Is the Chemical Industry on Track to Achieve Sustainability Targets?

The chemical industry is a significant producer of scope 1 and scope 2 emissions and plastic waste. Direct CO2 emissions from primary chemical production amounted to 925 mt in 2021, according to the International Energy Agency (IEA).

The industry also consumes significant volumes of natural resources such as fossil fuels and coal, which generates undesirable effluents and pollutes the environment if not treated properly.

With the ratification of the 2016 Paris Agreement, the governments of many countries have drawn stringent regulations that mandate global chemical companies to set ambitious targets such as net-zero emissions by 2050 and step into a sustainability-focused ecosystem.

Key Focus Areas for Sustainability in the Chemical Industry

A review of long-term sustainability agenda of global chemical companies including BASF, Dow, LG Chem, INEOS, Mitsubishi Chemicals, GC, ExxonMobil Chemicals, Shell Chemicals, Reliance Industries and CP Chem reveals that chemical companies are focusing on:

• Circular economy or waste recycling
• Climate protection by reducing GHG emissions
• Carbon mitigation or management
• Environmental responsibility or protection

To achieve these long-term goals, chemical suppliers are increasingly collaborating with other companies, making investments and performing acquisitions in areas such as plastic waste recycling, renewable energy, bio-based feedstocks, carbon capture & storage (CCS) and sustainable and alternative fuels.

How Much Have Companies Progressed?

ESG (Environmental, Social & Governance) scores and ratings provided by auditors such as Morningstar’s Sustainalytics, Dow Jones Sustainability and EcoVadis are useful tools for analyzing sustainability progress in the industry.

As per Sustainalytics, more the score on a scale of 0-100, more is the industry-specific material ESG risk associated with the company’s operations.

• Approximately 80% chemical companies fall under medium and high-risk category of ESG rating, indicating necessity of quick actions and targeted investments in sustainability focus areas.
• Companies headquartered in Europe and North American regions have better ESG performance (lower ESG scores) as compared to companies headquartered in the Asia-Pacific and other regions, due to stringent rules and regulations.

Green Chemicals Market Outlook

The global market for green chemicals was estimated to be USD 1.7 billion in 2022 and is anticipated to reach USD 3.3 billion by 2030 -- a CAGR of 8%-10%. Asia-Pacific is anticipated to be the fastest growing market while Europe currently holds the maximum market share ~36%.

China and India are emerging as manufacturing hubs of key market players and are expected to lead the manufacturing of sustainable chemicals.

Europe and the U.S. continue to focus on R&D related activities for green chemicals and will lead the way for a more sustainable ecosystem of chemicals.

Chemical companies are also producing green specialty chemicals, bio-based chemicals, organic chemicals and other such chemicals as per their product stewardship strategy.

More End-users Demand Green Chemicals

Global chemical manufacturers have witnessed over 5% increase in end-user demand for green chemicals across customer segments such as agriculture, pharmaceuticals, specialty industrial and specialty consumer chemicals. The latter two chemical types have registered a double-digit growth in demand as compared with 2019 volumes.

The demand drivers for green chemicals include:

• Stringent government regulations for creating a sustainable industrial ecosystem
• Negative impact of conventional chemicals on the environment and health & safety concerns
• Increasing awareness among consumers and digital transformation

Market constraints for green chemicals include:

• Widespread application, easy availability, scale production and reliability associated with conventional chemicals
• Cost associated with the production of green chemicals vis-à-vis the production cost of conventional chemicals

Chemical Companies After Sustainability Tailwinds

The “greenness” of a chemical company is decided on two parameters — green product portfolio and end-market penetration catering sustainability areas. Chemical companies having both attributes are called “Green Leaders”, while companies that have one of these attributes are called “Green Laggards”.

Chemical companies have also finalized investment decisions on sustainability tailwinds that include EVs and energy storage, water reduction, bio-based consumer products, energy efficiency and renewable energy. These investments are anticipated to drive sustainability in the chemical industry in the long term.

Key Drivers of Sustainability in the Chemical Industry

The key drivers of sustainability in the chemical industry are:

• Public perception of chemical companies and stringent regulations
• Improved capital market performance of chemical industry
• Chemical company’s exposure to end-market catering sustainability has higher valuations (return on capital invested)

In a nutshell, concerns over climate change and environmental impacts associated with chemical industry’s operations, pressure from stakeholders and financial benefits associated with sustainability are the key driving forces for a sustainable chemical industry.

Role of Financial Institutions and Regulatory Authorities

Leading banks, private investment firms, public funds and capital markets are increasingly scrutinizing environmental, social and governance (ESG) and sustainability as integrated parts of their investment strategies.

Regulatory authorities continue to emphasize plastic and battery recycling. Chemical companies are therefore increasingly investing in recycling and circular economy initiatives.

Sources and references:

https://www.iea.org/fuels-and-technologies/chemicals

https://www.sustainalytics.com/esg-rating

https://www.lek.com/insights/ar/us-chemicals-companies-invest-more-sustainability