Sustainability is becoming mainstream in the investment-grade chemical industry, and management teams are already rushing to redefine priorities and strategies accordingly. The largest IG companies are taking the lead in pushing ahead with the required changes to make their operations and products more sustainable. This push is driven not only by stricter regulatory requirements, particularly in Europe and Asia, and investors increasingly scrutinizing companies through environmental, social and governance lenses, but also by the expectation of better business opportunities as customers across markets increasingly require products with a lower carbon footprint. Chemical frontrunners with most credible ESG roadmaps and the capability to best execute them should benefit the most, cementing their competitive advantage under an evolving regulatory and investment environment that will increasingly penalize the most polluting sectors and the slowest-moving issuers within them.
From our engagements with chemical issuers, we get the sense that sustainability considerations are becoming more systematically embedded in strategic business and financial planning, and that increased effort is also made to report and communicate targets and roadmaps. Year-to-date investor presentations by largest IG issuers like BASF, Dow and Air Liquide are already showing the depth of the work undertaken behind the scenes.
We have noted more commonalities than differences among these companies in their ESG approach. Many focus on climate targets, as high energy consumption and carbon emissions are issues for the whole industry, especially commodity chemicals. Recurring pathways highlighted to achieve carbon reduction targets are the adoption of new low-carbon product and process technologies, increased use of renewable energy, selective growth projects to upgrade product mix for promising applications (such as chemicals for EV batteries and recyclable plastics for circular packaging). Chemical companies are also increasingly promoting alliances with customers and suppliers to dilute R&D costs and capex while better meeting customers’ requirements. These partnerships, if successful, should lock in future earning streams.
The next five to 10 years will be crucial for chemical companies to effectively execute their plans to become more sustainable, while enhancing competitiveness and keeping solid balance sheets to cushion against cyclical slowdowns. Given many similarities in targets and strategies, best execution should differentiate winners from laggards. This explains why, in assessing chemical credits we prefer when management is properly incentivized with variable compensation tied to ESG, among other factors. We are starting to see more chemical companies introducing ESG key performance indicators in compensation. This is another positive change. The industry is getting serious about sustainability.