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The chemical industry’s new green deals

Chemical companies are increasingly paying attention to how mergers and acquisitions affect their environmental goals

by Alexander H. Tullo
June 26, 2022 | A version of this story appeared in Volume 100, Issue 23


Plastics production at Lanxess's plant in Gastonia, North Carolina.
Credit: Lanxess
Lanxess is putting its plastics business into a joint venture so it can focus on specialty chemicals.

When the petrochemical maker LyondellBasell Industries announced in April that it would close its century-old refinery in Houston by the end of 2023, the news was hardly a surprise. The facility, which processes heavy imported crude oil to make fuels and aromatics, had lost money for the past 3 years. LyondellBasell had been looking to sell it since September to no avail.

What was unusual about the announcement was then–interim CEO Ken Lane’s declaration in a press release that shutting the unit “advances the Company’s decarbonization goals.” The refinery accounts for nearly 15% of LyondellBasell’s emissions from industrial processes and purchased energy.

In a conference call later that month, Lane added that the 300-hectare site would be ideal for Lyondell to repurpose for sustainability initiatives. The company has been piloting a pyrolysis process that breaks down postconsumer plastics into petrochemical feedstocks, and the Houston refinery has hydrotreaters that can aid the process. The site, Lane told analysts, “could be very synergistic with our circular ambition.”

For decades, major corporate decisions like shutting, divesting, acquiring, and spinning off businesses were motivated mainly by dollars and cents. A big chemical company might, for example, sell a commodity chemical business to focus on higher-growth and more-profitable specialty chemicals. Now, executives at such companies are increasingly weighing environmental impact—carbon footprint, in particular. In just the past few months, Evonik Industries, Solvay, Lanxess, and Trinseo all highlighted the environmental benefits of major portfolio maneuvers.

Managers at these companies have made the shift because shareholders are demanding it. A growing number of mutual funds managed by institutional investors are evaluating the environmental, social, and governance (ESG) performance of the companies they hold stock in. To attract these investors, companies must aspire to ambitious environmental goals. As a consequence, executives are allocating a significant share of their capital spending toward ­sustainability and are making environmental performance part of their merger and acquisition strategy.

Environmental action incentivized by Wall Street might seem like an unambiguous good. But critics caution that chemical companies could dress up their environmental performance by divesting their dirtier operations to firms that don’t care as much, resulting in little gain—and perhaps even a loss—for the planet.

ESG concerns are now impossible for executives to ignore. Investment in funds that consider ESG performance in their selection criteria is growing at a 15% annual rate and is set to reach $41 trillion globally this year, according to Bloomberg Intelligence. ESG holdings, the consulting firm says, represent roughly a third of total assets under management.

You don’t want to sell to someone with a poor reputation, just like you don’t want to buy something that has a poor reputation.
Omar Diaz, managing director, Balmoral Advisors

Institutional investors say companies have a social responsibility beyond hitting their quarterly earnings targets. And they argue that having high standards for sustainability makes good business sense.

Larry Fink, the CEO of BlackRock, an asset management firm with $10 trillion in assets, is a leading light of the ESG movement. His annual letter to CEOs is treated like a papal encyclical. “I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime,” reads the most recent one, issued in January. It later asks, “As your industry gets transformed by the energy transition, will you go the way of the dodo, or will you be a phoenix?”

Most chemical companies want to be a phoenix. One of them is Dow, the largest US chemical maker. Howard Ungerleider, Dow’s president and chief financial officer, is quick to point out that the company has been focusing on sustainability for longer than most. “We are in the third decade of setting 10-year sustainability goals,” he says. “The first set was 1995.”

Like Fink, Ungerleider sees business advantages in elevating ESG. For instance, he says consumers are now willing to pay for more environmentally responsible products. “It’s just the right thing to do as human beings, as individuals in society, but also it’s the right thing to do for the enterprise,” he says.

Investors’ growing interest in ESG funds is another motivator for the increased focus on sustainability. “I would not say it’s the leading motivation,” Ungerleider says. “But obviously, anywhere you can make sure that you’re giving yourself as large a potential shareholder base as possible is in the direction of goodness.”

Ungerleider adds that Dow has “gotten good feedback from investors” for major ESG advances, like in 2020 when it set a goal of reaching net-zero carbon emissions by 2050. It also received positive investor response in October when it announced specific zero-carbon plans—notably, the world’s first ethylene cracker that will capture its carbon emissions.

Overall, Dow plans to spend $1 billion per year, about a third of its capital budget, on decarbonization. This level of spending could become the norm for the petrochemical industry. According to BloombergNEF, the sector will need to outlay a total of $759 billion by 2050 to nearly eliminate carbon emissions.

With such high levels of capital spending required to reach emission goals, major chemical companies are, not surprisingly, looking to trim or exit their more carbon-intensive businesses to reduce the amount of investment they will need to meet their targets.

Growing importance
The number of global chemical deals in which sustainability was stated as part of the rationale has spiked in recent years.
A bar graph of importance of sustainability for chemical deals.
Source: Accenture Research analysis based on Capital IQ and Factiva.

Bernd Elser, global chemical lead at the consulting firm Accenture, says the number of chemical deals in which sustainability was stated as part of the rationale has spiked in recent years, hitting a record of nearly $10 billion in transaction value in 2021. “We see a lot of divestments being communicated where businesses with a significant share of the greenhouse footprint of the overall company are divested,” Elser says. “I think that’s a game changer.”

In May, for example, Evonik Industries said it would divest its performance materials businesses by the end of 2023. They include most of its bulk chemical operations—such as C chemicals, isononyl alcohol, and superabsorbent polymers—and generate about $3 billion in annual sales, 20% of Evonik’s total.

The company noted that these businesses emit about 20% of its greenhouse gases. Evonik aims to cut emissions by 25% by 2030. What’s more, the company plans to redeploy the proceeds it gets from the asset sales toward a $3.2 billion investment in sustainable businesses.

“We are even more systematically integrating sustainability into all elements of our strategy, into portfolio management, into innovation steering, into capital allocation, and into our culture,” Evonik CEO Christian Kullmann told analysts when he unveiled the plan in a presentation.

Another European chemical maker, Solvay, announced in March that it will split in two. One firm, with about $4.5 billion in annual sales, will house Solvay’s commodity businesses, such as soda ash and peroxides. A separate, $6.6 billion company will hold its specialty chemical and polymer businesses.

In 2021, Solvay set a goal of reaching net-zero carbon dioxide emissions before 2050, and the soda ash business was going to be among the last to reach this target. After the split, the specialty chemical company will have a net-zero target of 2040.

A series of deals is likewise improving Trinseo’s sustainability profile. In December, the polymer firm sold its European synthetic rubber business to Poland-based rival Synthos. The unit represented about 10% of Trinseo’s sales but 25% of its greenhouse gas emissions, according to the company’s sustainability report. Trinseo is now planning to divest its polystyrene and feedstock businesses, which account for 28% of its sales and 46% of its emissions.

Francesca Reverberi, Trinseo’s chief sustainability officer, says in an email that ESG is “a key consideration of our M&A activities.” This is also true, she says, not only in selling but also in buying businesses and extends beyond greenhouse gas reduction. The firm’s purchase of Arkema’s acrylics business, she notes, has been an environmental positive because of the ease with which that polymer can be recycled. Earlier this year, Trinseo bought the European plastics recycler Heathland.

Such dedication to ESG is spreading. In a survey of executives, the consultancy Bain found that 65% said their focus on ESG would increase. In energy and natural resources, a sector that includes chemicals, the interest is acutely high: 40% of deals were motivated by ESG, versus 14% for other sectors. “It was impacting what sort of deals they were pursuing. It was impacting how they conducted diligence and how they valued companies,” says Whit Keuer, a partner in Bain’s energy and resources practice.

Acquirers are willing to pay more for more-sustainable businesses, Keuer says. Conversely, they will pay less when large investments would be needed to bring assets up to higher standards. “Those things are actually being sold at discounts to what they were several years ago,” he says.

Omar Diaz, a managing director of Balmoral Advisors, an investment bank that markets chemical businesses to potential buyers, is seeing ESG considerations crop up increasingly. And he is encountering finicky buyers, such as when he was trying to market a materials business that a large conglomerate wanted to sell.

“We had multiple buyers who in the past had been involved in materials businesses, and they came right back at us almost immediately and said, ‘This just doesn’t meet our ESG criteria,’ ” Diaz says.

Conversely, Diaz has encountered sellers that have ruled out certain buyers. “You don’t want to sell to someone with a poor reputation, just like you don’t want to buy something that has a poor reputation,” he says.

For publicly traded companies with relatively high environmental standards, selling carbon-intensive businesses to private companies with a lower commitment to the environment—“transferred emissions,” as it is known—could be a new hazard. BlackRock’s Fink called it out in his most recent letter to CEOs. “Divesting from entire sectors—or simply passing carbon-intensive assets from public markets to private markets—will not get the world to net zero,” he wrote.

The Environmental Defense Fund (EDF) released a study in May looking into this issue in the oil and gas industry. It found that over the past 5 years, major oil companies with net-zero commitments sold $86.4 billion in assets to firms without such pledges.

And the EDF found evidence of more lax environmental practices at the acquiring firms. For example, Shell and Eni sold an oil field in the Niger Delta to a local operator, leading to increased flaring.

Gabriel Malek, the lead author of the report, says the issue of transferred emissions isn’t necessarily relegated to oil and gas. “Across all of these sectors, whether it’s petrochemicals, transportation, cement and steel, there’s growing pressure on public companies to begin to decarbonize and set energy-transition plans. And understandably, those companies will need to begin shedding some of their most demanding assets,” he says.

Malek is worried that many of those assets will go to private equity firms that aren’t focused on the long term. Most net-zero targets are nearly 30 years away. “The private equity firms that we speak to, they may be looking at a 7-year window between now and when they end up selling the asset once again,” he explains.

A major shift of a business from public to private hands was announced in May. The German chemical maker Lanxess and the private equity firm Advent International are forming a joint venture—to be owned at least 60% by Advent—to buy DSM’s engineering polymer business. Lanxess is contributing its own nylon and polybutylene businesses to the partnership, marking an exit from polymers so it can focus on specialty chemicals.

Lanxess noted in its presentation that divesting its polymer businesses will improve its emission profile. The company has a goal of reaching climate neutrality by 2040.


Ronald Ayles, an Advent managing partner, says his firm will honor Lanxess’s targets for the businesses that it is acquiring. “We are one of the largest private equity funds,” he says. “We set ourselves very high ESG and environmental targets.”

Ayles says the notion that private equity firms have lower environmental standards is an unfair stereotype. “Our investors behind Advent are the very large institutional investors,” he says. “There’s no difference versus a public company.”But

Bain’s Keuer says a difference between public and private equity–owned companies is transparency. Public companies face pressure from green investors and the public to hold themselves to environmental targets. “Private equity is not subject to that same level of disclosure, scrutiny, and pressure,” he says.

Ideally, mergers and acquisitions would be an environmental trade up for both companies. Trinseo’s sale of its rubber business to Synthos demonstrates that this is possible.

After the deal, Trinseo may more easily reach its goal of a 35% reduction in emission intensity—greenhouse gas emissions per unit of production—by 2035. And Reverberi says the company is considering instituting a net-zero target if it is technologically and financially feasible.

Synthos had not committed publicly to ambitious targets, but when it closed the rubber purchase, it unveiled a sustainable growth strategy. The Polish firm said it would move completely away from coal as an energy source and reduce greenhouse gas emissions by 28% by 2028. It now aims for climate neutrality by 2050.

If ESG-driven mergers and acquisitions merely transfer emissions from one firm to another, they won’t be of any benefit to the environment. But if they become a means for large chemical companies to spread sustainability awareness and capability—instead of just off-loading dirty operations—they might just have a positive influence.


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