The carbon conundrum: unlocking ESG potential in the Chemical industry

In the research report “The carbon conundrum: unlocking ESG potential in the Chemical industry” conducted using publicly available data of 38 European chemical distributors (available as download), the industry is portrayed as a fascinating sector from a sustainability research standpoint. Not only does it boast high growth and value, but at the same time has a substantial impact on society and the environment. However, compared to other sectors, chemical distributors are immature when it comes to transparent ESG reporting, the development of sustainability programs as well as the implementation of concrete and bold ESG measures.

The need to decarbonize the chemical supply chain

With rising emissions around the world, and the European agreement at the COP26 committing to achieving net-zero by 2050, the attention on reducing carbon emissions is more than ever. The IPCC’s 2021 report had a strong emphasis on climate change impacts that are occurring at an increasing and unprecedented rate. This means that impacts on climate will only worsen if we are not able to reduce carbon emissions and limit warming to within 1.5°C.

The chemical industry is the third-highest contributor to carbon emissions in the industrial sector. Moreover, with supply chain activities of fast-moving consumer goods, like chemicals and plastics being responsible for around 5% of global emissions, the chemical industry needs to move beyond simply signing net-zero pledges.

Comparing the chemical distribution industry with chemical manufacturers shows that chemical companies are aware of materiality assessments and the business relevance of ESG factors, as their ESG reporting is more advanced and transparent. Nevertheless, the adherence of provision metrices is not standardized and neither is CO2 footprinting.

Earlier commitments from companies to reduce emissions focused on Greenhouse Gas (GHG) Protocol’s Scope 1 and Scope 2 emissions. However, measuring Scope 3 emissions is often neglected (upstream and downstream value chain). With Scope 3 upstream emissions contributing to around 50% of the carbon footprint for many chemical companies, efforts to include Scope 3 in reporting and engage the value chain to act upon the reduction whereof need to be boosted.

At the time of conducting the study 82 chemical companies had already signed up to the science-based target initiative (SBTi) and of those a mere 23 are committed and have set net-zero targets. The research reveals that only 21% of companies in the chemical distribution industry report their Scope 1, 2 or 3 emissions. Additionally, only 1 of the researched companies signed up to the SBTi, highlighting the fact that the decarbonization of the industry should be an urgent matter.

Reducing emissions for Scope 1 and 2 was already a great task for chemical companies but, now adding Scope 3 adds additional challenges. When considering the GHG-emission status quo of the chemical distributors, net-zero targets of the chemical industry are at stake. Collaborating along the chemical value chain (up-and down-stream) will be key to decarbonizing the chemical supply chain and to fulfill governmental, investors, societal as well as corporate ambitions to achieve emission targets. Not only the industry will benefit from decarbonizing chemical supply chains but a positive impact will be generated globally since they provide the foundation for many other value chains.

Key activation enablers for decarbonization to reach net-zero are:

1. Collecting, completing, and monitoring primary data based on standardized metrices. Exchanging data with suppliers to create transparency.
2. Researching and developing new technologies and innovations that support the decarbonization process. This includes redesigning products and optimizing value chains based on sustainable and responsible sourcing requirements.
3. Integrating emissions metrics in procurement standards and follow-up on performance (tracking of metrices and targets). Forming new types of partnerships with key stakeholder groups are also crucial.

Using both the carrot and the stick to accelerate sustainability performance in the supply chain

Companies should see it as an opportunity to gain public recognition by being transparent when reporting on their emission data which could result in being rewarded by key stakeholders including investors, customers, and (potential) employees. The collected data will support companies to participate in ESG benchmarks and show suppliers how they perform in relation to their competitors. This could especially trigger competition amongst lower-performing suppliers. Moreover, implementing emission reduction measures will support companies to share their existing knowledge with suppliers, thus strengthening the buyer-supplier relationship.

Additionally, new technologies and innovations can lead to financial and non-financial rewards pointing to the chemical industry’s unique position to accelerate efforts on circular economy. On the one hand, they can aggregate the demand for post-consumer waste and alternative fuels and on the other hand, they can supply for example advanced recycled materials, thereby reducing emissions and costs at the same time. Greener products and services with lower emissions are known to deliver better margins and in general, investing in initiatives to support suppliers' decarbonization projects, provides financial support and reassurance and further strengthens buyer-supplier businesses.

Decarbonization commitments can be enhanced by including non-financial and financial penalty-based clauses in procurement policies

In the process of selecting suppliers (pre-tender phase), companies can introduce selection criteria, based on ESG metrices. This would include assessing suppliers’ commitment to reducing their emissions. In line with the company’s needs, the supplier selection can favor those having a carbon reduction commitment and clear actions. Companies with either lower emissions or actions reducing their emissions will outperform their competition. Nevertheless, carbon reduction clauses can also be integrated into existing supplier agreements to get companies to commit to measurable carbon savings as well as carbon reporting transparency and Scope 3 emission commitment to SBTi. Breaching these clauses could result in financial penalties.

Interested in learning more about the key ESG performance insights from the Chemical Distribution sector?

We welcome your feedback and are keen to discuss the report that forms the base of the insights and performance ranking with you while learning how Finch & Beak can assist you in activating and improving your ESG performance.

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^{Photo by Mika Baumeister on Unsplash}