Balancing the ESG Equation

After percolating for 50 years, environmental, social, and corporate governance (ESG) seems to have finally reached its boiling point. What Leon Sullivan, a Black board member of GM, began in the 1970s as a response to the apartheid regime in South Africa has evolved into a broad, socially driven investment strategy with far-reaching impacts. Add the COVID-19 pandemic, the Black Lives Matter movement, and the significant pollution and extreme weather events of recent years to the growing concern over climate change and it’s no surprise that we are now seeing an explosion of attention on ESG. But will the renewed focus on ESG issues cause a reaction in the chemical industry?

In his January 2021 letter to CEOs, Larry Fink, CEO of BlackRock, the world’s largest asset manager, poignantly highlighted the fact that the COVID-19 pandemic has refocused attention on social issues by stating: “I believe that the pandemic has presented such an existential crisis—such a stark reminder of our fragility—that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. . . .” See Larry Fink CEO Letter (Black Rock, Jan. 2021).

Not surprisingly, investment in ESG-related funds is at an all-time high. From January through November 2020, investors in mutual funds and exchange-traded funds invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019, according to BlackRock. This represents a significant jump from the $20 billion in 2019, and a massive increase from $5–6 billion, where investment in sustainable assets typically stood between 2015 and 2018.

Investors aren’t just investing in ESG-related funds; they are also taking other actions to drive change. Take Climate Action 100+, an investor-led initiative that launched in 2017, as an example. In its short, four-year lifespan, the organization has grown to 575 investors with over $54 trillion in assets under management. Climate Action 100+ is known for targeting the world’s largest greenhouse gas emitters to help limit average global temperature rise to 1.5°C. Investors select (or “engage”) certain companies and then seek commitments to implement a strong governance framework that addresses climate risks, reduces emissions across the supply chain, and increases climate-related financial disclosures. To date, 167 companies have been selected, accounting for over 80% of corporate industrial greenhouse gas emissions. Of those, eight companies (including BASF SE) are within the chemicals sector.

Chemical companies are not often seen as leading the sustainability charge. Many chemical facilities are energy intensive and emit greenhouse gases. According to EPA’s Greenhouse Gas Reporting Program (GHGRP), the chemicals (non-fluorinated) sector is the fourth-largest greenhouse gas emitter. Power plants, the oil and gas industry, and refineries hold the first, second, and third largest spots, respectively. See GHGRP Industrial Profile: Chemicals Sector (Non-Fluorinated), U.S. Env’t Prot. Agency (Sept. 2019).

In 2019, 7,624 direct emitters across a variety of sectors reported a total of 2.85 billion metric tons of carbon dioxide equivalent (bmt CO₂e). Power plants reported emitting 1.7 bmt CO₂e of that total. The chemicals sector (fluorinated and non-fluorinated combined) reported emitting 191 million metric tons (mmt) CO₂e, a notable difference of 1.51 bmt CO₂e. Power plants have shown a steady decrease in emissions, however. Power plants reported 1,668.7 mmt CO₂e in 2019, a decrease from 1,815.0 mmt CO₂e in 2018 and 2,221.7 mmt CO₂e in 2011. In contrast, total greenhouse gas emissions reported to the GHGRP by 449 chemical companies amounted to 185.6 mmt CO₂e in 2019, a decrease from 191.3 mmt CO₂e in 2018 but an increase from 180.4 mmt CO2e in 2011. Emissions from the chemical sector trended downward from 2011 to 2016 but rose in 2017 and 2018 and then declined to nearly 2017 levels in 2019. See 2019 GHGRP Overview Report, U.S. Env’t Prot. Agency, https://www.epa.gov/ghgreporting.

Industry’s overall downward trend in greenhouse gas emissions indicates that it is moving in the right direction to achieve net zero. But is it enough?

A recent report by Climate Action 100+ suggests industry must do more. In late March 2021, Climate Action 100+ released its Net-Zero Company Benchmark (Benchmark) for the world’s highest carbon-emitting companies. The Benchmark evaluates a company’s performance in three primary areas: emission reductions, strong corporate governance, and disclosure. According to ESG Today, “the Benchmark revealed that despite the increasing momentum in companies’ launching ambitious climate commitments, significant work remains to put the companies on the pathway to a net-zero, Paris Agreement-aligned future, with none of the focus companies performing at a high-level across all of the nine metrics.” See Mark Segal, Climate Action 100+ Releases Net Zero Benchmark, Reveals Significant Work Ahead for Major Emitters, ESG Today (Mar. 22, 2021).

Chemical companies with high ESG rankings outperformed companies with low rankings by 4.8% per year, according to an October 2020 report by Jefferies, an investment firm. The potential for increased performance can incentivize companies to make changes. See Vanessa Zainzinger, Is Green Investing Influencing the Value of Chemical Companies? 98 Chem. & Eng’g News, no. 44, Nov. 16, 2020, at 20.

Pointing again to Fink’s letter to CEOs, he stated:

There is no company whose business model won’t be profoundly affected by the transition to a net zero economy—one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2° C. . . . As the transition [to net-zero] accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders—with customers, policymakers, employees and shareholders—by inspiring confidence that they can navigate this global transformation.

Chemical companies like BASF SE recognize that the transition toward a climate-friendly society remains a fundamental challenge of the twenty-first century. As an energy-intensive company, BASF set an ambitious goal of climate neutrality (net zero emissions) by 2050, as well as raising its medium-term 2030 target for reductions in greenhouse gas emissions by 25% compared to 2018 (a reduction of approximately 60% compared to 1990 levels, which exceeds the European Union’s target of minus 55%). BASF set these goals because the company is convinced of the long-term strategic necessity and the technical feasibility, despite targeted growth and the construction of a large site in South China.

Similarly, the Dow Chemical Company (Dow), a U.S.-based company and within the top four largest chemical companies worldwide, committed to reducing its net annual carbon emissions by 5 million metric tons compared to its 2020 baseline (a 15% reduction) and intends to be carbon neutral by 2050. Dow’s approach to addressing climate change includes plans to optimize the efficiency of its operations, invest in renewable energy sources, and innovate new low-emission production processes. See 2025 Sustainability Goals, Dow (2020).

Smaller chemical companies are also making commitments to lessen their impact. For example, Solvay, a Belgian-based chemical company, “began participating in the Task Force for Climate-related Financial Disclosures in 2017—becoming one of the first chemical companies to do so—because it provides a framework that ‘goes beyond metrics and brings climate into corporate strategy, governance, and risk scenario planning,’” according to Solvay’s chief sustainability officer. In addition, Solvay set absolute emission reduction targets, rather than reducing the carbon intensity of its products. Path to Net Zero: ESG Accelerates Industry’s Push to Cut Emissions, Chem. Week, Feb. 1, 2021.

Will it work? Will a net-zero economy be reached by 2050? I don’t know, but as an optimist, I’d like to think so. Time will tell.