According to Nordea Bank there is a clear link between a cement company’s sustainability and the cost of its financial services.
“Since there are only limited replacement alternatives to cement, we expect the cement industry to continue to have access to capital. But the cost of capital will increase for less sustainable cement producers as visibility over their long-term earnings potential is reduced (for example as a result of potential green regulatory changes in the future) and investment flows diminish as the investment community increases its focus on sustainability”, says Marco Kisic, Senior ESG analyst at Nordea Bank which is a top 10 financial services companies in Europe.
Cement companies, and especially their shareholders, should therefore expect a significant drop in market value if sustainability is not integrated into the business model. A report from Nordea Bank estimates that stranded assets in the fossil fuel sector could lose more than USD 1 trillion in market value.
“We have seen coal companies struggle to raise capital, simply because investors are reluctant to invest in fossil fuels companies. I don’t see the same level of challenge for cement companies, but as investors increasingly look to reduce the carbon footprint of their portfolios cement companies become prime candidates for exclusion. Investors who sell their holdings will put pressure on market value of cement companies and stock liquidity”, says Marco Kisic.
Institutional investors go green
Looking at ESG data has become standard among investors when they screen investment opportunities. And there seems to be no investment appetite in companies that don’t make an effort to be sustainable.
“In 2014, we divested from two companies in cement production. In this process, we assessed whether these companies may be particularly vulnerable to future climate related regulatory changes, as well as other factors”, explains Marthe Skaar from Norges Bank Investment Management, the Norwegian state oil fund that holds 1.4% of all the world’s listed companies with a market value of EUR 923bn.
Institutional investors are at the same time putting pressure on companies to integrate sustainability in their business models.
Climate change issues, including physical impacts and regulatory and technological responses, may give rise to risks and opportunities for companies. Boards should integrate relevant climate change risks and opportunities in their business management, such as investment planning, risk management, and reporting.
Sustainability is about mitigating risk
With the Paris agreement and the EU Commission’s action plan for sustainable growth there is a strong catalyst for further regulatory ESG focus. This could lead to potential future fees, fines or reputational damage from sub-par ESG performance. As an example of the financial impact, 234 Nordic companies paid combined EUR 4.8bn in ESG-related fines from 2013-2018. A figure that think tank Zero Carbon Australia predicts to increase as the cement industry’s carbon footprint grows from 8% of world’s CO2 emissions up to 26% if no actions are taken. Initiatives in other industries to reduce emissions and overall lifestyle changes could potentially leave the cement industry with a larger share of the total emissions.
“We don’t see many companies where sustainability is a strategic part of their business model. Maybe Vestas, the windmill producer, Novozymes, the enzymes producer and a few others. Sustainability is about mitigating risk, so the company avoid being hit by a huge fine or suddenly must invest heavily to comply with new regulation on greenhouse gasses”, says Peter Holt from C Worldwide Asset Management.
But there are good business reasons to integrate sustainability in the business model
“The challenge is to find the right balance between producing enough cement to accommodate a growing world population and urbanisation while protecting the environment“, says Jan Kjaersgaard, President of Cement at FLSmidth.
The key to achieve this is to reduce energy consumption and improve a cement plant's productivity. With innovation, digitalization and a life-cycle perspective this is possible.
Definition of ESG
ESG (environmental, social and governance) is a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.
ESG factors are a subset of non-financial performance indicators which include sustainability, ethical and corporate governance issues such as managing the company's carbon footprint and ensuring there are systems in place to ensure accountability.
Source: Financial Times Lexicon