Managing Director & Partner
Sustainability is no longer just a matter of complying with regulators and dealing with NGOs. As customers and investors join the chorus of concern about the need to protect resources over the long term, it’s become a hot topic in chemical industry boardrooms. Sustainability also involves many more issues than it did in the past, from water and food supplies to climate change. But there’s a major upside to all this attention. For many companies, the demand for sustainable products offers opportunities for revenue and margins that outweigh the associated costs.
Most chemical companies are aware of the potential and already have a sustainability strategy. But they’ve struggled to develop effective business cases for investment. Their proposals tend to be small compared with most other investments, and these often fail to pass muster because the benefits are too “soft.” Some companies, however, have made sustainability investments that more than paid for themselves through higher margins. The key to success is supporting the company’s new products and services with a clear strategic ambition, a focus on the main value to be generated, and a commitment to driving change throughout the organization.
Before 2000, the chemical industry faced little demand for sustainability beyond the need to protect worker health and safety and prevent environmental pollution. Since then, ambitions have broadened. The United Nations’ Sustainable Development Goals, released in 2015, include ensuring that populations have sufficient food, water, and other key resources over the long term. Backing up these goals, several national governments have set strong sustainability targets with stepped-up enforcement.
Consumers and the general public, with help from NGOs, have made their voices heard as well. Whether you operate paraxylene plants in China or methanol plants in the US, your neighbors are aware of your operations and are increasingly willing to engage in protests and boycotts. Retailers, as agents of consumers, have also stepped in, with Walmart and other giants banning certain chemicals, such as triclosan, from their shelves.
Finally, institutional investors are increasingly making sustainability an investment criterion. A 2014 report from the Forum for Sustainable and Responsible Investment found that sustainability-minded investment now represents almost a fifth of assets under management. Attention has mainly centered on energy stocks but is beginning to spread to chemicals.
These trends have a silver lining: they create demand for new products and services that address sustainability challenges. For at least a significant segment of the chemical industry, sustainability has the potential to move from a compliance issue to a revenue generator. (See Exhibit 1.)
Chemical companies are increasingly aware of this demand. In 2015, as part of an annual BCG survey conducted with MIT Sloan Management Review on sustainability issues in a variety of industries, 85% of chemical companies reported having a sustainability strategy. That was more than any other industry covered, and a 70% increase from 2009. Also in 2015, 95% of chemical company executives reported that investors were paying closer attention to sustainability performance—yet only 36% said their company had developed a clear business case or a proven value proposition for sustainability. That’s up from 19% in 2009, but it shows that many companies are still struggling to make the case for investing in sustainability initiatives. (See “Investors Care More About Sustainability Than Many Executives Believe,” BCG article, May 2016.)
To gain a richer understanding of chemical companies’ experience with sustainability strategies, we studied 15 chemical and petrochemical businesses in developed and emerging economies. The sample included diversified companies as well as focused firms. Through interviews and other research, combined with insights from BCG’s project work, we have developed a framework that can help chemical companies get more value from their sustainability initiatives and investments. The framework comprises three steps: setting the strategic ambition, articulating the business case, and driving results.
Ambition runs along a continuum, and while we urge companies to raise their sights as they gain more expertise (and thus see more possibilities), not all companies have the same options. For example, those focused on basic chemicals, with few possibilities for differentiation, will tend to have fewer opportunities. Specialty chemical companies, by contrast, have more options because they are closer to end consumers who reward sustainability-driven innovation. Companies with a high public profile place greater weight on benefits to their reputation, so they will have an easier time making the case for sustainability than less well-known companies, which will focus on direct financial impacts. A single company can set different ambitions for its individual businesses.
Across the chemicals sector, we see five distinct levels of strategic ambition for sustainability. (See Exhibit 2.) Here are the assumptions and guidelines for each one, from basic to most ambitious:
Over time, we expect most companies to move along this continuum as they respond to increasing regulation and uncover new, profitable opportunities.
The next step is to clarify where—within the scope of the company’s ambition—the principal value will be created and to develop a business case that justifies the needed investment. Exactly how this plays out will vary from company to company, but our research suggests four approaches around which the business case can be built, listed here in order of least to most ambitious:
To build the business case for any of these four approaches, the company first needs to understand the impact of the new or altered product over its life cycle. It then designs the product to improve its life cycle value and reduce its environmental footprint. After validating the design, the company quantifies the benefits across the value chain and defines the new cost structure. Then it can factor the product’s benefits into pricing and marketing to ensure sufficient payoff. Are there likely to be enough buyers, willing to pay a high enough price, to generate a return on the investment? How will the company communicate with or educate consumers about the benefits?
To realize the value from sustainability investments, companies often need to adjust their ways of working. The greater their strategic ambition, the more they need to drive change throughout the organization. Leading companies have adopted a number of supportive measures. (See Exhibit 3.)
As the demand for sustainability rises and executives gain greater experience with how it contributes to competitive advantage, investments in sustainable products and processes will become more central to companies’ overall business strategy. This shift will make it easier to develop and justify business cases for new investment. Over time, these initiatives could lead to major new sources of earnings, while boosting the industry’s overall standing in the marketplace.
In following the three-step framework set out here, companies should start with only one or two initiatives and see how these play out in the organization. Sustainability will mean different things for different companies—and even for different divisions. Over time, in response to the opportunities that arise and its own ambition, the organization can expand its capabilities and move strategically along the sustainability spectrum.