Transition of Carbon-Intensive Industries Offers Unique Investment Opportunities

US investment management company Invesco and the Center for Green Finance Research (CGFR) at Tsinghua University in Beijing, have jointly announced the findings of the analysis report “Carbon Emissions and Low-carbon Transition of Listed Companies in Coal Mining, Coal-fired Power Generation, and Steel Industries".

This is the first research released by the two parties since the establishment of a research partnership last year.

Focusing on China's traditional carbon-intensive industries, the report analyses the current carbon emissions of listed companies in these key industries and how they are navigating a low-carbon transition.

The sources for the research are publicly available information from annual reports of analysed listed companies, combined with proprietary research by Tsinghua University. It aims to help market participants effectively identify sustainable activities of enterprises in traditional carbon-intensive industries and explore investment opportunities in their low-carbon transition process.

Data Gaps

Using the "emission factor method", a framework proposed by the United Nations Intergovernmental Panel on Climate Change (IPCC), the research estimates the carbon emissions from sample enterprises in the coal-fired power generation industry.  The research found that carbon emissions per unit of income varies widely across the industry, although unit emissions showed an overall flat or declining trend. 

When using the same method to analyze coal mining enterprises, the research found data on the total carbon emissions and energy consumption of the industry are relatively lacking, thus estimating total emissions is challenging as less public data is available and there are fewer industry disclosure requirements.

Estimating total emissions in the steel industry is similarly challenging; extra complexity is caused by varied estimations on different production process and products, with emissions values varying widely across sample companies based on disclosures.

Alexander Chan, Head of ESG Client Strategy Asia Pacific at Invesco said: "Coal mining, coal-fired power generation and steel industries are essential components of China's economy, therefore driving the low-carbon transition of these energy-intensive and carbon-intensive industries is critical for China to achieve its ‘Double Carbon’ goals.”

“In China's path to a low-carbon economy, these industries will need capital from domestic and global investors, and we expect that compelling investment opportunities will arise particularly in carbon reduction technology, transition leaders and green bonds as traditional industry transforms.”

Green Revenue

The research asserts that the EU-China Common Ground Taxonomy is internationally comparable and compatible, providing a basis for relevant information disclosure by Chinese enterprises. The calculation of corporate “green revenue" proposed in the report, which identifies financial revenue obtained from products and services by enterprises in “climate change mitigation” as defined in the Common Ground Taxonomy, is an innovative exploration of the use cases of the Common Ground Taxonomy to assess companies’ sustainable activities.

Findings from the research indicate that the proportion of green revenue of steel companies varies greatly due to different production processes and products. There is currently little consensus in the coal-fired power generation industry on how to provide financing to support the low-carbon transition, however "transition finance" is arising to address this.

The report also points to "green revenue" as a value indicator that identifies enterprises' sustainable activities, thus helping banks comprehensively evaluate environmental risks.  The analysis can also help investors determine a clearer and fuller picture of expected future cash flows and values of different enterprises as they transition to lower-carbon methods of income generation.

The research findings will support the investment analysis of the quantitative team at Invesco's onshore China fund management joint venture, Invesco Great Wall, which incorporates ESG-criteria into the investment analysis process.

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