Perspectives
10 January 2023
The decisive decade to limit climate change impact is here, and the chemicals sector is playing an increasingly critical role in the global transition to net zero. Generating $US4.7 trillion in global sales annually,1 the chemicals sector provides essential components, materials and technologies used as inputs in ~96 per cent of manufactured goods globally.2 Delivering on net zero ambitions at the scale and pace needed requires partnership across businesses, communities, investors and governments. The chemicals sector’s existing role in all major industries, such as agriculture, construction and energy, creates fertile ground for cross-sector partnerships to commercialise and create value in important net zero innovations.
Often overlooked, chemicals today are important sustainability enablers. Chemical products and derivatives are being used for energy efficiency, decarbonisation and circularity across the world. For example, epoxy resins, which are petrochemical-derived, are used to manufacture blades for wind turbines. They are also used in the aerospace and automotive sectors, including in electric vehicles, to improve fuel efficiency as a lightweight material that is also durable. Polystyrene is another example – a petrochemical-derived plastic which is used as an input into building insulation and reduces energy consumption for HVAC systems.
Beyond its role as a sustainability enabler, the chemicals sector is embracing change and taking steps to do its part for net zero. Globally agreed commitments to tackle climate change are increasing in both extent and rigour. Many investors are also making sustainability targets a pre-cursor to capital access. These dynamics are creating challenges and opportunities for the industry.
Demand for chemical products grows with population increases and rising living standards. Enabling deep decarbonisation in the sector beyond the use of renewable sources of electricity is likely to require scaling of alternative sources of potential emission abatement. For example, clean hydrogen production used for low-carbon ammonia and methanol can be used to reduce emissions in the fertiliser industry and create new potential energy storage solutions.3 Sustainability tailwinds are having a profound impact on supply chains for mature chemistries and creating space for innovative alternatives and feedstocks.
Given the pervasiveness of its products today, it is not surprising that the chemicals sector is the third-largest source of industrial greenhouse gas emissions. Its large carbon footprint is therefore increasingly important to manage and optimise. Emissions data, however, is only one lens to consider environmental impact and it commonly overlooks downstream sustainability benefits. Substitution of materials with new chemistries should always be balanced with consideration of its durability and application in the end market and therefore requires a more holistic approach when considering trade-offs in achieving net zero targets.
Several attractive sustainability-led investment opportunities are emerging as a result. These include biotechnology for lower-carbon substitutes, electricity-based feedstocks, process technologies and digital enablement through sensors. However, there is no single solution or technology for reducing emmissions in the chemicals sector and multiple initiatives will be required.4
Chemical companies are also leading the creation of circular product loops to push current global plastic recycling rates. The opportunity for recycling is immense given only 10 per cent of plastics globally are being recycled (Fig. 1).5 However, waste collection challenges are expected to inhibit recycling uptake and virgin sources of plastic will likely persist in specific applications, for example in construction and packaging.6 Emerging bio-based and biodegradable materials, such as polylactic acid and PHA, have increased interest from global consumer goods companies as they look to meet consumer demand for clean labels and green products (Fig. 1, 2). Together, these two solutions have the promise of making the plastics chain independent of fossil feedstock while also solving the challenge of waste.
Source: Roland Berger
Source: Roland Berger
Today, large quantities of chemicals are globally traded, creating the need for global supply chains and large-scale production assets in dedicated locations. As the world considers nearshoring and onshoring various supply chains, this will impact where chemicals need to be produced, presenting investment opportunities, which can also cut transportation emissions from shipping those chemicals.
Ultimately, these challenges cannot be solved by the chemicals industry alone and require broad stakeholder alignment among chemicals, energy providers, downstream manufacturing, packaging and consumer companies, as well as governments. There are numerous examples across the sector today where chemicals producers are strategically partnering with their upstream and downstream counterparts, as well as startups, to develop new opportunities, whether in battery materials, biomaterials or agriculture.
The amount of capital required to achieve net zero in chemicals by 2050 is estimated at $US3 trillion, and creative financing solutions are needed to achieve this.7 These funds could be directed to retrofitting legacy production and new greenfield production infrastructure while also assisting in the scale-up of decarbonisation technologies or cross-industry initiatives. As an example, Macquarie Asset Management’s Green Investment Group (GIG) recently partnered with Nobian, a leading Netherlands-based chemicals company, to create the Hydrogen Chemistry Company (HyCC), to scale up green hydrogen solutions for decarbonising large industries such as aviation, steel, chemicals and refineries. HyCC is accelerating investment and development of green hydrogen throughout Europe from this cross-industry partnership. Together, HyCC leverages Nobian’s experience in large-scale water electrolysis to produce green hydrogen from renewable power and GIG’s specialist green infrastructure project development expertise.
“The development and scaling of new technologies and innovations will play a critical role in enabling hard-to-decarbonise sectors undertake climate mitigation,” says Rajat Sehgal, Senior Vice President, Industrials at Macquarie Capital. “Macquarie is playing a leading role in providing the capital needed for this as part of its commitment to helping achieve global net zero emissions by 2050.”
Investment for the sector’s role in the net zero transition is attracting attention among a growing cohort of sustainability-driven investors. These funds are often looking to diversify beyond mature energy transition asset classes like renewables.
“Institutions have set a lot of targets when it comes to investing their own capital, so management teams in chemicals have a dual focus on how they can produce more sustainable products and develop more sustainable supply chains,” comments Ajay Singh, Senior Managing Director and Head of Chemicals Coverage across Americas, Europe and Asia for Macquarie Capital.
The push for sustainability is also prompting M&A activity in chemicals, driven by the search for new areas of growth, diversity and portfolio reviews to improve sustainability profiles. In the last few years, ESG considerations have gained focus in transaction due diligence by both the buy side and sell side.
Macquarie Capital’s chemicals team has been active in supporting investors on several recent transactions where these sustainability themes have been prominent. In 2021, Macquarie Capital supported Platinum Equity in its $US5.2 billion acquisition of Solenis, a global producer of specialty chemicals used in water-intensive industries, from Clayton Dubilier & Rice and BASF.8 That same year, Macquarie Capital supported One Rock Capital’s ~$US1 billion acquisition of Eastman Chemical’s tyre additives business which improves efficiency of rubber tyre production and development of green tyres for vehicles.
Chemical companies that successfully innovate and invest in sustainability tend to achieve higher valuations, according to McKinsey research.9 Those with sales in end markets aligned with sustainability tailwinds achieve an enterprise value-to-revenue multiple four times higher than those exposed primarily to ‘sustainability-neutral’ end-markets.10 Highly valued subsectors include natural ingredients, circular packaging, biomaterials and fuels, electrification and water efficiency.
Proactive pursuit of top-line growth in these markets could facilitate a valuation re-rating. Not all sustainability-led growth strategies are equal, however, and today they are partially dependent on the downstream value placed by customers and end consumers. Some market opportunities, such as natural ingredients into personal care, are commanding premium pricing relative to alternatives due to end consumer tailwinds. In more commoditised markets, displacing highly cost-competitive chemistries is proving more difficult and less lucrative for the time being. These could prove to be attractive opportunities where scale investments and cross-sector partnerships could improve cost positions dramatically and deliver significant climate benefits.
According to Ajay Singh: “The capital markets are increasingly recognising sustainability. We expect that boards and management teams will continue to remain super committed to long-term sustainability goals, in recognition of the role they will play in delivering on net zero ambitions and the impact they will increasingly have on value creation and cash flows. If they do, the chemicals industry can both have a net positive impact on the UN’s climate goals by 2050 and secure top-line growth from new products and processes.”
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