Like many business sectors, chemical suppliers are also facing pressure from investors and consumers to improve environmental, social and Governance (ESG) practices throughout the value chain. In particular, chemical suppliers should be responsible for purchasing raw materials and improving the recyclability of downstream products. As a result of this rigorous review, chemical suppliers are taking a comprehensive approach to improving ESG practices.
We provide a list of ESG factors affecting the chemical industry, and qualitatively assess the relative pressure from external stakeholders in Figure 1. Chemical suppliers are under the most pressure to improve the recyclability of their products, produce cleaner chemicals, and reduce emissions from their factories in order to comply with increasingly stringent regulations and relevant local communities.
In addition, based on ADI’s work and research, we also listed 10 key ESG trends in chemicals. In general, with the change of consumer behavior, the chemical industry is facing great pressure on environmental and social issues. To achieve the goal of environmental governance, we need to focus on both factory emissions and waste, and the impact on downstream industries (such as recyclability). Finally, governance issues are highlighted as stakeholders are pushing for more board oversight and transparency in reporting.
As consumers become more aware of plastic waste, some governments are phasing out disposable plastics and putting pressure on chemical manufacturers to improve the recyclability of their products. Many people in the industry have announced plans to “close the cycle” of plastic waste by creating a circular economy. In a circular economy, less complex chemicals are used because they are more difficult to recycle, and plastics are rarely turned into waste. Companies such as BASF, shell, BP and Lyondell Basel, which are also investing in recycling technologies, have launched projects focusing on closing the recycling of plastic waste.
Over the past decade, environmental reviews of chemical plants have increased, leading chemical companies to consider retrofitting equipment or using alternative energy to reduce greenhouse gas emissions. Chemical suppliers such as Ecolab, Dow Chemical and 3 million companies committed to reducing carbon emissions through the use of renewable energy.
Ultimately, the key driver of change in the chemical industry is consumers. As consumers increasingly assess the personal health and environmental risks of products, their buying behavior is changing. This shift in behaviour has affected industries such as personal care, baby products, cleaning products and clothing, leading chemical companies to reassess their product portfolios and increase investment in sustainable solutions. In the beauty industry, we see major brands such as L’Oreal Group and ulta beauty announce sustainable development goals that affect the long-term demand for chemicals in the industry.
Historically, when chemical companies built new factories, they mainly dealt with the resistance of environmentalists, but now, the opposition of the local community is increasing. The local community no longer only cares about what kind of high paying jobs a factory will bring, but what kind of impact the factory will have on the local water and air quality. For existing factories, it is important to build and maintain trust in the local community. Once trust is broken, it’s hard to have strong community relationships, as we’ve seen in point comfort, Texas and Formosa, where local residents filed lawsuits after discovering plastic particles in a nearby stream.
Although regulatory review has eased, stakeholders are pushing for more transparent reporting. After years of internal reporting, chemical suppliers began to issue Sustainability Reports, focusing on attracting investors and local communities. Standardization of reporting remains a problem because it is difficult to compare key indicators of emissions and safety, but many leading companies have adopted the standards of the carbon disclosure program (CDP) or the climate related financial disclosure task force (TCFD).
Chemical enterprises are implementing internal governance process and supervising ESG issues at the board level. Like other industries, ESG’s management accountability system (especially diversity) is being valued, and more and more people call for linking executive compensation with ESG indicators. While internal and external stakeholders monitor ESG commitments, it is important that the investment and strategy of chemical enterprises reflect the information they convey to stakeholders. Some companies, such as Braskem, have announced their sustainability goals, strategies and investment roadmaps to achieve them.