Concrete and cement are ubiquitous, forming the foundation of our industrialised societies. However, cement has a carbon footprint equivalent to the third largest country on earth, accounting for 8% of global emissions. This report outlines why cement is so carbon-intensive, pathways for decarbonisation, and why institutional investors need to act. The cement industry generated 2.2 billion tonnes of clinker, accounting for 40% and 50% of total cement emissions, respectively, in 2016. The industry is driven by rising demand which leads to increasing emissions.

Decarbonisation pathways

The International Energy Agency and the Cement Sustainability Initiative modelled different decarbonisation pathways for the cement industry. The Reference Technology Scenario, incorporating nationally determined contributions made as part of the Paris Agreement, shows emissions rising 4% by 2050. To limit temperature increases to 1.75°C above pre-industrial levels will require a 60% reduction in emissions by 2050, while limiting temperature rises to 1.5°C will require net-zero emissions by 2050.

Decarbonising cement

This report suggests ways to reduce emissions from cement production, including reducing the clinker ratio, developing alternative building materials, and using alternative fuels. Emerging technologies, such as carbon capture storage, could also help to reduce emissions.

ESG risks and mitigation

Climate risk and mitigation are crucial environmental, social and governance (ESG) issues in cement production. Cement companies face policy and demand-side risks and need to manage these risks through risk management strategies, scenario analysis, and metrics and targets. Companies also face governance-related risks, with investors needing to consider lobbying activities and board-level oversight of climate-related risks.

The role of institutional investors: Engagement

Investors need to engage with cement companies on their management of environmental risk. Engagement with companies can be achieved through collaboration with industry groups, filing shareholder resolutions at climate laggards, and voting against companies at annual general meetings.

The role of institutional investors: Primary market financing

Investors can limit the negative impact of their investment portfolios and incentivise companies to act by not partaking in new bond or equity issuances by climate laggards that fail to align with investor expectations.

Conclusion

Investors must take action if engagement does not lead to progress in sustainability investment. Cement companies must decarbonise, and new plants must be fitted with the best technology available to reduce emissions. Investors must consider the risks of external financing and the alignment of investment with low-carbon strategies. Cement companies need to act now using all tools at their disposal to decarbonise, as plants built today can last up to 30-50 years. Investors’ role is vital in incentivising companies towards the integral topic of sustainability.