Chemical companies, similar to a broad range of corporate sectors, are under pressure from investors and consumers to improve Environment, Social, and Governance (ESG) practices across their entire value chain. Chemical companies are particularly being held accountable for sourcing raw materials responsibly as well as improving the recyclability of products produced by downstream industries. Due to this heightened scrutiny, chemical companies are taking a holistic approach to improving ESG practices.

We have provided a list of ESG factors impacting chemical industries as well as a qualitative assessment of the relative pressure from external stakeholders in Figure 1. Chemical companies are feeling the most pressure to improve the recyclability of products, produce cleaner chemicals, and reduce emissions of their plants to adhere to increasingly stringent regulations and concerned local communities.

Figure 1: Pressure to improve ESG practices

In addition, we have also listed 10 key ESG trends in chemicals based on ADI’s work and research. Overall, the chemical industry faces strong pressure in environmental and social issues as consumer behavior is changing. Achieving ESG targets will require a two-pronged approach focused both on plant emissions and waste as well as impacts on downstream industries e.g., recyclability. Finally, governance issues are being highlighted as stakeholders are pushing for more board oversight and transparency in reporting.

Environment

  1. As consumer awareness of plastic waste grows some governments are phasing out single use plastics and are placing pressure on chemical manufacturers to improve the recyclability of their products. Many in the industry have announced plans to “close the loop” on plastic waste by creating a circular economy. In the circular economy, less complex chemicals are used as they are more difficult to recycle and plastic rarely become waste.  Some companies are also investing in recycling technologies, such as BASF, Shell, BP, and LyondellBasell who have launched projects focused on closing the loop on plastic waste.
  2. Environmental scrutiny of chemical plants has increased over the last decade causing chemical companies to consider retrofitting equipment or using alternative energy sources to reduce greenhouse gas emissions. Chemical companies, such as Ecolab, Dow, and 3M who have pledged to cut their carbon emissions by using renewable energy sources.
  3. Scrutiny from local communities on waste management practices, specifically wastewater and plastics, is increasing. To combat water scarcity and demonstrate more sustainable practices, chemical companies are reusing more wastewater and are partnering with local municipalities to improve local water treatment capabilities. The practice of disposing plastics and other toxic waste is also under intense scrutiny (e.g., DuPont-Chemours $671 million settlement) as communities and investors are demanding changes to such practices.
  4. Chemical companies are being pressured to reduce their reliance on fossil fuel feedstocks and are exploring alternatives. The use of bio-based and recycled raw materials as feedstocks is limited but increasing. In 2019 both Shell and Dow launched new products made from plastic waste and announced plans to increase the amount of plastic waste used in their operations.

Social

  1. Ultimately the key driver of change in the chemical industry is the consumer. The purchasing behaviors of consumers are changing as they are increasingly assessing the personal health and environmental risk of products. This shift in behavior has impacted industries such as personal care, baby products, cleaning products, and clothing, causing chemical companies to reevaluate their product portfolio and increase investments in sustainable solutions. In industries such as beauty we have seen large brands such as L’Oreal Group and Ulta Beauty announce sustainability targets impacting long term chemical demand in that industry.
  2. Historically, chemical companies primarily dealt with resistance from environmental activists when constructing new plants but now opposition is increasingly coming from local communities. Local communities are no longer just asking what high paying jobs will a plant bring, but what impact will the plant have on their water and air quality? For existing plants, it is important to establish and maintain trust within local communities. Once the trust is broken it is difficult to have strong community relations as we have seen in Point Comfort, Texas with Formosa where local residents have filed lawsuits after finding plastic pellets in nearby creeks.
  3. Concerns about safety risks of chemical plants resurfaced in 2018 and 2019 when a string of accidents raised questions about community and employee safety. One of the most notable accidents occurred during Thanksgiving in 2019 when a massive explosion at a TPC Group petrochemical plant in Port Neches, Texas forced nearly 50,000 residents to flee their homes. Such accidents result in steep fines, lawsuits, regulatory scrutiny, and a loss of public trust. After this uptick in accidents, chemical companies began overhauling training programs and hiring third-party experts to assess risk of operations.

Governance

  1. While regulatory scrutiny has moderated, stakeholders are pushing for more transparency in reporting. After years of internal reporting, chemical companies began publishing sustainability reports focused on engaging investors and local communities. Standardizing reporting remains an issue as it is difficult to compare key metrics in emissions and safety, but many leading companies have adopted either Carbon Disclosure Project (CDP) or the Task Force on Climate-related Financial Disclosures (TCFD) standards.
  2. Chemical companies are implementing internal governance processes and board-level oversight of ESG issues. Like other industries, management accountability of ESG, especially diversity, is being emphasized and increasingly there are calls for executive compensation to be tied to reaching ESG metrics. As internal and external stakeholders monitor commitments to ESG, it is important for chemical companies to have investments and strategies reflecting what they are communicating to stakeholders. Some companies, such as Braskem, have announced their sustainability targets, strategy, and investment roadmap to reach their goals.
  3. Growing disparities between executive and employee compensation has highlighted the need to reevaluate compensation strategy. This topic has been of focus in many other industries but has now found its way into chemicals. In 2018 a 3M shareholder introduced a proposal highlighting the growing compensation of the company’s CEO relative to the growth of median compensation for the company’s employees. In May 2020 shareholders did not approve the proposal to set target amounts for CEO compensation.

Please reach out to us if you’d like to learn more about ADI Chemical Market Resources’ work in and around ESG issues.

-Brandon Johnson & Uday Turaga