COMPETITIVE OPPORTUNITIES EXIST FOR CHEMICAL COMPANIES THAT LEAD IN PREPARATION FOR A LOW CARBON ECONOMY

COMPETITIVE OPPORTUNITIES EXIST FOR CHEMICAL COMPANIES THAT LEAD IN PREPARATION FOR A LOW CARBON ECONOMY

CDP’s latest quarterly sector research report ranks companies in one of the highest-emitting sectors: diversified chemicals, based on a number of emissions-related metrics which in aggregate could have a material impact on company performance.It reveals which companies in the sector are best prepared for the future in developing green products, enhancing efficiency or addressing regulatory change across sector specific environmental metrics. The international not-for-profit organization holds the largest global collection of corporate environmental data.

The industrial sector accounts for more than 32% of global GHGs^[1] and is the largest contributor to manmade greenhouse gas (GHG) emissions. The chemical industry contributes some 15% of these global industrial GHG emissions. The report covers 18 global chemical companies, which is the largest set of companies analyzed so far in this series. Together they represent approximately US$500bn in market cap and account for more than 60% of the combined emissions (scope 1+2) of the 80 chemical[2] companies that responded to CDP.

In the report,Back to the laboratory: are global chemical companies innovating for a low-carbon future?CDP ranks eighteen of the largest and highest-emitting chemical companies, based on a number of different GHG emissions-related metrics, which, taken in aggregate, could have a material impact on a company’s earnings.

Paul Dickinson, executive chairman of CDP said: “We are seeing investors become increasingly aware of the significance of environmental factors to the bottom line, with the prospect of ever tightening regulation to reflect scarcity of resources. What they need is reliable environmental data to assess the financial impacts. CDP’s sector research series is core to a set of tools we are building that investors can adapt as needed to engage with companies on material issues.”

James Magness, head of investor research at CDP added: “The high emissions in the chemicals sector mean there is significant potential from efficiency measures for those companies which choose to act. Of the key metrics analyzed, we assign the most significant share (40%) to process and energy efficiency, which we see as a proxy for efficiency and competitive advantage. Product innovation has the greatest potential to transform a company’s fortunes, though our analysis highlights the need for more comprehensive reporting and reliability in this area.”

Key findings show:

• {DuPont is a comfortable leader (overall score of 6.12) with A and B grades across all areas except for supply chain optimization. Data analyzed for DuPont pre-dates the June spin-off of its high-emitting chemicals business, making its achievement even more impressive;

• {Dutch companies DSM and AkzoNobel are second and third, with three A-grades each. The top three are the only companies to achieve an A-grade in our new carbon regulation readiness area, emphasizing the leadership of companies supportive of low carbon regulation;

• {German companies BASF and Bayer are ranked fifth and sixth. They would have ranked higher but for their poor performance in our carbon regulation readiness area, where they both scored an E. According to InfluenceMap[3], BASF appears to oppose a number of policies relating to climate change in the EU, including the potential reforms to the EU ETS to make it more efficient, and Bayer lacks transparency with its position towards climate change policies. This is surprising given their good performance in the other five key areas;

• {There are three Japanese companies in the top half of the table, and three in the bottom half. Sumitomo (fourth) is the leading Japanese company, with Nitto Denko (fifteenth) the lowest ranking Japanese company, due to high water risk, poor data transparency and supply chain optimization including a worrying lack of supplier or customer engagement;

• {After DuPont, the four remaining US companies are spread throughout the table, with Dow Chemical mid-table (ninth) and Ashland last. All five US companies performed poorly in the supply chain optimization analysis, receiving D and E grades. Eastman and Solvay join Ashland in the bottom three of the table. They all receive two E-grades, including in the most important area of process and energy efficiency. Ashland is the worst performer on future emissions reduction targets, which does not bode well for its commitment to future efficiency savings. Solvay is ranked bottom on emissions-reduction performance over the last ten years;

• {Disclosure to CDP is critical to achieve the highest level of data quality, as risk for non-responders cannot be assessed. The largest non-responders to CDP’s 2014 questionnaire were: LyondellBasell Industries, Nan Ya Plastics, Formosa Plastics, Formosa Chemicals & Fibre, Petronas Chemicals, Westlake Chemicals and Celanese Corporation.

• This research is part of a series of in-depth sector analysis by CDP and will provide investors with the most comprehensive environmental data analysis in the market. It aims to identify the most material metrics for each specific sector and how they link to financial performance. It is unique in that the weighting assigned to each metric is transparent and can be adjusted according to investor preference. Each of these metrics can provide a league in itself but the over-arching research reveals a ‘Super-League Table’ – combining all metrics. Quarterly reports on the automotive sector and electric utilities were released earlier this year.

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Methodology:

We score each chemical company based on a number of different metrics which are first ranked and then graded A to E. A is the best grade and E is the worst. The metrics can be categorised into six key areas:

1) Process and energy efficiency: we assess process and energy efficiency trends of the chemical companies as measured by emissions intensity. We analyze historic trends in emissions intensity over the last ten years for the companies’ own manufacturing. We also assess emissions-reduction targets set by companies against science-based targets, as well as the transparency of data provided by companies.

2) Product innovation: we perform a mostly qualitative review of whether companies are integrating sustainability analysis into their decision-making processes, goals setting and resource allocation. We have extracted information from more than five years of CDP responses and publicly available company data. We also include quantitative metrics including sales and R&D related to green products.

3) Supply chain optimization: we assess companies’ supply chain management, analyzing how they engage with their suppliers and customers on environmental topics and how they manage their supply chain emissions.

4) Carbon exposure: we assess the cost exposure of the companies to carbon markets through two metrics: (i) carbon exposure as determined by current exposure of the companies to existing or planned emissions trading systems, (ii) potential future exposure based on the companies’ total global emissions.

5) Carbon regulation readiness: we adopt InfluenceMap’s proprietary analysis to assess companies’ readiness for a shift towards a low-carbon regulatory framework. InfluenceMap analyses the actual behavior of the chemical companies regarding the key regulatory items affecting their business, including the EU Emissions Trading System (European Union), the Energy Efficiency Directive (European Union) and the Clean Air Act (USA).

6) Water risk: we evaluate water risk facing chemical companies based on their risks and opportunities, supply chain management, policy and regulatory compliance, and water withdrawal intensity.

Each of the above focus areas has a separate chapter within this report and the precise methodology for how we rank and grade each metric is outlined in the relevant chapter.

In addition to the six key areas, we also include CDP’s annual climate performance band for 2014 in the SLT. It scores the 1,749 companies that respond to CDP’s investor-backed climate change questionnaire based on their climate change readiness. A high score can imply a well-run business with a forward looking management team, not just focused on the short term.

The table above summarizes the key areas of the SLT and the weightings we have assigned to each area, according to our sense of potential impact on company performance. In determining the overall SLT score, we apply these weightings to the weighted ranks achieved by the companies in each area.

About CDP. CDP, formerly Carbon Disclosure Project, is an international, not-for-profit organization providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information. CDP works with market forces, including 822 institutional investors with assets of US$95 trillion, to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them. CDP now holds the largest collection globally of primary climate change, water and forest risk commodities information and puts these insights at the heart of strategic business, investment and policy decisions. Please visit www.cdp.net or follow us @CDP to find out more.

CDP press contactsAshleigh Lezard // communications manager // + 44 (0) 7811 428030, ashleigh.lezard@cdp.netAlex Farquharson // communications executive // +44 (0) 7817 948 076, alex.farquharson@cdp.net

[1] Based on IPCC data for 2010.

[2] Includes diversified, specialty and commodity chemicals (but not fertilisers or industrial gases).

[3] InfluenceMap is a UK-based not-for-profit whose remit is to map, analyse and score the extent to which corporations are influencing climate policy and legislation. http://www.influencemap.org/