Chemicals and capital markets: Growing sustainably

Green chemicals—those with a low-carbon product portfolio or a higher exposure to end markets supporting sustainability—are being rewarded by capital markets and safeguarding future cash flow.

The chemicals industry has always been at the forefront of creating new or improved materials to meet the needs of society. Historically, this has shown itself as delivering products with the right physical or chemical properties. Currently, the focus is on delivering products and materials with a lower environmental impact, including (but not limited to) lower carbon footprints. As industries increasingly shift away from fossil fuels and transition to renewable sources, chemicals will play a central role in moving the economy to net-zero emissions.

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Today, the chemicals industry creates significant Scopes 1 and 2 emissions and is central to the question of plastics waste. Moreover, the industry consumes substantial amounts of fossil fuels such as natural gas, crude oil, and, increasingly, coal. These environmental factors already contribute to the public perception of chemical companies. In addition, many institutional investors have set sustainability targets for their portfolios. The combination of these two factors has led management teams to consider how investors value sustainability in the chemical industry and what actions they should take to maximize value creation in the future.

Objectively, measuring the “greenness” of a chemical company (or any company, for that matter) is not straightforward. The environmental, social, and governance (ESG) metrics typically used to determine a company’s sustainability profile often encompass a broad list of criteria around the latter two categories. Investors and stakeholders are also skeptical of greenwashing and see little or no correlation between ESG ratings and financial performance in the chemicals industry. This should not come as a complete surprise, because many ESG criteria have only an indirect impact on cash flow. Yet there are ways to create value out of ESG.

Ultimately, what matters to investors are future cash flows. Therefore, sustainability efforts can be tailwinds for the industry in three ways: increased customer willingness to pay, sourcing advantage, and the rapid growth of products and end markets exposed to sustainability trends.

This article illustrates how capital markets are increasingly recognizing sustainability, and it details five steps companies can take to act upon capital-market expectations: growing market-back opportunities for green growth, safeguarding value and managing risk, continuing to turn over their portfolios, decreasing emissions, and remaining agile enough to adapt decision-making processes as new opportunities arise. Companies that take these steps will be better positioned to keep up with the sustainability transition and therefore more likely to stay competitive in the years to come.

Sustainability and what matters to investors

Our research shows that absolute ESG ratings do not correlate to financial performance. Yet, interestingly, chemical companies that improved their ESG combined score by more than five percentage points from 2016 to 2019 were, indeed, rewarded by capital markets.

Of course, correlation isn’t causation, and we can only conjecture that improvements in ESG ratings may be linked to performance improvements, such as lower emissions or water usage, better process controls, or increased transparency. It’s not difficult to see how these factors could translate to improved or more sustainable cash flows or how they could ensure the future “right to operate.” As a recent McKinsey article demonstrates, future cash flow and financial performance (as measured by ROIC and growth) are the only relevant metrics that lead to significantly improved capital-market performance.

To understand how sustainability in chemicals is actively driving valuation, we segmented our sample of chemical companies along two dimensions:

  1. those with “greener” product portfolios—defined as more than 25 percent of revenues in biologic, recyclable, or low-carbon product portfolios
  2. those with exposure to end markets supporting sustainability tailwinds, such as electric vehicles (EVs), energy storage, water reduction, energy efficiency, natural ingredients, or circular packaging

In both segments, we see a clear correlation between improved total shareholder returns and an improved sustainability profile (Exhibit 1). Although there are many ways to define “sustainability,” our research shows positive correlations with both sustainability measures. The number of companies included in each definition is not the same. There are companies that are classified as sustainable according to dimension one or two, and there are also a few companies identified as “green leaders” that fall into both categories.

Companies with greener product portfolios or that experience tailwinds from sustainability in their end markets outperform laggards.
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Exposure to end markets with sustainability tailwinds is highly correlated with growth or margin premiums. However, Scopes 1, 2, and 3 emissions currently have limited correlation to current or future cash flows, and as a result, they do not drive valuation of ESG scores. Similarly, pine chemicals are highly sustainable because they are a coproduct of renewable tree harvesting, yet customers are not willing to pay premium prices for them because of their applications, which are typically in road construction or adhesives. As a result, chemical companies see little valuation benefit, while biobased materials start to see premium uplift.

Regarding carbon intensity, there is currently no correlation between Scopes 1, 2, and 3 (upstream Scope 3 emissions are a relevant contributor for many players in the chemicals industry) and TSR, although we expected to find such a correlation. This may be because many relevant players do not yet report Scope 3 emissions, and not all reported Scope 3 emissions are presented in a form that allows for comparison. Therefore, the capital market does not take these into account.

The impact of sustainability becomes even more apparent when looking at green leaders, which are typically companies that combine both sustainability dimensions (a green portfolio and exposure to end markets with sustainability tailwinds). In fact, green leaders doubled their TSR compared with green laggards (Exhibit 2).

The TSR for green leaders is two to three times higher than for green laggards.
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Five steps to define a sustainability strategy

Sustainability is here to stay. It’s already unprecedented in the degree of change it has produced, touching all elements of corporate value creation, as well as in how it’s regarded in the capital markets. Senior leadership of chemical companies should make large-scale, difficult decisions and reallocate capital based on an increased focus on the nature of the portfolio and sustainability.

Management teams won’t be rewarded for incremental moves. Rather, sustainability should be an integral part of defining strategy, which requires bold moves. The following five steps can help chemical companies determine the path forward.

Grow market-back opportunities and ‘go green’

Sustainability is, first and foremost, an innovation and growth opportunity for the chemicals industry; therefore, identifying market-back opportunities for green growth is a key value driver. End customers have set targets that the chemicals industry cannot currently meet. Being at the forefront of innovation, such as in recycling materials or biomaterials, will be a key differentiator going forward. It can also position companies to gain a deep understanding of how to serve their customers’ future needs rather than to product push innovation without clear market needs. This market-back product development of green chemical technology should happen in-house and will likely require alliances or targeted venture capital investments.

Being at the forefront of innovation, such as in recycling materials or biomaterials, will be a key differentiator going forward.

Safeguard value and manage risks

Continuing to improve ROIC and driving a value creation program remain key to meeting investors’ expectations. With regard to sustainability, it is crucial for chemical companies to recognize and proactively manage potential sustainability risks, such as increasingly stringent regulations and asset devaluation, as well as any foreseeable decrease in demand in certain product or end-market groups.

Continue to turn over portfolios

Chemical companies should upgrade their portfolios at a fast pace, both organically and inorganically. While the commodity versus specialty line has separated players and driven valuations for the past ten years, the next ten years could see a separation between the portfolios of green leaders and green laggards. Markets will mostly reward players that have made decisive choices across these dimensions by focusing their portfolios on building leadership positions in a few chemical segments that are either pushing green products or experiencing sustainability tailwinds.

Some chemical segments are intrinsically greener than others, and these seem to have better future cash flow expectations (based on higher valuation levels). Industrial gases, flavors and fragrances, biotech-based chemicals, and some agricultural chemicals contribute strongly to greener product portfolios. In addition, a set of players that have started to build alternative product portfolios, including engineering plastics, coatings, and fibers, have not yet put stakes in the ground. Thus, chemical companies should not blindly enter these segments; there are typically already strong players in leadership positions. The key is to explore options based on their specific starting positions, such as their portfolios, operating models, or factors of current differentiation. The currently accelerated M&A momentum can then be seen as a trigger for a structured portfolio review—a comprehensive M&A opportunity scan—and current valuation levels can make divestment options for otherwise carbon-intensive portfolios increasingly attractive.

Decrease emissions

All chemical companies should have fact-based emissions reduction targets in place, such as those founded on science-based target initiatives—ideally with a goal of reaching net-zero emissions across Scopes 1, 2, and 3 by 2050. Such targets can be complemented by a lever-based plan to deliver the reductions.

In the beginning, cutting emissions often seems easy because quick wins exist, but getting to net-zero emissions will be difficult and require very real and very tough choices. Therefore, setting reduction targets of 10 to 30 percent from 2025 to 2030 likely won’t suffice—even if companies are relentless about decreasing emissions across Scopes 1 and 2.

Be agile

New value pools, regulations, and other tailwinds creating opportunities will arise quickly. Companies should simplify decision making and create an agile way of working to react to changes faster than the competition. If opportunities arise, they should position a cross-functional team to drive fast execution far beyond business-as-usual processes.


Acting on sustainability is key—not only for the planet and for the future of humankind but also for the midterm survival of chemical companies and their cash flows. Top management teams in chemicals must act now to assess which factors are most material for their companies and to determine how best to move forward. The next steps will likely be informed by their individual strengths and opportunities to create advantageous leadership positions that will drive sustainable growth and generate future cash flow.

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