The chemicals industry has always been at the forefront of creating new or improved materials to meet the needs of society. Historically, this has shown itself as delivering products with the right physical or chemical properties.
urrently, the focus is on delivering products and materials with a lower environmental impact, including (but not limited to) lower carbon footprints. As industries increasingly shift away from fossil fuels and transition to renewable sources, chemicals will play a central role in moving the economy to net-zero emissions.
Today, the chemicals industry creates significant Scopes 1 and 2 emissions and is central to the question of plastics waste. Moreover, the industry consumes substantial amounts of fossil fuels such as natural gas, crude oil, and, increasingly, coal. These environmental factors already contribute to the public perception of chemical companies.
In addition, many institutional investors have set sustainability targets for their portfolios. The combination of these two factors has led management teams to consider how investors value sustainability in the chemical industry and what actions they should take to maximize value creation in the future.
Objectively, measuring the “greenness” of a chemical company (or any company, for that matter) is not straightforward. The environmental, social, and governance (ESG) metrics typically used to determine a company’s sustainability profile often encompass a broad list of criteria around the latter two categories. Investors and stakeholders are also skeptical of greenwashing and see little or no correlation between ESG ratings and financial performance in the chemicals industry. This should not come as a complete surprise, because many ESG criteria have only an indirect impact on cash flow. Yet there are ways to create value out of ESG.
Objectively, measuring the “greenness” of a chemical company (or any company, for that matter) is not straightforward. The environmental, social, and governance (ESG) metrics typically used to determine a company’s sustainability profile often encompass a broad list of criteria around the latter two categories. Investors and stakeholders are also skeptical of greenwashing and see little or no correlation between ESG ratings and financial performance in the chemicals industry. This should not come as a complete surprise, because many ESG criteria have only an indirect impact on cash flow. Yet there are ways to create value out of ESG.
Ultimately, what matters to investors are future cash flows. Therefore, sustainability efforts can be tailwinds for the industry in three ways: increased customer willingness to pay, sourcing advantage, and the rapid growth of products and end markets exposed to sustainability trends.
This article illustrates how capital markets are increasingly recognizing sustainability, and it details five steps companies can take to act upon capital-market expectations: growing market-back opportunities for green growth, safeguarding value and managing risk, continuing to turn over their portfolios, decreasing emissions, and remaining agile enough to adapt decision-making processes as new opportunities arise. Companies that take these steps will be better positioned to keep up with the sustainability transition and therefore more likely to stay competitive in the years to come.
