How to think about ESG influences on the Chemicals sector

Put a broad-ranging topic like ESG into a diverse sector, such as Chemicals, and it would be easy to end up in knots. Therefore, we make no apologies for employing an approach that hopefully provides a framework for discussions with companies, but likely falls short of tackling every single influential ESG-related factor. Unpeeling the ESG "onion" leaves us with 7 core topics for Chemicals:

1. de-carbonisation;
2. natural feedstocks;
3. energy efficiency;
4. land, sea and air (environment);
5. protectionism;
6. material scarcity; and
7. demographics.

Clearly, there will be other relevant themes, but these are likely to be generic to all companies, e.g. diversity of employees or management compensation.

The next decade is likely to be more competitive, given the broader recognition of ESG as a positive force for change. In the past 12 months alone, there have been 7 ESG-only investor events in the EU Chemicals sector, as compared with only 2 in the whole of the last decade. We note that several companies have faced "exclusion" from portfolios in the past decade on the grounds of, for example, oil and gas exposures, or biodiversity risks associated with biotech seeds or pesticides. Chemical companies' strategies are likely to more widely embrace the challenges and opportunities of ESG factors in the future, and, hence, exclusion could become inclusion.