Companies have largely avoided scrutiny on climate, but investor pressure could be a catalyst for change.
From plastics and fertilisers to paints and the chlorine in your swimming pool, the chemicals sector is far-reaching, diverse and a huge challenge for investors looking to accelerate the world’s transition to net-zero greenhouse gas (GHG) emissions.
With over 95% of manufactured products relying on chemicals to some degree, the sector is responsible for 5.8% of global emissions, according to a recent report published by NGO ShareAction.
Despite the sector’s influence on and involvement in practically all carbon-intensive industries, it remains “fairly invisible”, says Neville White, Head of Responsible Investment Policy and Research for EdenTree Investment Management.
“If you buy a plastic bottle of water, you may think about the problems surrounding recycling, but you don’t necessarily think about the chemicals required to make that bottle,” he tells ESG Investor.
Chemicals companies have largely eluded the pressures forcing other industries, such as oil and gas, automakers and aviation, to change their processes, policies and even business models. The sector has become “a blind spot” for investors, says Helen Wiggs, Head of Corporate Climate at ShareAction.
Regulation is encouraging transition, however. Planned reforms mean costs incurred by the chemicals industry from the EU Emissions Trading System are forecast to quadruple by 2030, ShareAction said, predicted at €1.5 billion in 2021 alone.
And transition could be a positive. There is tremendous opportunity for growth in the sector, says Matthias Baeumler, Sustainability Lead of the Chemicals Sector for Boston Consulting Group (BCG). “Chemicals companies could become the sustainable innovation engine for the future,” he says.
As the sector is so interconnected with other carbon-intensive industries, there are opportunities to design and sell solutions. For example, developing sustainable fertiliser.
But it won’t be easy.
Malini Chauhan, ESG Analyst for global asset manager Aviva Investors (£348 billion in assets under management), describes the chemicals sector as “heterogenous and complex”, noting that the sheer variety of chemicals companies means there is no clearly defined pathway to decarbonisation.
Chain reaction
Once the spotlight is on the chemicals sector, some of the most challenging issues are all too easy to identify.
Until now, investors have been focusing their emissions reduction efforts on the “lower hanging fruit in the energy and transport sectors”, according to ShareAction’s report.
Chemicals companies are also contributing to the emissions of these companies, purchasing crude oil and natural gas feedstocks to produce petrochemicals. To reduce emissions in other sectors, investors have to understand how chemicals companies contribute to unsustainable operational processes and products.
Petrochemicals – chemicals obtained from petroleum or natural gas – are responsible for two-thirds of the sector’s energy use, the report noted.
ShareAction warned investors that a number of multinational companies, such as Solvay, are active in the production of a wide range of chemicals, which will each require a different strategy or replacement materials. Solvay produces ammonia, methanol, light olefins, plastics/polymers, fertiliser and BTX (a combination of benzene, toluene and xylene).
Changing production processes can reduce, but will not eliminate the sector’s carbon footprint.
“A challenge for the sector is indirect (Scope 3) emissions along the value chain,” says Chauhan.
For example, ammonia is used to make environmentally-damaging fertilisers for farmers that release nitrogen oxide (a powerful greenhouse gas) when used. Investors need to be aware of the relationship between the two industries.
Industry under pressure
As investors turn their attention to the chemicals sector, companies can expect an increase in pressure to adopt net-zero strategies and interim targets.
ShareAction has convened a group of investors collectively managing US$3.2 trillion in assets in order to encourage shareholder engagement.
A working group will now onboard the recommendations in the report within their own engagement strategies, including EOS at Federated Hermes, EdenTree and NN Investment Partners (NN IP).
For example, producers of ammonia or methanol will need to demonstrate how they plan to replace fossil fuel feedstock with green hydrogen or by electrifying their processes using renewable energy, both of which require time, money and resources.
At the moment, credible transition plans in the sector remain “scarce”, ShareAction said. Just two out of 21 Stoxx Europe 600 Chemicals companies have a Science Based Targets initiative-approved (SBTi) 1.5°C target.
Further, none of the seven chemicals companies that feature on Climate Action 100+’s Net-Zero Company Benchmark have set a verified science-based target aligned to a 1.5°C pathway. Only Air Liquide and LyondellBasell Industries had climate-based public discussions during their annual general meetings (AGMs) this year.
This is set to change as investors increasingly engage, experts say.
“We mainly focus on emissions reduction targets and the strategy put in place to meet those targets,” says Florentine van den Eerenbeemt, Responsible Investment Specialist at NN IP. For example, the asset manager considers whether companies have identified their highest-emitting chemicals and processes and whether they have a plan in place to decarbonise.
Joanne Beatty, Engager and Chemicals Sector Lead for EOS at Federated Hermes, explains that the specialist stewardship service provider deploys a formal climate change-specific voting policy, which targets “climate change laggards”, such as chemicals companies.
“We apply escalated engagement techniques, including raising issues at annual shareholder meetings and supporting shareholder resolutions which promote positive change,” she tells ESG Investor.
There are signs that investor engagement is having a positive effect.
In March, BASF, the largest chemical producer in the world, set new targets to cut its emissions by 25% by 2030, from 21.9 to 16.4 million tonnes. BASF is currently one of Europe’s largest blue hydrogen producers, but has outlined its intentions to shift from blue to green in the future.
Next year, the chemical producer will also be making a final investment decision to green light a prospective carbon capture, utilisation and storage (CCUS) project to store captured carbon under the North Sea. The latter would potentially allow BASF to store more than a million metric tonnes of CO2 per year from the production of basic chemicals.
However, investors should be wary of transition plans that rely too heavily on blue hydrogen or CCUS technologies to achieve their set targets, as these have “serious limitations on both cost and emissions grounds”, said ShareAction.
Innovation engine
“The chemicals sector has a key role to play in the energy transition due to its links to multiple other sectors,” says van den Eerenbeemt.
Developments in renewable energy and green hydrogen will play a big part in the sector’s future as we edge closer to 2050, the ShareAction report noted. However, some solutions are still in their infancy, meaning chemicals companies need to get creative in the near term in order to reduce their emissions in line with a 2°C or lower temperature scenario.
It’s a good thing that there is a myriad of opportunities for chemicals companies. For example, as automakers shift towards developing electric vehicles there will an increase in demand for chemicals-driven solutions for batteries and thermal insulation. BASF partnered with Porsche in July, pledging to provide recyclable and sustainable battery materials.
Further, as consumers become more aware of the damage plastic waste causes, big energy companies such as Shell and bp have launched projects that aim to close the loop on plastic waste, shifting to a circular economy using fewer complex chemicals. This will require chemicals companies to provide sustainable solutions.
A number of chemicals companies are also beginning to invest in innovative technologies to reduce emissions from their production processes, as well as designing more sustainable products to be sold to their clients, thus reducing Scopes 2 and 3 emissions.
Earlier this month, green chemicals company Solugen raised US$357 million from investors (such as BlackRock and Baillie Gifford) to aid efforts to replace its petrochemical production with an alternative carbon-negative method of turning sugars into chemicals.
“This industry has a future, so investors need to take a balanced point of view,” says Baeumler.
