Corporate capex will face scrutiny in the net zero transition

European regulators have highlighted how data on company spending can be used to assess the credibility of climate transitions, but it's not always clear cut

The EU believes that, when it comes to the credibility of their net zero transitions, companies should be judged on their spending. 

Speaking at the launch of a new ‘sustainable finance framework’ earlier this month, the European Commissioner for Trade, Valdis Dombrovskis, said the requirement for companies to disclose the level of their capital expenditure that qualifies as green under the EU Taxonomy is providing insight into their trajectories.

Dombrovskis was referring to conclusions reached in a Commission document on the growth of transition finance, which noted that the taxonomy was increasingly being used for transition finance purposes. It added that many companies were “reporting Taxonomy-aligned capital expenditure that is materially higher than aligned revenue, especially in high-impact sectors.”

French supervisor AMF echoed these views in analysis published last November. Looking at taxonomy reporting in France, it said it could be “useful” for a high-emitting company with strong climate ambitions but only a small amount of current revenues aligned with the taxonomy to “stress the importance of its aligned capex… which will be able to fund its transition.”

Green capex, the thinking goes, will eventually become green revenues. And that’s how you change a business model. 

Car giant Audi says just over 80% of its revenues are generated from activities eligible under the green taxonomy, but only 12.8% align with the framework’s stricter rules on social safeguarding and not undermining other environmental objectives. The 12.8% is pretty evenly split between revenues from hybrid vehicles (5.2%) and battery-powered electric vehicles (7.6%). 

But that eligibility leaps to 100% for Audi’s capex. 41.3% is fully aligned with the taxonomy, of which more than three quarters is devoted to battery-powered vehicles, indicating that Audi’s future sales will be based on pureplay electric vehicles, even if right now they only account for 7.6% of its revenues. 

“In some cases, the capex data will show a real short-term plan to generate more green revenues,” says Nicolas Redon, a green finance expert at French research house Novethic. 

Given that most major economies plan to ban the internal combustion engine in coming years, it doesn’t really require capex analysis to predict a shift in the business model of automotive companies like Audi. 

There are instances where capex data provides some more surprising insights, though. 

German utility RWE is one of Europe’s most carbon-intensive companies, and is regularly criticised by campaign groups and responsible investors for its high levels of fossil fuel generation, especially in coal. According to its 2022 sustainability report, just 12% of RWE’s revenues were aligned with the EU taxonomy. 

Its green capex, on the other hand, is reported as 83% aligned. And last week, the firm announced it would fund that capex through a new €50bn Green Financing Framework centred on renewables, battery storage, green back-up capacity and investments into hydrogen.  

But the correlation is not always so clear. 

For starters, not all green capex becomes a source of green revenues. As Redon explains, a company can count spending on areas like environmental consultants or energy efficiency measures as green capex under the taxonomy’s rules. While this may indicate that its management is addressing sustainability issues, it doesn’t necessarily have any implications for its future business model. 

“There should be a clearer distinction between those different types of spending if the taxonomy is going to be used to indicate transition pathways,” Redon suggests. 

And then there’s gas. 

Last year, the EU made the controversial decision to label certain gas activities as green under the taxonomy. To qualify, those assets should perform as baseload only, meaning they prop up Europe’s grid so that renewables can become the dominant source of energy - they are not allowed to operate at full capacity over their lifetimes. But there’s currently no mechanism to enforce that rule. So a company could label spending on a new gas project as green under the taxonomy, and then run the site at levels that surpass the EU’s threshold, meaning the green capex actually becomes brown revenues.  

Crucially, the taxonomy doesn’t ask for any information on those brown revenues. And the same goes for capex - companies only have to disclose their green spending - which makes it hard to put any of this information into context. 

“If you look at the expectations laid out in the taxonomy, it essentially says that, as long as you grow your green spending, you can maintain or grow your spending on polluting activities,” says Mark Campanale, founder of think-tank CarbonTracker. “But that isn’t going to get us to net zero. The world has an absolute carbon budget, it’s not relative to how much green stuff we do.”

CarbonTracker is trying to balance out this emphasis on companies’ green activities by creating a Global Registry of Fossil Fuels. Launched last year in partnership with fellow non-profit Global Energy Monitor, it’s a database containing information about current and planned fossil fuel projects, including their potential emissions. 

Details about the associated capital expenditure is hard to find in the public domain, though, says Campanale - it's typically held by specialist data businesses like Rystad Energy or WoodMac. 

Instead, CarbonTracker has asked a number of large fossil fuel companies to provide the Registry with data on the embedded CO2 in reserves, but so far none have agreed. Campanale says one company executive told him that it wouldn’t cooperate because this level of transparency on future fossil fuel projects would inevitably lead to calls for constraints on production.