How Do Cement Firms’ Financial Outcomes Relate to Their Carbon Intensity?

Abstract

Sustainable finance emerged as a new investment field to help investors and governments allocate capital in line with global sustainability targets such as reversing the trends in climate change, biodiversity loss, and resource depletion (Consolandi et al., 2020). However, while global sustainable investments reached over $30trillion as of 2022, all global targets all global targets to reverse environmental decline have been missed in the last several years (GSIA, 2023; IPCC, 2022). This disconnect raises questions on the effectiveness of the approach, assumptions and expectations sustainable finance relies on to allocate capital. Most sustainable finance debt and capital allocations are done based on companies’ ESG ratings or similar aggregate, subjective assessments of environmental, social and governance performance, which recent research found ineffective in indicating real world impact (Kölbel et al., 2020; Berg et al., 2022). The only current mainstream approach to allocate capital based on sector specific tangible metrics is sustainability-linked instruments, which constitute only a small portion of the overall sustainable investments. In addition to the challenges around the tangible metrics, most investors expect similar or higher financial performance on sustainability themed investments, and existing mainstream sustainable research supports this expectation (Van Der Beck, 2021). This thesis investigated the global cement sector and assessed the relationship between financial and environmental metrics of cement companies. Carbon emission intensity per ton of cementitious material was used as the key environmental metric as itis widely agreed as the sector’s most material environmental impact, it is a standard metric across the sector and there are global targets set around it. Emissions intensity was then compared against the key financial metrics of profitability, firm value and leverage. Considering the available decarbonization levers for the cement industry, their expected financial impact and the scale of deployment necessary to meet global cement decarbonization targets, I tested the hypotheses that better environmental performance will be positively correlated with companies’ leverage and valuation metrics, and negatively correlated with its short-term profitability metrics. The results indicated no significant statistical relationship between cement companies’ carbon intensity and any of its key financial metrics (except for debt-to-equity leverage metric, which indicated a negative correlation between better environmental performance and higher leverage). These results potentially indicate that only those decarbonization investments that are not negatively affecting the financials are being implemented on a large scale. This might mean some decarbonization levers, even though they are commercially proven and are expected to be implemented on a full scale to meet the global targets as part of decarbonization pathways for the sector, are excluded or implemented only on a limited scale across the sector, to ensure companies’ financials are not negatively affected. This reinforces the investor expectation that the companies that have better environmental performance than their peers should have the same or better financial returns. However, the results from this analysis highlight that to achieve the scale of transition required to meet the global targets and to design effective policy and financial support for sectoral transition, it would be critical to understand what is happening as well as what is expected to happen but is not happening.