Three Climate-Transition Stock Stories
Air Products, Saint Gobain, and Standard Chartered are all well-positioned to benefit from the climate-transition actions that companies and countries around the world are taking.
The Fundamental Growth and Core Equity (FGC) team’s research process focuses on the attributes of a company that are likely to lead to sustainable growth. These attributes are qualitative and forward-looking; our assessment is based on the expertise and judgment of our analysts and is therefore unique to the FGC team.
Our fundamental research process specifically incorporates a comprehensive analysis of companies’ ESG and climate-transition credentials. We use this analysis to identify high-quality companies that will benefit from the global climate transition and will be well positioned to act as enablers of other firms’ transitions, realizing opportunities in areas such as carbon emission reduction, green finance, and green energy. In this white paper we profile three such firms.
Air Products
Supported by its competitive position and by strong demand for its products across the consumer, medical, and industrial sectors, Air Products & Chemicals, Inc., is using innovative techniques to reduce carbon emissions. The firm is also a leading producer of hydrogen in the commercial market.
The market for industrial gases like nitrogen, oxygen, and hydrogen is dominated by a handful of key players, one of which is US-based Air Products. The commercial industrial gas industry has $90 billion in annual revenues and is expected to expand at an annual growth rate of 6.0% from 2021 to 2028.1
Common applications for industrial gases include carbon-infused beverages or the helium used in party balloons. Less well-known uses of industrial gases include refining (CO2 or nitrogen for enhanced oil recovery), healthcare (medical oxygen or helium used in MRIs), electronics (nitrogen used in manufacturing of semiconductors and flat-screen TVs), and metals (oxygen used in steel furnaces).
Challenges and Opportunities
The key energy transition challenge for Air Products is carbon-intensity. Whether on an absolute level, or relative to total revenue, industrial gas companies have a high carbon profile across sectors. This is because they use natural gas to make hydrogen (which drives up Scope 1 emissions) or use electricity in the process (which drives up Scope 2 emissions). Being an “enabler of energy transition” is key to Air Products’ sustainable growth strategy, so the firm has aggressively committed to sustainability goals and better-than-average disclosures.
Air Products views sustainability as a tailwind for its business, and two of the firm’s stated growth platforms align well with energy transition strategies:
- Carbon Capture The International Energy Agency (IEA) expects carbon capture to grow to 190 times its current level2 in its net zero scenario.3 Working with Air Products, the Valero refinery in Port Arthur, Texas, has been capturing approximately 1 million tons of carbon dioxide annually since 2014.4 The rising price of carbon will enhance the economic case for this growth platform.
- Hydrogen Generation A need to decarbonize hard-to-electrify end markets such as steel and cement, as well as the heavy-duty vehicle market, is leading to renewed enthusiasm around hydrogen. Air Products is one of the largest producers of hydrogen in the commercial market. The firm’s NEOM project in Saudi Arabia, which will produce 650 tons per day of green hydrogen, will be the world’s largest production facility, eliminating equivalent emissions of 3 million tons of CO annually.5
Quality Assessment
Air Products stands out relative to the broader chemical industry because of its management team’s forward-thinking approach — which supports the FGC team’s belief that management can continue to create long-term shareholder value. Air Products scores well in the FGC team’s proprietary Confidence Quotient (CQ) framework as well. We particularly like the market position of the company, operating in an oligopolistic market with technology leadership in its two growth platforms. Furthermore, Air Products’ financial condition gives it the flexibility to invest in transformational projects.
In sum, while the energy transition trend is going to be disruptive to the chemicals sector, in our view Air Products’ core strength of enabling efficient use of natural resources, along with leadership in newer technologies like carbon capture and hydrogen, should lead to long-term success.
Saint Gobain
The building construction industry is undergoing significant change in Europe. Updating the aging building stock in Europe is an important component of the EU’s plan to cut net carbon emissions by 2030. As a leading supplier of building materials and solutions, Saint Gobain is well placed to benefit from the renovation wave sweeping across Europe.
Saint Gobain is a manufacturer and distributor of building materials used in residential and commercial construction in over 70 countries. The firm has more than 168,000 employees and annual sales of €51.2 billion;6 it offers a wide range of building products that includes flat glass, insulation systems, interior systems, flooring and roofing solutions, and ceramics. Its renovation solutions can typically decarbonize two-thirds of building-related emissions, and in fact, sustainable solutions represent close to 75% of the firm’s sales. Saint Gobain’s business exposure is 37% new construction, 50% renovation, and 13% industrial high-performing solutions.7
Challenges and Opportunities
Europe’s building stock is old, and buildings in Europe account for 40% of total energy consumption and 36% of greenhouse gas emissions from energy.8 Renovation is the key to reducing the energy consumption of buildings, which in turn brings down emissions and reduces energy bills. The European Commission proposed in the Climate Target Plan 2030 that it would cut net greenhouse gas emissions in the EU by at least 55% by 2030 (compared to 1990).
Multiple EU and country-level stimulus plans and regulations have been created to help achieve this target, and these clearly represent tailwinds for the building renovation industry over the medium to long term. Such stimulus plans reduce the payback period of renovation investment, and regulations also encourage renovation activity by improving real estate values.
Solutions sold by Saint Gobain in 2020 avoided 1,300 million tons of emissions for customers, which is equivalent to 40 times the firm’s carbon footprint.9 Saint Gobain was also the first Environmental Product Declaration (EPD) issuer in the industry, issuing about 1,500 of these impact assessments in 2020.10 With regard to minimizing its own carbon footprint, Saint Gobain is aiming to reduce Scope 1 (direct) and 2 (indirect) emissions by 33% in 2030 versus 2017, and is committed to achieving carbon neutrality by 2050.11
Saint Gobain is a key beneficiary of the EU’s renovation wave related to the energy transition, and about two-thirds of its European sales come from the renovation market. In response to renovation-led demand — especially from France, Spain, and Italy — Saint Gobain has created a one-stop-solution renovation platform, “La Maison Saint-Gobain,” where customers can get all the information they require on renovation-related questions from qualified professionals.
Quality Assessment
Saint Gobain’s considerable footprint, strong brand, and the renovation trend in Europe provide support for the firm’s prospects — and the company is well positioned to outperform the market. The firm also scores well in the FGC team’s proprietary Confidence Quotient (CQ) framework. Management showed strong execution over the last three years by spinning off lower-margin distribution businesses, acquiring high-quality and high-growth businesses, and operational enhancements helped to improve operating margin. We are expecting further improvement to operating margin through continued management execution.
Saint Gobain’s management actions drove strong CQ scoring in the areas of management, financial condition, and market position, positioning the firm as a leading player in the European building products market with strong pricing ability in an inflationary environment. Saint Gobain clearly wants to maximize the positive effect of ESG factors for its customers through the solutions it offers, while also seeking to minimize its own carbon footprint.
We are confident that Saint Gobain can capture sustainable growth opportunities in the European building renovation market.
Standard Chartered
Standard Chartered Group is committed to playing a major role in funding the climate transition and generating related investment opportunities. The Group plans to devote $300 billion of its assets to green and sustainable finance by 2030.
A leading bank in Asia, Standard Chartered has taken a clear position on preparing for and addressing the risks of climate transition. The Group has publicly committed to specific climate-related targets,12 aligning itself with the International Energy Agency’s net zero 2050 climate scenario in 2021 and adapting that organization’s emissions trajectory for its footprint markets.13
Standard Chartered has also set clear green financing targets, specifically for renewable energy and energy efficiency technologies, pollution prevention and control, water management, sustainable infrastructure, sustainable agriculture, the circular economy, and climate change adaptation.14 The Group, which follows TCFD15 principles and has published 2050 net zero commitments, links executive compensation to climate-transition performance.16 Group management has also established a Sustainability Finance team to support strategic ESG and climate initiatives.17
Challenges and Opportunities
While climate change presents both physical and transition risks to Standard Chartered, the net zero pathways represent a growth opportunity for the Group, for example, as an enabler of financial solutions that clients can use to support their own transition plans. The Group has a geographic footprint where green financing will be needed; it has set ambitious targets to capture opportunities that the climate transition will bring; and it is developing an organizational structure and products to deliver against those targets.
Financing Standard Chartered has committed to financing in the amount of $300 billion aligned to the Green and Sustainable Product Framework and the Transition Finance Framework by 2030. This amount is equal to current total Group loans. In 2022, they had already mobilized £23.4bn through their Sustainable Finance activities. The Group has a target to launch “green” mortgages in key markets across its footprint and had already launched in three new markets in 2022.18
Advisory In 2021, the bank’s Sustainable Finance Solutions teams expanded to include a new ESG Advisory service to support clients in ESG strategy implementation, ESG reporting and disclosures, and ESG ratings. This team works closely with the Transition Finance team and Carbon Markets trading team to create bespoke product solutions.
Invested Assets Standard Chartered has committed to doubling its share of sustainable-investing assets under management by 2025 and integrating ESG considerations into the advisory activities in its wealth management business.
Regulation and Engagement In the last couple of years, Standard Chartered participated in a number of climate risk stress tests, including those carried out by the Hong Kong Monetary Authority and the Bank of England’s 2021 Climate Biennial Exploratory Scenario (CBES). The stress tests involved significant engagement with clients and allowed the Group to grow and deepen its understanding and management of climate risk.19 Many other regulators across their footprint have also proposed or set supervisory expectations on climate/environmental risk management.
Quality Assessment
Standard Chartered is a leader in climate reporting, having published its fourth TCFD report in 2022 and its Net Zero Approach Methodology in 2022. By looking to provide clear and comprehensive disclosure, Standard Chartered is better able to engage with key stakeholders. This is crucial because investor support is needed in order for Group management to execute on its sustainability aspirations.
Standard Chartered has already started to deliver against its financing goals. The group has facilitated $65bn of sustainable finance from January 1, 2021 to March 31, 2023. Sustainable finance income was up 37% year over year as of May 2023 and assets were up 8% year over year as of March 31, 2023 from December 31, 2022.20
Banks will continue to play a major role in the allocation of capital to fund the climate transition, but at the same time they must address the physical and credit risks (and the implications for creditworthiness) of their clients in this new setting. Standard Chartered is a market leader in assuming this challenge.
This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.