INSIGHT: Is the ‘Inconvenient Truth’ a convenient distraction for chemicals?

LONDON (ICIS)–Using profitability as the sole metric of success is literally unsustainable, according to Dow CEO Jim Fitterling.

Speaking at the World Economic Forum (WEF) Virtual Davos summit ‘Designing Connected and Sustainable Value Chains’ roundtable on Tuesday, Fitterling argued that financial measures were lacking for more holistic goals.

“Our capitalist system is driven towards profitability and low-cost growth, but sometimes that is not what we are trying to solve for,” the Dow CEO said.

“If we are looking at less carbon dioxide (CO2) emissions and less plastic waste, these are big challenges and a profit metric alone will not solve that.”

This sentiment echoed the words of other chemicals executives also speaking at Davos; Dutch specialty chemicals producer DSM co-CEO and chief operating officer (COO) Dimitri de Vreeze said it was necessary for private companies to consider people, planet, and profit.

“The new way is holistic, and we feel that the economic system we have today is too mono-dimensional towards profit,” said de Vreeze.

“It is not only a dynamic between the public and private sectors; it is also consumers, governments, manufacturing companies and suppliers in the holistic view of how you meet public plant profit.”

As a heavy, energy-intensive industry, the chemicals sector in particular is trying to balance the necessary greenhouse house (GHG) emissions of today , which are necessary to pave the way towards a greener tomorrow.

CLIMATE CHALLENGE REMAINS
Despite the pandemic, the green agenda has not been pushed aside, with the EU’s economic recovery strategy laying foundations in funding sustainable initiatives.

As plastics producers talk about pre-used products to produce recycled material in the circular economy, now manufacturers are trying to break the loop of profits feeding success in traditional business.

Although infection rates keep much of Europe under lockdown measures and are high enough to remain a concern throughout the world, industries are using the new normal to pivot towards sustainability.

Both Dow and DSM are among 61 companies who have pledged commitment to the Stakeholder Capitalism Metrics set by the WEF and the International Business Council (IBC).

The venture, created in September 2020, sets out a list of environmental, social and governance (ESG) values that private sector companies can adhere to regardless of the industry or region they operate in.

In doing this, the WEF hopes to provide more transparency and accountability for ESG issues and provide a framework for investors and companies to benchmark sustainability against.

Other signatories from the chemicals sector are Spain’s Repsol, India’s Reliance Industries, or Belgium’s Solvay, as well as Norway’s fertilizer major Yara and crude oil major BP, Shell, Total, and Eni, among others.

GREEN WAVE OR GREEN WASH?
As evidenced by the range of companies signing up to the Stakeholder Capitalism Metrics, this does not mean a future without manufacturing, even for products with a toxic reputation like plastics.

Fitterling argued that when designing for circularity, there is a lot to consider.

With plastics having the lowest CO2 footprint and being among the cheapest materials to produce and recycle, there is still a place for these goods in the new normal.

“When you are looking at the economy and use of material and design for circularity, you have to think about the overarching goal; you can make plastic, paper, glass, aluminium or steel and it can all go to landfill,” he said.

“Plastics waste does not have to end up in the environment, but our consumer behaviour over decades has been linear, use something once – it doesn’t matter if it is plastic or anything else – and throw it away.

“How do you drive behaviour not to throw it away but to recycle it?”

While plastics companies are driving innovation in some areas such as chemicals recycling, this puts the pressure back on consumers and legislators, rather than encouraging producers to take responsibility.

From this light, chemicals executives encouraging observers to look away from financial results could appear like a cynical attempt to distract from poor performance, just ahead of companies’ 2020, full-year results are published.

Quarterly updates from last year indicated that, although operating under terse economic conditions, the chemicals sector marked a solid year compared to other manufacturing segments.

There was no guarantee that 2020 would have been a good year for financial stability prior to the pandemic, following on from a rocky 2019 which could naturally have resulted in an economic slump, unaided by the virus.

Bellwether of the European chemicals industry BASF tracked the slowest rate of growth since the 2008/2009 financial crisis in 2019, while Dow closed the fourth quarter of 2019 with weaker sales year-on-year.

Although there has been some – initially unexpected – buoyancy for the chemicals sector in 2020, the C-suite of high ranking executives may be taking the long view to disconnect shareholder confidence with financials.

INCONVENIENT TRUTH, OR CONVENIENT DISTRACTION
In 2006, former US Vice President Al Gore coined the phrase ‘An Inconvenient Truth’ in his film and book imploring the world to take notice of climate change.

At Davos this week, on a roundtable debating how to finance the net zero emissions economy, Gore made it clear it would take funding from both the private and public sectors to provide a greener future.

This will inevitably mean a less hawkish focus on short-term quarterly financials in favour of an over-arching long-term view.

“Companies who only think you can only be successful on profit will be the dinosaurs of the future – and we all know currently no dinosaurs exist,” said de DSM’s Vreeze.

The Dutch company has extended its accountability by requesting its financial auditors to also audit its sustainability metrics, reflecting anxieties about the environment that are present across the entire value chain.

In doing this, DSM is no doubt aware that they could be more attractive to investors: green looks set to remain a long-term trend.

Companies may benefit from a halo effect for embracing ESG goals, but the holistic impact of this could enable them to compete in future markets while addressing consumer concerns.

Insight by Morgan Condon