Few sectors attract as much skepticism for ESG investors as cement. It is a carbon-heavy and resource-intensive industry.
For investors committed to sustainability, the instinct to exclude it is understandable. We believe that instinct, however well-intentioned, is mistaken, and – in the context of emerging markets – potentially harmful.
We do not view sustainability as a screening exercise. It is an analytical framework built on what we view as “rational sustainability”.
When we apply that framework rigorously to cement, what we find is not a sector to be strictly avoided, but one where ownership in companies that follow best practice can drive genuine environmental improvement while simultaneously addressing some of the most pressing human development challenges of our time.
Across emerging markets, the alternative to cement is not a greener lifestyle, but a precarious one. Around 62% of urban housing in Africa is informal, while Asia is home to nearly 60% of the world’s slum population.
In Latin America and the Caribbean, that figure is 17%. As per United Nations data, over 1.1 billion people in these regions lack adequate housing. Cement is the material through which these deficits get closed.
Cement’s role in the energy transition
Paradoxically, the energy transition itself depends partially on cement as well. Typical onshore wind projects require hundreds of tonnes of concrete per megawatt of capacity, while solar farms, hydroelectric dams, and transmission infrastructure all rely on cement as well.
Investors who exclude the sector on environmental grounds may inadvertently be obstructing the transition we are all trying to accelerate.
Recognising that cement is essential does not mean accepting a blank cheque for pollution. The sector is materially less carbon-intensive than it was a decade ago – and the direction of travel is clear.
This transformation is being driven by a convergence of technological innovation, shareholder engagement and rational self-interest: the economics of decarbonisation, in many cases, are simply compelling.
Key levers of decarbonisation
Three key levers are reshaping the industry’s environmental profile. The first is energy.
Cement production is highly energy-intensive, and producers are increasingly adopting waste heat recovery systems (WHRS) and solar to cut both emissions and costs.
WHRS capture exhaust heat from the kiln to drive turbines, generating power at a fraction of the cost of grid electricity with zero incremental emissions.
The second is clinker substitution. Clinker, the carbon-intensive material produced in kilns, is the main source of Scope 1 emissions in cement manufacturing.
Replacing part of it with industrial by-products such as fly ash or slag lowers both emissions and production costs, while also repurposing large waste streams that would otherwise pollute both land and water.
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The third is the use of alternative fuels through higher thermal substitution rates (TSR), replacing fossil fuels with materials like waste, biomass, and municipal residues.
The high-temperature cement kilns also provide a controlled environment that can significantly reduce the CO2-equivalent impact compared to traditional incineration or pyrolysis, and allows for the “safe and harmless” co-processing of hazardous industrial and medical waste.
In addition, plastic waste that is not processed in those kilns does not simply disappear. Instead, it ends up in rivers, oceans, or is openly incinerated in conditions that release far more harmful toxins than controlled combustion in an industrial kiln.
Together, these shifts reduce emissions, lower costs, and improve the sector’s role in wider waste management and decarbonisation systems.
Efficiency gains
Leading Emerging Markets companies in this space are achieving Scope 1 intensities materially below the IEA global sector average.
Crucially, this performance is being achieved primarily through product and process efficiency rather than fuel switching, which means there is significant further upside as alternative fuel infrastructure matures across EM.
For context, European producers routinely operate at thermal substitution rates well above 60%, driven by stricter EU waste management goals, whereas the EM baseline remains at just 10-30%.
ESG challenge & opportunity in cement
For ESG investors, we believe the cement sector presents both a challenge and an opportunity. The challenge is disciplined differentiation: not all cement producers are equal, and the range of environmental, social and governance performance across the sector is wide.
For example, local externalities, such as air quality and quarrying impacts on surrounding communities, are real concerns, and they are precisely where the gap between leaders and laggards is widest.
Passive exclusion fails to distinguish leaders from laggards, and in doing so, potentially deprives the former of capital.
The opportunity is to back management teams that view sustainability not as a compliance exercise, but as the primary lever of operational efficiency and long-term resilience.
In a sector where energy accounts for roughly a third of operating costs, every tonne of CO2 avoided is also a reduction in the cost of production.
Sustainability here is not a trade-off – it is structurally aligned with financial performance and the shift toward a cleaner economy.
