Portfolio Sustainability Assessment gaining momentum in chemicals industry

There is a growing drive in the chemical industry for voluntary action in the field of sustainable innovation, according to Arthur D. Little partners Martijn Eikelenboom and Michael Kolk. By unlocking the value of sustainability, through gaining deep insights and understanding in its mechanics and link with internal portfolios, chemical firms can better plan and prepare for a more prosperous future.

The chemicals industry – a $4,2 trillion industry globally – is, similar to other sectors, facing major change in its landscape. One of major challenges ahead is the need to speed up the transition to greener visions and business models. Despite the fact that the sector has managed to cut its CO2 emissions by over half since 1990 (-58%), whilst seeing production grow by 71% – an impressive feat underlining its position as one of the world’s most innovative industries – players in the chemicals value chain still have a long way to go to reach long term climate goals. 

Regulatory requirements, such as cutting carbon dioxide emissions, using renewable energy, phasing out of certain technologies such as converting mercury cell to membrane technology, are the driving force behind the emission ambitions, however, the industry is seeing a growing momentum for voluntary action, says Martijn Eikelenboom, who heads Arthur D. Little’s practice in the Benelux and is the firm’s Global Sustainability practice leader.

“We see that most of the sustainability action is voluntary and chemical companies want to become better competitors”, he remarks. Eikelenboom highlights that by embracing the power of sustainability, organisations can gain a competitive advantage across a range of dimensions, including improved capabilities to ramp up growth potential, through identification of new opportunities, and more streamlined operations, through, an enhanced capacity to mitigate risks, among others. 

Transition to sustainable practices on top of legal requirements also enables chemical companies to better tap into rapidly growing potential of technology-led advances – digital platforms and ways of working are set to reshape the face of the industry, with major improvements in financial performance and ecological footprint forecasted to go hand in hand. Another commonly cited benefit of adopting sustainability, says Eikelenboom, is the opportunity to extract value from circular principles, which have across a range of cases globally demonstrated to enable considerable savings and improvements. A recent study by Ellen MacArthur Foundation found that the circular economy could add $1 trillion in economic value annually by 2025, with the chemicals industry earmarked as one of the key players in the chain – chemicals serves as a foundation for markets such as energy, food, and materials. 

“New emerging eco-systems such as re-using waste gases (i.e. carbon dioxide) in order to achieve a more sustainable world are becoming increasingly important drivers for chemical companies”, remarks Michael Kolk, a partner at Arthur D. Little and head of the firm’s Chemicals practice.

Portfolio Sustainability Assessment (PSA)

Against the changing backdrop, Solvay, a Belgium-based chemical company that has embraced sustainable innovation for some time, in 2009 undertook the initiative to devise a methodology for incorporating sustainability trends within its business operations. The approach, which it calls ‘Sustainable Portfolio Management’ (SPM), was initially created in-house, and later on developed further with the support of Arthur D. Little and Dutch research institute TNO. The tool has since been transformed into an approach for wider usage within the industry, titled ‘Portfolio Sustainability Assessment’ (PSA), allowing chemical companies to gain insight in how sustainability trends are impacting their strategies and portfolios.

“The PSA approach helps to anticipate the future of a product in terms of environmental, health, economic and social sustainability.” Since it first deployment over six years ago, dozens of cases have been realised, with underlying results showing that the approach paves the way for bottom-line results, says Kolk. “Aligning a chemical product portfolio with relevant sustainability trends leads to stronger, longer term growth.” 

The success has not remained unnoticed in the industry – the concept of sustainable portfolio management is gaining momentum. “It is being used as a tool to identify which products, in which applications and in which regions are contributing to a more sustainable future and higher growth expectations. And also to identify those products which are not and are at risk of discontinuity or substitution”, explains Eikelenboom.

He highlights the chemical product bisphenol-A (BPA) as an example. While the product is used in various applications, the type of application or process is very important in assessing sustainability. When bisphenol-A is, for instance, is used in coatings for windmills it has a different sustainability performance compared to its usage in aluminium cans or baby bottles. In the prior case, applications in windmill, where sustainability concerns about human exposure are limited, BPA is likely to experience above average growth rates, whereas in the latter case, the application of bisphenol-A in in cans is facing serious health concerns, which is set to slow growth potential.

The ‘early warning system’ of the PSA approach helps chemical companies to act timely for the sake of sustainability and make any necessary changes in their portfolio. “If you wait till the legislation, then you are too late,” highlights Kolk. According to the expert, Hydrofluorocarbons (HFCs) were an example of a group of chemical products which faced SPM red flag signals well before governments erected concrete (legal) measures. Kolk: “The output provides companies with alerts about products, which are sustainable and those which are not. It can flag up which part of a company’s turnover and margin are at risk of potentially being banned or put on ‘a watch list’ for sustainability reasons.”

Innovation management

Besides allowing firms to optimise their commercials and streamline operations, PSA also provides a great deal of information to the innovation function, says Kolk. In an industry which is characterised by early planning and lengthy development cycles against hefty investments, linking strategic and product portfolio planning with longer-term sustainability-driven trends is key to ensure efforts are heading in the right direction. “The tool helps companies not only to identify sustainability risks but also encourages them to broaden their innovation scope from typically smaller short term improvements to larger and longer term decision making”, explains Eikelenboom.

According to a recent report from Finch & Beak, chemical companies that are frontrunners in the field of sustainability enjoy higher innovation success rate, grounded on more value chain collaboration and higher leadership commitment. The researchers found a considerable variation between frontrunners and the rest – a gap of nearly 15% in terms of the number of product innovations, and around 20% in the number of process innovations. Down the line, revenue share extracted from innovation by frontrunners is described as “significantly higher”.

Embracing sustainability also supports a range of non-financial, but equally important factors, such as confidence and credibility in the sustainability of a chemical company, attractiveness towards luring in talent (particularly from the younger generations) and good employership, including pride among employees working for the company.