By Christian Wilson, Senior Research Officer, ShareAction
Cement is everywhere. From schools to skyscrapers, it forms the very foundation of our industrialised societies.
Yet this seemingly innocuous substance is a hidden polluter. In fact, despite the falling carbon intensity of cement, increased production means that total emissions from the sector have risen 70% since the turn of the century.
Today, cement accounts for some 8% of global emissions.
And with cement production set to rise 23% by 2050 – as developing countries expand, cities grow and populations boom – without urgent action, emissions from the sector will only increase.
That’s a big problem.
Cement production in a Paris aligned world
To align with the goals of the Paris Agreement, to hold global temperature rises to well below 2C, cement emissions need to drop by at least 60% by 2050. To reach the Agreement’s more ambitious goal of limiting warming to 1.5C, the industry would need to get to net-zero.
Relative to other industries, decarbonising cement is particularly challenging, and achieving these cuts against a backdrop of rising demand will be tough.
Tackling embedded emissions
The biggest challenge for the cement sector comes from emissions embedded in the chemical reactions used to produce limestone clinker, the key component in traditional Portland cement.
Around half of all cement emissions come from this process. There are some effective ways to tackle these embedded emissions, including reducing the clinker-to-cement ratio and replacing clinker with lower-carbon alternatives.
However, unlike the power sector, where renewables offer a cheap and scalable alternative, low-carbon cements are currently constrained by high costs and the availability of substitute raw materials.
As a result, carbon capture and storage (CCS) remains central to decarbonisation pathways, despite significant uncertainty about the technology’s viability.
Business-as-usual is not an option
Despite these challenges, a business-as-usual approach cannot be an option.
Cement plants built today can last for 30-50 years, locking in high-carbon pathways for decades unless urgent steps are taken.
As well as investing in low-carbon cement, companies can, and should, use alternative fuels to generate the thermal energy used for clinker production – the second largest source of cement emissions.
In addition, a focus on energy efficiency can reduce both emissions and operational costs. Energy consumption accounts for a third of operational costs and cement plants with the best available technology consume 17% less than the global average.
A risk for companies and investors
Failing to act will leave both companies, and their investors at risk.
Climate laggards are exposed to changes in policy, while efforts by property companies and governments to cut embodied emissions could boost demand for low-carbon cement.
Scenario analysis has shown that these risks could impact financial performance but given the sector's significant contribution to global emissions, a failure to decarbonise would increase climate-related risks not just in cement industry, but across financial portfolios.
A rise in investor action
In response to these risks, investors are starting to take action. The Investor Decarbonisation Initiative has called on cement companies to set science-based emissions reduction targets (SBTs), and in June 2019, the Institutional Investors Group on Climate Change (IIGCC) outlined investor expectations for net-zero emission targets in the cement sector.
This trend has already delivered positive results, with HeidelbergCement becoming the first cement company to set an SBT and UltraTech Cement joining the EP100 initiative with a commitment to double energy productivity.
What steps should investors take?
Investors must engage robustly with climate laggards within the cement industry.
To date, only one climate-related resolution has been filed at a cement company, despite few producers having set long-term emission reduction targets. If companies continue to drag their feet, we need to see more such resolutions tabled, and for investors to vote against laggards at their AGMs.
Bondholders also have a crucial role to play. The largest ten cement companies, which account for 40% of global production, rely on bonds for external financing. Should cement companies fail to align with investor expectations or show no willingness to change, investors should not partake in new bond issuances by these companies.
Doing so will reduce the negative impact of investment portfolios, mitigate climate-related risks and incentivise companies to act.
These steps are in the best interest of investors. The sectors large contribution to global emissions means that, by tackling the cement sector, climate-related risks will be mitigated across portfolios.
Due to its carbon-intensive nature and the shrinking window available to meet the goals of the Paris Agreement – a sustainable cement sector must be a priority for all institutional investors and asset owners.
