Schneider Electric (SU) published its annual results yesterday, posting a profit increase of 2.8% and revenue growth of 6.6%. With a 170-year history, starting in metallurgy, Schneider Electric is now betting on one core element of its strategy, across all its business lines: energy efficiency.
Last November, the International Energy Agency reminded markets that energy efficiency is worth at least $310 billion a year, and growing1. Energy efficiency is expected to contribute to 40% of emissions reductions by 2040 and beyond, in a 2-degree limit global warming scenario. The IEA has nicknamed it the “invisible powerhouse,” and it has been the key driver of a peaceful but powerful industrial transition across markets.
Energy efficiency is, by its nature, a good investment. Because it locks a structurally lower energy consumption pattern into a business and insulates it from energy market fluctuations. If a program of building insulation has a pay-back period of four years, for example, this corresponds to a 25% return. After that payback period, the business will enjoy permanently lower energy-related costs.
More efficient use of energy in developed markets has saved the equivalent of 1,732 million of tons of oil over the past decade, or more than the total energy consumption of the US and Germany combined2. But there appears to be much more savings available. According to the IEA, two-thirds of the global energy efficiency potential is yet to be harnessed. Many industrial companies have focused on this huge potential and are slowly transforming the energy balance of the global economy.
Schneider Electric seems to be an example of a corporation set to monetize this rarely contested energy source. Its annual results illustrate steady progress, in both financial and ESG terms; since 2009, it has outperformed its benchmark indexes. The premise for growth of Schneider Electric is quite simple: halving our GHG emissions by 2050, when energy demand is expected to double, can only be achieved through energy efficiency. While it is not the full answer to our climate problem, it certainly is a major one, and it is at the heart of the company’s expertise.
How insulated is Schneider Electric’s model from current oil prices and their potential effects on energy efficiency investments? While intuitively, we could think that the lower cost of oil might dampen demand for energy efficiency, it is actually not particularly relevant. Energy efficiency, as an energy source, competes mainly with electric power supply sources, and therefore not with oil (except in transport). It is often regulated, through standards, policies and incentives, which are isolated from short-term energy price variations. Low oil prices might actually provide an incentive to regulators to reduce or even phase out fossil-fuel subsidies3, rather than impair energy efficiency engagements. As a set of technologies, energy efficiency, like renewable energies, is set to become cheaper over time, while extracted non-renewable energy sources are likely to become more costly. Moreover, in times of economic contraction, as some of Schneider Electric’s markets are expected to be in 2015, investments in cost reduction projects (such as those in energy efficiency) can actually increase.
What distinguished Schneider Electric from other industrial and electric equipment companies is probably the advance that the company has gained from a relatively early engagement in ESG performance monitoring4, and the scope of its disclosure. It published numbers such as revenue breakdown by stakeholders5, including payroll; contribution of “green growth” products and services; and social impact measurement in terms of access to energy. Schneider Electric is one of the 3% of the world’s largest companies that discloses all basic ESG indicators6.
One potential problem, detected through ESG data analysis, is related to human capital management. The company has a relatively high employee turnover rate (7.4% in 2013), and some employee-related incidents. In a competitive and expertise-based market, this can represent a risk for corporate performance.
Schneider Electric reminds us why E.ON, the German utility, has recently transformed its business model to generate value in a transitioning energy market, while building the foundations to remain profitable tomorrow7. Today’s energy markets are still very much focused on volume, security and price, but tomorrow’s context might place much more emphasis on flexibility, efficiency, and low- or zero-carbon emissions. What is compelling in Schneider Electric’s model is its ability to combine the two: energy security and energy efficiency, in one company. While organic growth has been moderate, we expect that the global market for energy efficiency, the core of Schneider Electric’s business, has not yet reached its full growth potential, and has a strong long-term outlook.
|Company||Ticker||PX LAST||Market Cap||Avg 2015e EPS||Avg 2016e EPS||PE RATIO||EV/EBITDA|
|Schneider Electric||SU FP||71.38||EUR 41737||EUR 4.21||EUR 4.62||23.01||11.11|
|Siemens||SIE GY||97.48||EUR 85880||EUR 6.92||EUR 7.30||16.33||9.97|
|ABB Ltd||ABBN VX||20.26||$46,897.00||$1.27||$1.44||19.04||8.94|
|Emerson Electric||EMR US||58.41||$40,023.00||$3.80||$4.00||15.86||8.88|
|Mitsubishi Electric||6503 JP||1357||JPY 2913753||JPY 93.54||JPY 102.03||14.27||6.38|
*Consensus Bloomberg. Data as of February 20, 2015
Margarita Pirovska, PhD, is the Policy & Sustainability Analyst at Cornerstone Capital Group
Michael Geraghty and Sebastian Vanderzeil contributed to this article.
 IEA, idem.
 Advice given by the IEA to governments: http://www.iea.org/newsroomandevents/speeches/150127_OxfordEnergyColloquiumspeech.pdf
 Since 2005, it publishes ESG data in its annual results, and in 2012 introduced dated and quantified objectives to improve its ESG performance.
 These indicators are: GHG emissions, energy and water consumption, waste generation, payroll, injury rate, and employee turnover. http://www.corporateknights.com/wp-content/reports/2014_World_Stock_Exchange.pdf
 See our comment on E.ON’s break-up: http://cornerstonecap.wpengine.com/2014/12/redefining-energy-utilities-the-e-on-revolution/
Cornerstone Capital Inc. doing business as Cornerstone Capital Group (“Cornerstone”) is a Delaware corporation with headquarters in New York, NY. All other marks referenced are the property of their respective owners. The Report is licensed for use by named individual Authorized Users, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an Institutional Subscriber without written authorization from Cornerstone.
The views expressed herein are the views of the individual authors and may not reflect the views of Cornerstone or any institution with which an author is affiliated. Such authors do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned in this publication. This publication does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing the recipients’ particular investment needs. Recipients should consider the information contained in this publication as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources. Information contained herein is current as of the date appearing herein and has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed and should not be relied upon as such. Cornerstone has no duty to update the information contained herein, and the opinions, estimates, projections, assessments and other views expressed in this publication (collectively “Statements”) may change without notice due to many factors including but not limited to fluctuating market conditions and economic factors. The Statements contained herein are based on a number of assumptions. Cornerstone makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this publication. Cornerstone accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this publication, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law. This publication may provide addresses of, or contain hyperlinks to, Internet websites. Cornerstone has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.