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ESG Industry Report Card: Capital Goods


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ESG Industry Report Card: Capital Goods

Analytic Approach

Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).

Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.

In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.

Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.


The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.

ESG Risks In Capital Goods

Environmental Exposure

The biggest environmental risks for the capital goods sector relate to carbon emissions and resource management. Tighter energy and carbon regulations and growing use of renewable technologies are shaping demand for industrial equipment and services, and costs are rising for capital goods businesses to develop processes and achieve compliance with these tightening standards. Costs are also rising to mitigate possible fines or remediate environmental matters, such as emissions, water use, and waste disposal. Some companies in the capital goods sector, particularly those that rely on--or produce--coal- or gas-fired turbines or power plants, are under growing pressure from environmental risks, while others, like wind turbine makers, are likely to benefit from the transition towards renewable energy. We also view favorably issuers with product lines that significantly reduce greenhouse gas emissions such as Ingersoll Rand PLC, which we view as better positioned than its peers in the HVAC segment.

Incidents of environmental claims, such as asbestos- or pollution-related liabilities, have resulted in meaningful fines or financial obligations for some capital goods companies. Examples include several lawsuits against 3M alleging that its use and disposal of perfluorochemicals led to the contamination of drinking water in multiple locales throughout the U.S., and Emerson Electric's litigation relating to a variety of asbestos-related personal injury claims.

Social Exposure

In considering social risk, S&P Global Ratings focused on the sector's exposure to changing consumer behavior and human capital management. No capital goods company in the rated universe is substantially better or worse off than the whole industry. Automation, digitalization, and robotics are global trends across most industries and create opportunities for growth and profitability. However, they will fundamentally change the work environment for employees in the manufacturing industry. Safety management and customer engagement are also important to an issuer's competitive advantage, supported by strong brand name recognition, product quality, and technical leadership. Overall, we assess that the capital goods sector has a below-average exposure to social risks.


Governance factors (how companies' governance impacts their ability to achieve strategic targets while mitigating exposure to litigation or unexpected headwinds) are company-specific. Only two companies, Japan-based Toshiba and Germany-based diversified industrial conglomerate ThyssenKrupp, are negatively influenced by governance factors, though we note that the majority of the ratings in the capital goods sector are speculative grade and many are under private equity ownership.

ESG Risks In Capital Goods

Table 1

Company/Issuer Credit Rating/Comments Analyst
3M Co.(AA-/Watch Neg/A-1+)  
3M's credit profile is negatively influenced by environmental factors, mainly associated with hazardous chemicals, while social and governance factors are in line with the capital goods industry. 3M is the defendant in many lawsuits surrounding its use of per- and polyfluoroalkyl substances (PFAS; found in a wide range of consumer products), and faces a number of lawsuits regarding aqueous film forming foam (AFFF; used to fight fires). In response, 3M has made sizable payments and committed to continued research and potential remediation where the materials were manufactured and/or disposed. The charges to date, however, have had minimal effect on the company's credit metrics. While the company began phasing out the use of perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), and was the first of its peers to do so, we believe there remains a substantial liability surrounding PFAS, though the precise timing and size are unknown, thus we have not incorporated specific amounts into the rating. If PFAS is ultimately designated a "hazardous substance" under the Comprehensive Environmental Response, Compensation, and Liability Act, better known as the superfund law, it would begin to clarify potential cleanup obligations. At the same time, we believe that milestones in the federal case related to AFFF could weigh on the rating. Positively, 3M has sustainability goals with a 2025 target year, including improving energy efficiency by 30% and achieving "zero landfill" status in 30% of its manufacturing plants. 3M also committed to sustainable and ethical raw materials sourcing. These actions help to partially mitigate risk, in our view. Trevor Martin, CFA
ABB Ltd.(A/Negative/A-1)  
We view ABB's positions relative to ESG factors as largely in line with the industry's and don't expect them to materially influence the company's credit quality over the next few years. Emissions reduction, management of environmental resources, and human capital management do not pose a risk for the group. ABB has nine sustainability objectives and actively reports progress against these objectives, which include increasing the share of eco-friendly products, reducing waste and emissions, and responsible relationships with employees. ABB is one of the global players pioneering technologies that are changing the manufacturing industry (automation, digitization, and robotics). We view the company's management and governance as strong. We consider ABB well-managed, with high disclosure standards typical for a large, international, publicly listed group. In our view, the strategic direction of the group has been strongly influenced by the group's activist shareholder base, which triggered a significant structural change at the end of 2018 with the announced sale of its power grids business. However, at this stage, we do not see a material governance related risk to influence the group's credit quality. Tobias Buechler, CFA
Atlas Copco AB(A+/Stable/A-1)  
We view Atlas Copco's positions relative to ESG factors as largely in line with the industry's, but recognize that Atlas Copco has a long history of steering its product development towards energy- and resource-efficiency that in turn increases customers' productivity, energy and cost savings, and CO2 reduction. This allows Atlas Copco to charge a premium price for its products, underpinning its above-average profit margins. We expect Atlas Copco to continue to invest heavily in research and development (R&D); it invested about 3.1% of revenues in 2018 into R&D, including capital expenditures. We view the company's management and governance as strong, reflecting a solid track record of strategic and operational execution and its highly experienced management. Per Karlsson
Briggs & Stratton Corp.(B-/Negative/--)  
We consider Briggs & Stratton to be less favorably positioned on environmental credit factors than its capital goods peers. The company's Engines segment, which primarily provides gasoline engines for lawn and garden equipment applications, faces risks related to gasoline-powered engine exhaust. While we expect the company's product line will remain compliant with emissions standards, we expect a continued secular shift in customer preferences toward battery-powered engines, a market in which the company currently has limited but growing presence. Briggs & Stratton's labor practices are in line with those of its peer base, with no major safety standard deficiencies to highlight. The company cited labor scarcity in the U.S. as one of the factors for lower EBITDA generation in the past year, and we expect skilled labor market interruptions to persist in the future. Still, this labor shortage is similar to ones faced by capital goods peers. Ezekiel Thiessen, CFA
Caterpillar Inc.(A/Stable/A-1)  
We view Caterpillar's environmental risks to be in line with those of most large, global capital goods peers. Caterpillar manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives, and is therefore exposed to regulations regarding exhaust emissions and environmental sustainability. The company's end markets, particularly mining, also face increasingly stringent environmental standards globally. Caterpillar is investing heavily to improve the energy efficiency of its products and reduce the environmental impact of its manufacturing plants. Longer term, we believe more infrastructure projects aimed at improving living standards, such as access to clean water, could boost demand for construction equipment. Similar to its peers, Caterpillar contends with occupational health and safety risks stemming from the labor-intensive nature of its manufacturing operations and the construction and mining industries. Consequently, the company engineers its products and processes to reduce the occurrence of injuries in its facilities and on job sites. We assess Caterpillar's management and governance as satisfactory. The company is currently the subject of a U.S. federal investigation related to, among other items, tax and export activities involving its U.S. and non-U.S. subsidiaries. We are uncertain how this federal probe will affect Caterpillar and will continue to monitor the investigation. Svetlana Olsha, CFA
CNH Industrial N.V. (CNHI)(BBB/Stable/A-2)  
We view CNHI's ESG risks to be in line with those of its capital goods peers. Agricultural equipment manufacturer CNHI faces environmental risks due to the weather-dependent nature of its agricultural end markets, where extreme weather can affect a farmer's income and ultimately investment sentiment for new equipment. As a manufacturer of trucks, engines, and light and heavy construction equipment, CNHI is exposed to increasingly stringent regulation regarding greenhouse gas emissions, fuel efficiency, and NOx emission. CNHI is well positioned, in our view, due to significant R&D investments and capital expenditures necessary to maintain compliance with environmental standards, and by continuously improving the energy efficiency of its products. For example, its newest liquid natural gas (LNG) trucks reduce particulate matter by 99%, CO2 by 99% (when using biomethane), and NOx by 30% compared with diesel engine trucks. CNHI plans to roll out alternative-fuel tractors in 2022. CNHI is also increasing its environmental standards and aims to use fewer resources in its processes. For example, in 2018 the company reduced its CO2 emission per production unit by more than 34% compared with 2014 and derived more than 70% of its total electricity consumption from renewable sources. Social factors do not play a major role in our credit assessment but potential risks are product liability issues and health and safety in its own manufacturing operations, which we view as well managed. We view the company's management and governance as satisfactory and see no material risks relating to governance. We view the group as solidly managed with high disclosure standards typical for a large international publicly listed group. Tuomas E. Ekholm, CFA
CRRC Corp. Ltd.(A+/Stable/--)  
We view CRRC as better positioned than peers with respect to environmental credit factors. Under the "Blue Sky Protection Plan" the Chinese government vows to shift the transportation of certain commodities from highways to railways, so as to reduce carbon emissions. The plan also specified the target to increase railway freight transportation volume by 30% over 2018-2020 (equivalent to a cumulative average growth rate of 9%), which would lead to solid demand for locomotives and freight wagons. This could benefit CRRC and drive revenue and profit growth in the next two years. CRRC is also actively investing in new energy, new materials, and environmental protection-related technologies to reduce energy consumption and increase efficiency of its traditional rolling stock products. It is a key supplier of motors and blades for the wind power turbine industry in China, and is expanding into environmental protection equipment and polymer composite material production, among other areas. We expect CRRC's R&D expenditure to remain around 5% of its revenue in the next two to three years. In our view, CRRC's social and governance factors are largely in line with those of peers and we view the company's management and governance as satisfactory. As a railway equipment provider, CRRC is exposed to potential reputation damage and costs arising from warranty and product liability claims for quality deficiencies. The company makes about RMB3 billion in additional warranty provisions per year, which should be largely sufficient to cover normal repairs and returns. However, any high-profile fatal railway accidents could have severe negative consequence for industry demand. Though these accidents are rare and may be irrelevant to CRRC's products, the company still bears a lot of the social, operational, and reputational risks. Chloe Wang
Deere & Co.(A/Stable/A-1)  
We view Deere's environmental risks to be in line with those of most large, global capital goods peers. The company's agricultural end markets are weather-dependent, and we incorporate the potential for cash flow and leverage volatility that results from farm cycles into our rating. Still, Deere designs its products for efficiency, which supports ongoing replacement demand. As an engine manufacturer, Deere faces tightening engine emissions regulations globally, and will continue to incur R&D costs to comply with these standards. On the social front, population growth and increasing equipment mechanization in developing countries give Deere a competitive advantage. Still, the shortage of skilled labor is a growing risk for all equipment manufacturers, especially in the U.S., due to an aging workforce. We view the company's management and governance as strong, reflecting a solid track record of strategic and operational execution and its highly experienced management. We believe the company's management and board of directors appropriately balance the interests of its various stakeholders. Svetlana Olsha, CFA
Emerson Electric Co.(A/Stable/A-1)  
We view Emerson Electric's ESG risks to be in line with those of its capital goods peers. Emerson is exposed to various environmental regulations, including those covering the discharge of waste materials and greenhouse gases, although the company currently has no environmental litigation liabilities. Emerson has set environmental goals, including quantitative targets for reducing its greenhouse gas emissions, water consumption, and energy use. Additionally, many of Emerson's products helps customers meet the tightening environmental standards. Its Automation Solutions segment, for example, helps industrial manufacturers increase energy efficiency, maximize raw material yield, and enhance safety. Though Emerson's Residential and Commercial Solutions segment continues to offer products that use hydrofluorocarbons (HFCs), a type of refrigerant that has been shown to have a global warming effect that is significantly larger than CO2, it also manufactures refrigeration systems that can use more environmentally friendly substitutes. Other products help homes and commercial buildings manage their energy and lower their carbon footprint. Its Cold Chain technologies help customers manage the quality of food products, mitigate damage from the risk of foodborne illness, and limit waste. Michael Tsai
Filtration Group Corp. (FGC)(B/Stable/--)  
We view FGC as favorably positioned relative to capital goods peers when it comes to environmental factors because the company generates more than 40% of revenue from products that improve air quality. We believe these products either benefit the environment or reduce the impact of environmental pollution on society. For instance, FGC's transmission products allow automobiles to meet tightening regulations governing carbon dioxide emissions. The company also manufactures products that remove industrial contaminants and ambient dust from the air. As the world's population becomes richer and more urban, we expect environmental considerations to become more prevalent, leading to rising demand for the company's filtration product lines, which should grow revenue faster than GDP and drive higher revenue growth than the broader manufacturing industry over the medium and long term. Ezekiel Thiessen, CFA
Generac Power Systems Inc.(BB/Stable/--)  
We view Generac as favorably positioned relative to capital goods peers when it comes to environmental factors. Specifically, severe-weather-related power outages continue to raise demand for the company's main product, standby power generators. We believe weather-related power outages will increase in frequency and severity due to rising world temperatures and an aging electric grid, which should drive demand for emergency power across residential housing markets in the U.S. and globally. Most portable generators are not environmentally friendly, but Generac is expanding its offering of natural gas powered generators (which currently comprise about 40% of U.S. sales and 1%-2% globally) and is developing energy storage products in a relatively nascent market. Natural gas is cleaner, greener, and more cost effective than coal or diesel fuel, and we believe Generac's strong brand recognition will allow the company to expand its natural gas product sales, particularly in global commercial and industrial markets. Overall, we expect major weather events and a shift from centrally generated power toward renewable energy sources (which will likely increase the need for energy storage) to boost revenue growth for the company above GDP levels. Generac's safety standards and access to skilled labor are in line with those of the broad peer base in the capital goods sector. Stanice Gaspard
General Electric Co. (GE)(BBB+/Stable/A-2)  
We view GE's ESG risks to be largely in line with those of most large, global capital goods peers, but note that environmental and governance are currently important factors in light of challenges in the power segment for the group. The collapse in the performance of the power business triggered two downgrades in 2017 and 2018. Still, GE remains an important player in the global energy market and has a large installed base of power generation equipment (and related service businesses), which generates about one-third of the electricity on the planet. While GE remains a market leader in power, shifts toward renewable energy as well as service business execution issues have affected consolidated profitability and cash flow. We assess GE's management and governance as fair, reflecting operational missteps by previous management teams and senior management turnover, while acknowledging management is taking a range of actions to address these challenges. GE continues to focus on improving its balance sheet and has applied asset-sales proceeds from Wabtec Corp. and Baker Hughes shares toward debt reduction. We expect GE to complete the sale of its biopharma business to Danaher and receive an additional $20 billion in cash proceeds by early 2020, which will help reduce leverage and bolster liquidity. We believe the new management team has a creditor-focused financial policy as evidenced by the dividend cut and sizable asset divestitures to bolster liquidity. Ana Lai, CFA
Hitachi Ltd.(A/Stable/A-1)  
We consider Hitachi's exposure to ESG factors, particularly to environmental factors, as on par with those of industry peers. Hitachi's energy business, which is core for the company, is exposed to environmental risks, but accounts for as little as 5% of consolidated operating income, so we think Hitachi can manage the impact. Amid the drive to reduce carbon emissions, many thermal power generation businesses have faced pressure on earnings and profits. But Hitachi spun off its thermal power business into a joint venture, and finally decided to sell all stakes on the joint venture to the partner, Mitsubishi Heavy Industries. As one of the major diversified capital goods and information technology (IT) companies in Japan, Hitachi has some exposure to social factors, in terms of security of data usage, and recruitment and staffing. However, the company has been steadily managing these issues and businesses, so we think the impact of these risks will remain manageable. Makiko Yoshimura
Honeywell International Inc.(A/Stable/A-1)  
We view Honeywell's ESG risks to be largely in line with those of most large, global capital goods peers. Honeywell is exposed to a moderate level of environmental risk, mainly through its performance, materials, and technologies division. This segment (26% of 2018 sales) is involved in supplying catalysts, adsorbents, refrigerants, and other chemicals and additives to customers in the oil and gas, industrial process, and manufacturing industries. The company is subject to environmental remediation liabilities, much of which stem from businesses that Honeywell has since closed or sold. It spun off its AdvanSix business (which makes nylon 6 resin, chemical intermediates, and ammonium sulfate fertilizer) in 2016. In 2018, the company spun off its turbocharger and residential building businesses; as part of those transactions, Honeywell will be partially indemnified from legacy asbestos and environmental liabilities through reimbursement arrangements with the spun companies. In many cases, the company has repurposed these remediated sites into viable commercial, residential, and open space assets for the surrounding communities. Like many large, publicly traded manufacturing companies with strong disclosures, Honeywell has stated performance goals related to energy efficiency, greenhouse gas reduction (it reduced intensity by 90% since 2004), and water conservation. It has increased its energy efficiency by about 70% between 2004 and 2018, lowered its greenhouse gas intensity by more than 10% from 2013, and saved more than 127 million gallons of water since 2013. Regarding social factors, Honeywell's status as a defense contractor may not align with the concept of socially responsible investing, though the defense and space markets account for roughly 13% of the company's sales. The company offers avionics, propulsion, satellite communications, instrumentation, software, and other products and services to militaries worldwide. Honeywell is in compliance with all applicable U.S. and foreign laws and regulations. James Siahaan, CFA
Ingersoll-Rand PLC (IR)(BBB/Stable/A-2)  
We see IR as being better positioned on environmental risk relative to its peers in the heating, ventilation, and air conditioning (HVAC) industry, evidenced by its progress in GHG emissions reduction. Environmental factors are fairly important in our analysis of capital goods companies, particularly with regard to increasing regulation of GHG emissions and resource management. These factors are more pronounced in the HVAC subset of the capital goods sector, as HFCs are still widely used in air conditioning units. These refrigerants last roughly 14 years in the atmosphere and have higher global warming potential than carbon dioxide. IR has exposure to environmental risk, but during the past five years has reduced the GHG emissions intensity associated with its operations by 45% while increasing total energy efficiency 23%. IR's target is to reduce its Scope 1 (direct carbon dioxide emissions from fuel and refrigerants) and Scope 2 (indirect carbon dioxide emissions, i.e. from electricity) emissions intensity by 35% by 2020 compared to 2013. We see the company's goal of being able to offer more sustainable HFC alternative products by 2030 as positive to its business, as we believe consumers will increasingly opt for products that are more environmentally friendly, assuming no degradation in product quality. IR has invested more than $400 million--approximately 80%--of its goal to invest $500 million over the next five years in R&D to fund the long-term reduction of GHG emissions. Its new goal is to reduce 1 gigaton of carbon emissions from its customers' footprint by 2030. IR's Trane and Thermo King units have agreed to join the RE100 and set a 100% renewable electricity target for its entire global operations by 2040. They have also agreed to join the EP100 and have committed to doubling its energy productivity by 2035. Trevor Martin, CFA
Itron Inc.(BB/Stable/--)  
We consider Itron to be more favorably positioned on environmental credit factors than its capital goods peers because the company's products and services help utilities and individuals reduce resource use and thus mitigate the impact of climate change on society. Itron manufactures utility meters and provides solutions that measure, manage, and analyze electricity, natural gas, and water usage. The company's engagement with unions and workers' councils reduces the risk of social backlash related to potential workforce restructuring and job eliminations, and we therefore view social risk as being on par with that of the capital goods industry. We assess Itron's management and governance as fair. Although the company faces an elevated cybersecurity risk created by its proximity to critical infrastructure, Itron mitigates this risk by performing internal and external vulnerability tests on its products and managed services. We view the company's 2019 CEO transition as providing continuity and appropriate management of governance risks. Ezekiel Thiessen, CFA
Johnson Controls International plc (JCI)(BBB+/Stable/A-2)  
We view JCI's ESG risks to be largely in line with those of most large, global capital goods peers. In our view, the company has a good track record of identifying and mitigating ESG risks. As a leading producer of HVAC products, the company is adapting to existing and potential state regulations prohibiting the sale of HFCs. JCI and other industry firms advocated for the Trump administration to ratify the Kigali Amendment to the Montreal Protocol, which calls for a global phase-down of the use of HFCs. JCI is working to develop standards regarding energy efficiency, and introduced a highly efficient, less-polluting line of centrifugal chillers and is investing to develop alternative refrigerants with less potential for ozone depletion. In addition, JCI's sale of its battery manufacturing business distanced the company from the water-intensive production process and reduced its risk exposure to groundwater contamination. In December of 2019, JCI linked the pricing of its new five-year and one-year revolving credit facilities to sustainability metrics, becoming one of the first industrial companies to do so. Regarding social risks, JCI tries to ensure its supplier base abides by sustainable practices and that the suppliers are diverse. The company has a good safety record, comparable to that of high-performing companies in the industrial manufacturing space, with its total recordable incident rate decreasing to 0.50 incidents per 100 employees in 2018 from 0.74 three years prior, and no history of significant environmental accidents. We view JCI's management and governance as satisfactory. Annual goals pertaining to strategy, sustainability, and social responsibility issues are reported to the board. The company has made progress toward formalizing the sustainability governance process by 2025, and in the future will disclose climate-related risks in financial reporting. James Siahaan, CFA
Komatsu Ltd.(A/Stable/A-1)  
We view Komatsu's ESG risks to be largely in line with those of peers. We believe Komatsu can continue to manage ESG risks that are inherent to its industry, proven by its long history of engaging in environmental and social activities in a more proactive manner than its sector peers. Regulations require the company to address CO2 emissions, especially in mining projects. Nonetheless, we view Komatsu to be more advanced in its energy-efficiency technology in reducing CO2 emission in manufacturing and machine use than other players in the sector, thus the company is well positioned for reducing environmental risk and managing profits. We believe Komatsu's exposure to social risk is relatively low and it continues to improve safety at its customers' job sites, and to meet changes in their behavior. For example, Komatsu has developed technology that reduce the need for dangerous manual labor, achieving complete unmanned operation at some mining sites. We believe Komatsu's management team has strong strategic planning and execution abilities. These are demonstrated by its successful efforts to reduce market fluctuation risk through rigorous inventory management and cost discipline as well as strengthening its after-sales services. We view Komatsu's management and governance as strong, reflecting its management's strategic competence, experience, and the depth of human resources in its management team. Roko Izawa
Mitsubishi Heavy Industries Ltd. (MHI)(A-/Negative/--)  
We view MHI's ESG risks to be largely in line with those of most large, global capital goods peers and believe the company is likely able to manage environmental risks on a companywide basis. A rise in environmental risk, in particular, has put MHI's earnings and cash flow, mainly those of its thermal power generation system business, under moderate pressure, leading us to revise the outlook on MHI to negative from stable in 2017. We expect orders in the global thermal power generation market to decrease, affected by a shift away from carbon economies. We have incorporated the negative impact of this in our base-case scenario. Nonetheless, we believe MHI retains competitive advantages, backed by strong technology, in Asian markets where the demand for thermal power generation plants remains strong. It also has a competitive edge in cleaner gas-powered generation systems, orders for which have been recovering. Furthermore, MHI's diversified product portfolio, which includes product lines that contribute to carbon dioxide emissions reduction, and its disciplined financial management, help mitigate the impact of environmental risk factors on the rating. Makiko Yoshimura
Nordex SE(B/Stable/--)  
Environmental factors are a key driver for the operational performance of Nordex and we view the company to be favorably positioned versus other capital goods companies. We expect that the demand for wind turbines will remain high for the upcoming years, supported by the global government policy to increase the share of renewable sources in power production but also increasing commitment by corporations to reduce its CO2 footprint. Nordex focuses only on the on-shore wind turbine market and has more than 25 GW of installed capacity worldwide. With the launch of its Delta platform, which translated into strong intake over the past 12 months, Nordex demonstrated its technical capabilities and competitiveness toward its much larger peers, like Siemens Gamesa or Vestas. However, the company is vulnerable to regulatory changes, as we saw with the change to an auction-based systems as an industry standard globally, increasing the pressure on profitability tremendously. It is likely to see more industry consolidation either by market exits (like in the recent case of Senvion) or by mergers over the next two to three years. Nordex is also increasing its environmental standards and aims to use fewer resources in its production processes and supply chain. For example, in 2018, the company increased the recyclability of its wind systems and derived more than 88% of its total electricity consumption from renewable sources, aiming to reach 100% by 2021. Social factors do not play a major role in our credit assessment, but potential risks are product liability issues and health and safety in its own manufacturing operations, which we view as well managed. We see no material risks relating to governance, and view the group as solidly managed. Tobias Buechler, CFA
Schneider Electric S.E.(A-/Stable/A-2)  
Schneider is favorably positioned in terms of environmental risks regarding the group's product offering, which focuses on energy management, automation, and software, compared to the wider capital goods industry. With regard to social and governance risks, we view Schneider to be largely in line with most large, global capital goods peers. Sustainability and social responsibility are core values of the group, and it has a record of well managing resources from an environmental and human capital perspective. Schneider aligns with the United Nation's Sustainable Development Goals (SDGs), and measures, audits, and presents its progress toward reaching its sustainability goals together with its financial information, and top management is held accountable for achieving those targets. We view the company's management and governance as strong. The group is well-managed and committed to a long-term strategy, of which sustainability is an integral part, with high disclosure standard typical for a large international publicly listed group. Tuomas E. Ekholm, CFA
Siemens AG(A+/Stable/A-1)  
ESG factors are embedded in our analysis of Siemens, but are not a material driver of the rating. Despite the significant exposure to fossil-fuel power generation and oil and gas-related activities (representing about 46% of the €27 billion combined revenues of Siemens Energy; the remainder is related to renewable energy and power grid activities), we view Siemens as in line with the sector in terms of environmental exposure due to the group's extremely wide product offering, broad end-markets, and wide geographical reach. In addition, Siemens Energy will be spun-off from the group and separately listed in 2020. Siemens has a nearly spotless record of managing environmental and social risks. Sustainability is one of the Siemens' core organizational values and the company aligns its internal targets with the UN's SDGs 2030, pledging to make its operations carbon neutral by 2030. Automation, digitalization, and robotics represent global trends in the capital goods industry and create opportunities for growth and profitability improvements. However, they will fundamentally change the work environment for employees in manufacturing. Global leaders, such as Siemens, will probably be able to balance additional investments with competitive gains while providing relevant training and qualifications to employees to prepare them for the changes in the working environment, thereby preserving their human capital. From a governance standpoint, Siemens adheres to the highest standard of disclosure, in line with large international players. Management is committed to long-term, stable organic growth, profitability gains, and clear organizational goals and values. Overall, we view the company's management and governance as satisfactory. Tobias Buechler, CFA
Siemens Gamesa Renewable Energy SA (SGRE)(BBB-/Positive/--)  
SGRE's credit profile is positively influenced by environmental factors in comparison to other capital goods peers. Tighter CO2 regulations and higher requirements for the share of renewables in total energy output will drive demand for SRGE's products. The company maintains leading positions in the wind turbine market, ranking number one in offshore business. We believe SGRE's competitive edge and scale will enable the company to lead industry consolidation and remain among the top players (along with Vestas, GE, and Goldwind). SGRE's installed base is over 99 GW of wind capacity worldwide. In this way, the company contributes to eliminating 260 million tons of CO2 emissions each year. SGRE has also adopted in-house policies to de-carbonize its footprint and operations, with the goal of becoming carbon neutral by 2025. Governance and social risks are in line with the industry, but SGRE is exposed to occupational risks related to the installation of onshore and offshore wind parks. Workplace health and safety are key elements of the company's risk management and internal control. Maria Vinokur
thyssenkrupp AG(BB-/Developing/--)  
We see governance factors negatively affecting the credit quality of thyssenkrupp, most notably in the areas of strategic direction and operating performance. Over the past two years, activist shareholders have initiated significant changes in the group's strategy, leading to the ongoing unwinding of the conglomerate structure, meaningful restructuring and reorganization expenses, and changes in management. Our assessment of the group's management and governance is fair. We view thyssenkrupp's environmental risk exposure as higher than that of most capital goods and engineering groups due to its significant exposure to steel production. The steel sector overall carried higher risks associated with CO2 emissions standards, and we believe that steel producers in developed markets are more exposed to increasing regulations and emissions standards and energy taxes and surcharges. The group's energy consumption came to more than 70 terawatt-hours in the 2018-2019 fiscal year, where we estimate the vast majority relates to its steel production. However, thyssenkrupp is aiming to reduce emissions from its own production and processes and from the purchase of energy by 30% versus the base year 2018 by 2030. Furthermore, thyssenkrupp has targeted an environmental management system (ISO 14001) by fiscal year 2019-2020, covering all relevant environmental aspects such as reducing wastewater, emissions, and the environmental impact of products through to disposal. Social factors do not play a major role in our credit assessment for the group. Tobias Buechler, CFA
Toshiba Corp.(BB/Positive/B)  
We see governance risk affecting our credit rating on Toshiba primarily because of its accounting improprieties in 2015 and losses related to its U.S. nuclear power business, which the company recognized in late 2016. Our assessment of the group's management and governance is weak. At the same time, we observed a solid recovery in operating performance and expect profitability to improve in the next one to two years, as the cost-cuts and restructuring bear fruit. We do not think environmental and social factors have a major impact on our ratings on Toshiba at this time and view them to be overall in line with peers'. Nevertheless, global greenhouse gas emission controls will likely put Toshiba's consolidated earnings and cash flow under moderate pressure, especially in its core energy system solution business (including the thermal power generation business). The global decarbonization trend has hurt the company's energy business, and Toshiba is restructuring its thermal power generation and other businesses by shifting toward services and solutions. Nonetheless, its energy business' market position is not as robust as that of its competitors. Accordingly, even after restructuring, we expect profitability to be lower than for Toshiba's other core businesses, such as infrastructure and devices. Toshiba is exposed to some social risk related to staff in its IT service business, a strategic focus area for the company. Nevertheless, we do not believe this will be a major rating driver over the next couple of years, because we expect the business to account for less than 10% of total consolidated EBITDA. Still, within the space, it is critical for Toshiba as well as other IT service providers to secure and maintain staff with skills in artificial intelligence and data analytics, given that there is increasing competition to hire the best talent. Makiko Yoshimura
United Rentals Inc. (URI)(BB/Stable/--)  
We assess URI's ESG risks to be overall largely in line with peers'. We view URI's exposure to environmental risk to be relatively low from a credit perspective, similar to other equipment rental providers. We believe URI curates a fleet of equipment from original equipment manufacturers and therefore has some control over the sustainability of its fleet by choosing equipment that meets its broader environmental goals. In our opinion, the most relevant environmental factor in the company's business is the disposal of engine oil and harsh chemicals used to maintain URI's fleet. To that end, the company utilizes water-recycling systems in its wash bays and its water withdrawals are not made from sensitive water sources. Regarding emissions, fuel-efficiency, and other environmental standards, URI's exposure is low compared with equipment manufacturers' since the company's business model focuses on rental rather than manufacturing. Should one of the company's suppliers fail to comply with environmental regulations, we anticipate URI's liability to any subsequent fines or regulatory action would be minimal. On the social front, URI is primarily exposed to risks associated with occupational safety, and the company reinforces workplace safety by offering daily training and on-site support at each branch. These efforts resulted in a 7% reduction in the company's total recordable incident rate between 2016 and 2017. Svetlana Olsha, CFA
We believe Xylem's credit profile is positively influenced by environmental factors given its leading position in water metering, pumps, and filter products. With regard to social and governance risks, we view Xylem to be largely in line its peers. Rising sea levels around the world are causing increased flooding, which should drive faster replacement cycles for pumps used by municipalities. In our view, Xylem's portfolio stands to benefit from increased demand for potable drinking water, particularly within developing countries. Significant population growth and rapid industrialization in these nations can contribute to polluted water sources. Coupled with these countries' aging water infrastructure, we expect Xylem's products to become increasingly important in this transformation, especially as demand increases for its water filtration and pumps products. We believe Xylem's wastewater treatment solutions will be in higher demand as well following these countries' modernization of water infrastructure. Lastly, Xylem should benefit from increased scrutiny of water usage by farmers; agriculture currently consumes roughly 70% of water globally. Gilad Kopelman

This report does not constitute a rating action.

Primary Credit Analysts:Tuomas E Ekholm, CFA, Frankfurt (49) 69-33-999-123;
Ana Lai, CFA, New York (1) 212-438-6895;
Matthias J Raab, CFA, Frankfurt (49) 69-33-999-122;
Hiroki Shibata, Tokyo (81) 3-4550-8437;
Secondary Contacts:Chloe Wang, Hong Kong + 852-25333548;
Makiko Yoshimura, Tokyo (81) 3-4550-8368;
Marta Bevilacqua, Milan + (39)0272111298;
Tobias Buechler, CFA, Frankfurt (49) 69-33-999-136;
Stanice Gaspard, New York + 1 (212) 438 8221;
Roko Izawa, Tokyo (81) 3-4550-8674;
Per Karlsson, Stockholm (46) 8-440-5927;
Gilad Kopelman, New York + 1 (212) 438 1160;
Trevor T Martin, CFA, New York (1) 212-438-7286;
Svetlana Olsha, CFA, New York (1) 212-438-1467;
James T Siahaan, CFA, New York (1) 212-438-3023;
Ezekiel Thiessen, CFA, Centennial (1) 303-721-4415;
Michael Tsai, New York + 1 (212) 438 1084;
Maria Vinokur, Madrid (44) 20-7176-3727;

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