The transition to a net-zero-carbon future may be one of the biggest challenges to ever face human society.
Perhaps that is why less than 40% of US-headquartered chemical companies in the ICIS Top 100 have published net-zero climate goals or climate goals aligned with the Science Based Targets initiative (SBTi). The initiative now counts over 1,000 companies worldwide that are setting emissions reduction targets grounded in the science and actions necessary to limit global temperature rise to below 2 degrees Celsius above preindustrial levels. Buy-in lags in the US despite demonstrations across industry sectors that these targets boost profitability, improve investor confidence, drive innovation, reduce regulatory uncertainty and strengthen brand reputation.
Decarbonization is particularly challenging for the chemicals sector, which sits at the center of the connections between the products that people use in everyday life and the raw materials used to manufacture them. The most carbon-intensive sectors (such as oil and gas and power and utilities) have faced shareholder pressure regarding climate change for years, and chemicals now face more of the same scrutiny. Most of the largest companies have enhanced climate disclosures and conducted scenario analyses following the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
In the past year, many leading companies have set net-zero or other decarbonization ambitions. The financial sector is showing greater awareness of the systemic risk of destabilization that climate change presents, calling on companies to lead and considering the changes that will be necessary at a portfolio level to achieve net-zero greenhouse gas (GHG) emissions by 2050 or sooner as a society. Pressure continues to accelerate on all industries to decarbonize, especially those that are carbon intensive or highly consumer-facing. This pressure is also increasing in the US, intensified by the Biden administration’s emphasis on climate.
Renewable energy is increasingly cheaper than fossil fuel energy, and even the previously dismissed idea of cracking using renewable energy is being taken seriously.
Many aspects of this work are putting pressure on long-term value for the chemicals sector, including:
- Increased demand from governments, regulators, investors and the public to support net-zero commitments and decarbonization more quickly than previously considered.
- Investor uncertainty about future growth in the context of a changing and increasingly volatile business environment, which can now be described as “BANI”⁷ – brittle, anxious, nonlinear and incomprehensible.
- The changing future of the global energy system, which is the primary feedstock supplier to the chemicals industry. Many thought leaders are wary of the future role of carbon-intensive sectors, advocating for complete removal of fossil fuels from the global energy system and a rapid transition to lower-carbon energy sources. This move would probably bring increased volatility and higher pricing to basic chemicals feedstocks.
It’s our view that decarbonization strategies must move toward the top of the agenda in the chemicals sector, which has both direct and enabling roles to play in this race to net zero:
- Radically reduce the “footprint” of chemicals industry operations.
Building on strategic objectives, define an optimization framework across your organization to evaluate the cost/benefit case for different operational adjustments that will drive a reduction in GHG emissions. Many leading companies have been doing this for decades; one chemical company reports that it added $4 billion to its bottom line through energy efficiency improvements during a single decade. And there is still more to be done: new technology developments mean that opportunities that were previously judged not worthy of investment should be reconsidered. The proven EY decarbonization methodology has helped several large companies develop plans for profitable footprint reductions.
- Improve the “handprint” benefits of the products of chemistry.
Implement a supply chain approach that identifies emission hotspots in your supply chain, providing a platform for engagement. Then consider collaboration opportunities with value chain partners to develop ways to improve impacts at the point of greatest leverage. Revenue improvements and cost savings from more sustainable products have proved to be an important source of economic profit.
- Take the lead in developing a blueprint of industry practices, public policy and cultural changes that will be needed to get to net zero.
The voice of progressive industry is increasingly needed in today’s policy discussions. Policymakers and advisors recognize that a profitable and progressive chemicals sector will be key to successful change. And progressive practices, such as valuing ecosystem services and the role of nature in solving engineering challenges, have been shown to provide hundreds of millions of dollars in additional value in the chemical industry.
By Mark Weick, Matt Handford & Sue Tame
Read the full article at https://www.ey.com/en_us/chemicals/how-can-net-zero-in-chemicals-be-profitable.
