By Patrick Akl, Partner, Bain & Company, Middle East and Rob Pick, Associate Partner, Bain & Company, Chicago.
The global chemical sector is an essential centerpiece of modern economies, touching everything from fertilizers and fuels to construction materials and consumer products. The sector is increasingly under pressure for its significant environmental footprint. Consumers, regulators, investors, and other stakeholders are asking if it is possible to reap the same benefits from the sector, only with a lighter, more sustainable impact.
Across the broad and diverse chemical sector, every company will respond to this shift in its own way, depending on its market position, portfolio, capabilities, ambitions, and the regulatory context in which it operates. While some companies may take a more defensive stance, others may see the shift as an opportunity for growth in new markets and existing product lines. Many of these companies are already responding with bold and innovative approaches to new products and new ways to operate with the following goals in mind:
- Greener production: Reduce scope 1 and 2 emissions by switching to clean or renewable energy, or by incorporating carbon capture and sequestration in production operations. Design products that use less materials or make products that are inherently easier to recycle—for example, by decomplexifying plastic packaging.
- Greener supply chain: Reduce scope 3 emissions by encouraging suppliers to decarbonize their own inputs and operations, and make changes in how employees and downstream users of products operate.
- Green products: Switch to bio-based or recycled feedstock and design more circular products (biodegradable or recyclable) to reduce environmental impact.
- Green enablers: Support the energy transition and broader sustainability goals to reduce overall impact, even if specific products are not themselves greener (e.g., by supporting efforts in more effective waste management and recycling techniques such as chemical recycling).
New business models: Identify where the company is particularly good in some aspect of sustainability, and begin to offer that service to others.
While many companies are investing in sustainability, not all are capturing new value from these efforts. The leaders making these investments pay off define their ambitions clearly, gain a deep understanding of their customers’ needs, and form partnerships that help put their plans into action.
Setting the ambition:
Each company starts from a unique point. A clear understanding of market trends and costs helps to shape their ambition and investment levels. Along the value chain, some companies have faced an existential crisis to their entire portfolio and have made large bets to shift to biobased alternatives. Others, including some major plastic resin manufacturers, see a future in which green chemicals live side by side with their legacy products for years while they build out sustainable value chains.
The products in a company’s portfolio, its customers’ needs, the relative cost position of alternatives today and in the future, and the regulatory landscape, are all important factors in deciding whether to invest in green solutions as an industry leader, a fast follower, or to be positioned somewhere in the middle. Clarity and alignment on these issues help executives decide how much to invest over time and how far from the core business those investments may be.
Understanding how customers value sustainability:
Once the ambition is set, the next step is for companies to gain a better understanding of their customers and how they value sustainability. Specifically, what problems are their customers trying to solve, how will the new sustainable products help, and will they pay a green premium for it (or buy more of it)? Various segments of customers may value sustainability differently: One segment may be more interested in carbon neutrality while another segment values a product that is all natural—and the perceived value determines the willingness to pay a premium.
Chemical producers can tap into several different veins of opportunity to address customers’ needs.
Environmental impact: Some companies focus on reducing industry impact by reducing greenhouse gas emissions or stopping deforestation.
Natural products: Other companies will focus on natural products that have little impact for the environment and good impact for consumers. For example, many personal care and consumer product companies want to produce and market more natural products.
Recycling: Some companies will make products that are biodegradable or easier to recycle (for example through lower complexity in the chemical content of the product itself), or they will make products from recycled material.
Energy transition: Opportunities also exist in selling products and services to customers affected by the global energy transition, including electric vehicle makers, battery manufacturers, and battery material providers.
Customers will pay more for products that solve their issues. The more a sustainable product contributes to solving a customer’s key issues, the more valuable that product will be to that customer.
Implementing the plan:
Most new solutions require collaborations across the supply chain, for example to help improve traceability, use alternative feedstocks, and develop new ways of processing materials. Having a strong partnership strategy can drastically increase the speed of adoption, likelihood of success, and economic risk sharing for new investments.
Companies that are doing well in their transition typically get four things right:
- Segment customers, and price to value. Understand which customers value your products the most, and demonstrate how a new solution might help create a new premium product.
- Upgrade sales approach and tools. Pitching new products may require new tools and incentives. Some companies will set up a separate sales team to focus on new product lines.
- Build a future-proof business. The pace of scaling up will vary from one company to another, determined largely by ambition, customer needs, and regulatory conditions. Use established core capabilities to grow a new business that can supplement and surpass the existing one.
- Monitor the regulatory climate. Most executives would prefer not to wade into regulatory advocacy. Nonetheless, it is becoming increasingly important to understand regulators’ agendas in order to be ready for regulatory evolutions and emerge as a winner.
In conclusion, leading chemical producers already see tremendous opportunities in riding the green wave. Developing a deep understanding of the customer’s business—in particular, their sustainability needs and goals—is the key step that informs the initiative. Other steps are important too. Learning how to sell a premium green product, developing the necessary ecosystem partnerships, and pricing according to value are essential for building new, more sustainable chemical businesses that may ultimately compete with and supplant their legacy operations.