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Finance

Is green investing influencing the value of chemical companies?

Interest in sustainability-led investing has skyrocketed, but its impact on chemical firms is not yet clear

by Vanessa Zainzinger, special to C&EN
November 15, 2020 | APPEARED IN VOLUME 98, ISSUE 44

 

09844-feature1-solar.jpg
Credit: Arkema
Arkema's investment in solar energy at its site in Saint-Auban, France, may have contributed to its good standing in a Wall Street Journal sustainability ranking.

In the past couple of years, the stock market has not been kind to DuPont, 3M, and Chemours, three giants of the global chemical industry. Between January 2018 and September 2020, DuPont’s shares fell 45%, 3M’s dropped 31%, and Chemours’s plummeted 59%. That’s a combined decline in value of about $80 billion.

The tumble is the result of the contamination crisis caused by per- and polyfluoroalkyl substances (PFAS), of which 3M and DuPont, and then the DuPont spin-off Chemours, were major producers. The PFAS case is an extreme example—magnified by billions of dollars in potential liabilities and an unusually high profile in the media—of the effect environmental destructiveness can have on a firm’s stock market value.

Uneven judgment

Many organizations ranked companies’ environmental, social, and governance (ESG) performance this year, but their methodologies and results vary widely.

Dow

ChemScore: D+ (11)a
Just Capital: 67.5 (2nd)b
MSCI: BBB (average)
Sustainalytics: 27.9 (73rd)c

Ecolab

ChemScore: C– (14)
Just Capital: 75.5 (1st)
MSCI: AAA (leader)
Sustainalytics: 25.8 (40th)

Solvay

ChemScore: D+ (11)
Just Capital: Not listed
MSCI: AAA (leader)
Sustainalytics: 26 (46th)

a Score out of 48 points. b Rank out of 28 chemical companies. c Rank out of 424 chemical companies.

Methodologies

ChemScore scored the 35 largest publicly traded chemical companies based on 2018 revenue in four categories: hazardous product portfolio, development of safer chemicals, management and transparency, and controversies.

Just Capital polls Americans on important ESG and other business issues and assigns each issue to the stakeholder group—employees, communities, customers, shareholders, and the environment—it most affects. The group then scores each company on how it addresses those issues for the stakeholders.

MSCI rates companies according to their exposure to ESG risks and how well they manage those risks relative to peers. The firm rates chemical companies on six issues: corporate governance, chemical safety, opportunities in clean technology, carbon emissions, toxic emissions and waste, and water stress.

Sustainalytics measures the degree to which a company’s economic value may be at risk from ESG issues including emissions and the environmental and social impact of products. Sustainalytics includes an ESG issue in the risk rating if it has a potentially substantial impact on a company’s economic value.

On a less conspicuous but wider scale, the relationship between chemical companies and investors is being shaped by ESG investing: investors’ consideration of environmental, social, and governance factors alongside financial ones when they make investment decisions.

The practice of responsible investing began in the 1960s when investors excluded stocks or entire industries—such as tobacco or businesses involved in South Africa’s apartheid regime—from their portfolios.

Since then, the money flowing into funds that invest in companies with certain values and businesses has skyrocketed, fueled by rising awareness of the climate crisis and consumers’ interest in putting their money in firms they perceive as doing good. But while it’s tempting to see this trend as a vehicle for positive change, some experts question whether ESG investing has the power to truly influence a company’s financial worth.

Andy Hedberg, director of investor relations at Ecolab, a Minnesota-based company that specializes in water treatment, has seen interest in Ecolab’s sustainability profile soar as ESG found its way into the investor mainstream. “Ten years ago, these ESG-focused funds were niche, mostly based in the Nordics in Europe,” he says. Now, the sustainability focus permeates traditional funds globally. “Investors that hadn’t paid attention to ESG in the past are finding that it’s now being demanded by their constituents,” Hedberg says.

Ecolab won first place in the 2020 ranking of the most sustainable chemical companies by the nonprofit firm Just Capital. Hedberg and his colleague Mike Monahan, Ecolab’s vice president of external relations, say the real impact that such rankings have had on Ecolab’s stock price is fairly undefinable.

“Any number of factors, from the particular market cycle to the preference for a particular industry, can play a role,” Monahan says. But with the firm’s stock price-to-earnings ratio increasing by 20% over the past few years, “you’d have to think that part of that is ESG related.”

Data from analysts support this theory. In the past decade, shares of chemical companies that ranked highly in ESG indexes from the finance company MSCI outperformed shares of companies with low rankings by 4.8% per year, according to an October 2020 report by the investment firm Jefferies. The environmental component of ESG has been the dominant driver of outperformance in the US, while governance is the driver in Europe, which is further ahead in developing an ESG regulatory framework, Jefferies found.

Jefferies surveyed more than 2,100 individual investors in the US, UK, Germany, and China for its report. It found that most prefer to invest in companies focused on sustainability and that this demand “appears to be increasingly motivating money managers to incorporate ESG into their investment process, with climate change the leading issue.” An estimated $35 trillion is now invested in funds with sustainability considerations of some kind.

To some chemical companies, this is an incentive to let sustainability motivate decision-making. Monahan says Ecolab’s strong ESG profile came first, and the interest from ESG funds followed. But Ecolab also makes decisions that strengthen its attractiveness to ESG investors, such as the May acquisition of CID Lines, a firm that provides products for keeping pig barns and poultry hatcheries cleaner so the animals are less prone to infection and need fewer antibiotics.

Ilham Kadri put ESG at the center of Solvay’s corporate strategy when she became CEO in March 2019. The Belgium-based firm kicked off Solvay One Planet, its sustainability program inspired by the United Nations sustainable development goals, in February. In October, Kadri led a webcast for ESG investors in which she promised Solvay would reduce its greenhouse gas emissions according to the Science Based Targets Initiative, a nonprofit collaboration.

Solvay’s program also touches on the social aspect of ESG, seeking gender parity for mid- and senior-level management by 2035 and harmonized health coverage for employees across the world. Investors are clearly “looking for companies that serve people, the planet, and the pocket,” Kadri tells C&EN. In the future, Solvay will place a greater focus on nonfinancial disclosure, a practice that Kadri argues will increasingly impact its bottom line.

Some chemical industry executives, however, say developing ESG goals can be more of a risk-mitigation strategy than a driver for change. “Unfortunately, it is not yet the case that companies get rewarded for being sustainable. Rather, they get punished for not being sustainable,” says Ronald Köhler, head of investor relations at the German company Covestro.

Unfortunately, it is not yet the case that companies get rewarded for being sustainable. Rather, they get punished for not being sustainable.
Ronald Köhler, head of investor relations, Covestro

Köhler’s conversations with portfolio managers still revolve around financials, and few ask ESG questions, he says. He has noticed, however, a growing pool of ESG specialists hired by investment firms to bring sustainability into the mix.

“If you don’t live up to certain ESG targets, then you might be excluded” from the group of investable companies, he says. “On the other hand, few people decide to invest in a company because it ranks highest on ESG criteria. This might be the next step, but it’s not yet so far aligned.”

Aamit Joshi, cohead of the global chemical group at the asset management firm Alantra, confirms that a good ESG profile is “still a nice-to-have, not a need-to-have,” adding, “I have yet to be asked by anyone what a company’s ESG rating is. We do some environmental due diligence, but that’s just part of the process, not the primary reason for a deal.”

Only the very largest chemical companies feel pressure to build sustainability into their way of working, Joshi says. It will take years to truly impact midsize and smaller ones, “both in terms of investment and in their own thinking about ESG,” he says.

In Europe, governments are pushing industry to exit the pandemic in a green way: the European Union has set the goal of achieving a climate-neutral economy by 2050 under the European Green Deal, which includes a sweeping strategy for a more sustainable chemical industry. But Joshi thinks the current crisis has pushed back ESG investing by a couple of years.

“Changes will happen when the world economy is in a good place and people have the flexibility to think about these things because they’re not worrying about what comes next,” Joshi predicts.

For now, some investors care more about ESG than others. The world’s largest fund manager, BlackRock, made headlines earlier this year when it doubled the number of sustainability-focused exchange-traded funds it offers to 150 and removed from its actively managed portfolios companies that derive a quarter or more of their revenues from thermal coal.

London-based Aviva Investors says it has divested companies from its flagship socially responsible investment (SRI) fund range, the Stewardship Funds, for selling chemicals on the Stockholm Convention and Ospar Commission lists of bad-actor chemicals. “We also recently decided not to make a major investment in an industrials company due to its poor response to PFAS contamination at one of its sites,” says Eugenie Mathieu, a senior SRI analyst at Aviva.

Aviva uses ChemScore, a rating system recently launched by the International Chemical Secretariat (ChemSec), a Swedish nonprofit. ChemScore looks at the 35 biggest chemical companies in the world based on revenue and scores their performance in four categories: the toxicity of their product portfolio, R&D of nontoxic chemicals, management and transparency, and the number of controversies and scandals that the firm has been involved in. Mathieu says ratings like ChemScore “provide valuable insight into a company’s risks from litigation, regulation, and reputational issues.”

To ChemSec, influencing investors is a way of getting companies to do better. The nonprofit, which advocates for reducing the use of environmentally hazardous chemicals, hopes the five big SRI rating agencies will incorporate ChemScore into their methodologies. These agencies—Institutional Shareholder Services ESG, MSCI, RobecoSAM, Sustainalytics, and Vigeo Eiris—are the first port of call for fund managers wanting to cover ESG, says ChemSec’s senior business and investors adviser, Sonja Haider. An agency that includes ChemScore will add a layer of hazardous substance risk management into its scoring systems.

Investors, although increasingly interested in ESG, usually engage with sustainability sporadically and not strategically enough, says Haider, who is a former stockbroker. “Investors often get active when there is a threat like regulation kicking in,” she says, such as when the European Union implemented its Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) chemical management program in 2007. The recently published EU chemical strategy, touted as the bloc’s biggest chemical law reform since REACH, will spike interest in the topic again, she predicts.

Haider acknowledges that grasping a chemical company’s true sustainability profile is no mean feat for investors. There is a plethora of raters, such as MSCI and ChemScore, that rank companies according to ESG criteria. But their methodologies diverge widely. Several companies that other rating agencies judge to be leaders on sustainability, for instance, scored the poorest in ChemSec’s survey.

Companies mostly strive for strong ratings but also take them with a grain of salt. According to Köhler from Covestro—whose biggest shareholder is BlackRock—many ratings are not differentiating enough and rank companies by the amount of information they publish rather than by the data themselves. To asset managers, he says, rankings are often a starting point, complemented by in-house experts with their own methodologies.

Marie-José Donsion, chief financial officer at France-based Arkema, says it’s only a matter of time before the raters consolidate and a common metric makes ESG profiles as comparable as a debt rating from Moody’s or Standard & Poor’s. “It’s every company’s responsibility to get prepared for the point when [ESG] will actually have an influence on your access to capital and potential investors. The sooner you realize this, the better,” Donsion says.

Jefferies predicts that consensus around ESG frameworks will take a decade or more to evolve. Investors will need to probe and evaluate in new ways a company’s environmental footprint and impact, its governance structure, the role it plays as an advocate, and a mosaic of other factors. But until then, government policy trends and consumer pressure will continue to drive the importance of ESG.

Arkema, which last month clinched the top spot for the chemical sector in the Wall Street Journal’s ranking of the 100 most sustainably managed companies, is trying to weave sustainability into its own activities. In September, Arkema joined a project that aims to build the first 100% recyclable wind turbine blade. In October, the company placed its first-ever green bond—a loan earmarked to raise money for climate and environmental projects—and will use the proceeds to finance a new plant in Singapore that will manufacture 100% biobased nylon.

“Sustainability is always a journey; it never ends,” says Virginie Delcroix, the firm’s vice president for sustainable development. “But I’m convinced this is the trend we have to follow now. There is tremendous pressure from society that a company’s performance can’t only be measured in euros. It has to be measured also in the contribution you make to the well-being of the planet.”

Vanessa Zainzinger is a freelance writer who covers the chemical industry.

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