want to look beyond the usual suspect carbon-intensive industries to better understand the end-to-end risks that exist.

Looking beyond the usual suspects 

Climate change and efforts to work towards a low-carbon world are, if anything, intensifying, as highlighted by the United Nations Environment Program (UNEP) in its recently published Emission Gap Report.1The report reiterated that achieving the Paris Agreement target of 1.50C warming level would require unprecedented and urgent action by all nations.

Historically, institutional investors’ attention has been focused on traditional carbon-intensive industries that are directly affected by low-carbon transition e.g., fossil fuel-based power generation, coal mining and oil and gas production.2 In this context, MSCI ESG Research examined how much risk is faced by “overlooked”3 carbon-dependent industries that rely heavily on the carbon-intensive industries for their revenues. We also investigated how prepared these companies are to navigate the unprecedented economic transition required under a low-warming scenario. We define carbon-dependent industries as industries with low direct carbon emissions (scope 1 and scope 2), but high revenue dependence on companies with carbon-intensive operations and/or products.

Our analysis identified many industries which could be termed as “overlooked” carbon-dependent industries. Three such industries belonging to three different sectors in the Global Industry Classification Standard GICS®4 are outlined below.

Oil & gas equipment and services

Companies belonging to the oil & gas equipment & services GICS sub-industry depend heavily on the capital expenditures of fossil fuel producers. In the case of a downturn, in the capex cycle of fossil fuel producers, the revenue of oil & gas equipment & services companies could decline, which might have an adverse impact on such companies’ financial performance.5

Heavy electrical equipment

At present, six out of 10 companies belonging to the heavy electrical equipment GICS sub-industry in the MSCI ACWI Index derive a significant amount of revenues (more than 25%) from thermal power plant turbine manufacturing activity. Since the beginning of this decade, new investments in thermal power plants (especially coal-based) have been on the decline, which, in turn, is expected to reduce the demand for thermal power plant components (e.g., steam turbines6). Initial signs of a potential downside for steam turbines and power plant manufacturers are already visible. For example, in September 2018, Siemens AG announced hundreds of job cuts in its power and gas division citing contraction in the fossil fuel power generation market.7 are outlined below.And in 2017, General Electric Co. announced 12,000 job cuts in its power division, citing a softening of the gas and coal-based power generation markets.8 

Auto parts & equipment

Internal combustion engine and engine component manufacturers in the auto parts & equipment GICS sub-sector could be at risk if electric vehicle adoption rates accelerate and demand for fossil fuel-powered vehicles decreases. Currently, three companies out of a total of 32 belonging to this sub-industry in the MSCI ACWI Index derive more than 25% of their revenues from internal combustion engine and engine component manufacturing activities. Auto-component manufacturers (e.g. NGK Spark Plug Co. Ltd. and Denso Corp.) both have high revenue exposure to products that could become redundant due to electric vehicle adoption. 


Identifying carbon-dependent industries

*This chart highlights average Scope 1+2 carbon  emissions intensity  for all GICS Sub-industries and their revenue dependence  on companies with carbon intensive operations and /or products. It includes revenue a company derives from following business activities: oil & gas equipment & services, oil & gas trading, thermal power plant turbine manufacturing, auto-components such as carburator, piston, piston rings, valves, & electrical equipment for internal combustion engines. Values on both horizontal and vertical axis are plotted on logarithmic scale.


Sizing up the leaders and laggards

Each of these carbon-dependent industries is likely to contain leaders and laggards depending on individual companies’ capacity to innovate, adapt or pivot their business models. In the table below, we provide an example of top- and bottom-quartile companies in each of three carbon-dependent industries based on the MSCI Low Carbon Transition Scores. These scores, which are intended to systematically measure how prepared companies are to weather the low-carbon transition, incorporate company-specific data and MSCI estimates along four key dimensions: carbon intensity of a company’s operations and its supply chain, carbon intensity of its products, involvement in providing low carbon solutions and efforts to manage transition risk.


Top- and bottom-quartile companies in carbon-dependent industries

Oil & Gas Equipment & Services GICS Sub-industry percentile score Commentary
John Wood Group PLC 100 Diversification into clean energy solutions especially after AMEC FW acquisition, strong carbon risk management efforts
Dialog Group Berhad 12.5 Limited diversification to low carbon solutions, average carbon risk management efforts
Heavy Electrical Equipment GICS Sub-industry percentile score Commentary
Siemens Gamesa Renewable Energy, S.A. 83.3 Involved in fabrication of wind turbines and the construction of wind farms
Bharat Heavy Electricals Limited 0 Primarily a thermal power plant equipment manufacturer
Auto Parts & Equipment GICS Sub-industry percentile score Commentary
Valeo S.A. 96.3

Strong response to low carbon transition by adjusting its product portfolio to electric vehicle trends

NGK Spark Plug Co. Ltd. 3.7 High exposure to internal combustion engine related components, low efforts in terms of adjusting its product portfolio to electric vehicle trends

For institutional investors looking to manage their portfolio exposure to the low carbon transition, they may seek to take into account both the direct and indirect risks facing companies as well as the climate change risk of carbon-dependent industries. 


1 United Nations Environment Program (UNEP), Emissions Gap Report 2018, November 2018.

2 United Nations Principles for Responsible Investment (UNPRI), “How to invest in the low-carbon economy”, June 13, 2018.

3 MSCI defines these ‘overlooked’ carbon-dependent industries as those which have low direct carbon emissions, but high revenue dependence on companies with carbon intensive operations and/or products.

4 GICS, the global industry classification standard developed by MSCI Inc. and S&P Global. GICS is a service mark of MSCI Inc and S&P Global.

5 Oil & Gas-Oilfield Services Outlook: Struggle to Sustain.

6 International Energy Agency (IEA), World Energy Investments 2018.

7 Siemens to cut 2,900 German jobs as part of a 500-million-euro cost-saving plan, Siemens press release, 24 September 2018

8 General Electric to cut 12,000 jobs in power business revamp, December 2017


Further Reading

How funds are positioned for a low-carbon future
How institutional investors are responding to climate change
Aligning portfolios with UN Sustainable Development Goals
Pursuing ESG standards and diversification

Pagination Portlet