Changing Chemicals

Changing Chemicals

Implications and solutions for Government Relations teams

Investments in the Chemicals industry used to deliver solid returns over the long-run. In the Bulk Chemicals business for example, access to low-cost feedstock was a key driver of value and revenues grew twice as fast as GDP. It was about world-scale plants near cheap hydrocarbons, energy sources, access to low cost labor and consumer markets. The industry was helped by a stable regulatory environment and annual increases in demand. However, national and corporate initiatives to promote circular economies and new technological developments are altering traditional business models. Given today’s geopolitical uncertainties, supply chain challenges, national decarbonization plans and shareholders’ conviction that sustainability is good for business, it is easy to see why the landscape of the Chemicals industry is changing. The urgency of NGOs, the general public and governments, is putting many Chemicals producers on the defensive. However, the companies that make the right choices now have an opportunity to change the game altogether and win. From this we ask, What are the implications for the government relations and public affairs function inside Chemicals companies? We see five themes that warrant attention:

Energy Transition

The Chemicals industry is a significant emitter of CO2. Where it has not happened yet, governments are likely to impose carbon pricing schemes and other measures to incentivize emitters to bring down CO2 and other GHG emissions (e.g., methane). Recently, the European Chemical Industry Council’s Director-General Marco Mensink said: “Our companies need much more access to climate-friendly energy and feedstock. Connecting Europe in a new energy infrastructure and support for industrial symbiosis is crucial”. The price of one ton of CO2 reached almost EUR 100 on several occasions in 2022. Society and governments expect companies to refurbish their energy-intensive chemical assets rather than sell them. The Chemicals industry is looking to invest in creating CO2-neutral energy sources, but it also needs to maintain profitability. To do so, Chemical companies must work with all players along the entire value chain.

In a world where the dividing lines between the public and private sectors are blurring, bringing relevant stakeholders together from across industries is needed to retain competitiveness. In the US for example, Chemicals companies have joined companies in the Energy, Mining, FMCG and cement businesses to jointly advocate the US Government on the topic of emissions. By joining forces and engaging the Government together, members across different sectors collaborate to maximize regulatory clarity and stability, which will help their businesses thrive.

The Environmental Standards Dance

Traditionally, many governments adopted the least restrictive environmental regulatory framework defendable to attract inward investment and retain the economic benefits of a vibrant Chemicals industry. This encouraged a  situation where the Chemicals industry is associated with high energy consumption, emissions, and waste. Being allowed to pollute, however, is quickly becoming less of a competitive differentiator, driven by the pressure governments face around the world to improve their sustainability credentials. We believe global climate awareness and sustainability efforts will likely cause further convergence of environmental legislation, leading to more robust and uniform environmental standards across groups of countries. For example, we expect unified guidelines regulating corporate liability for emissions and faulty waste management. The EU Commission already signaled this trend in their effort to set “targets that give a clear direction and indicators to measure progress relating to the use of land, material, water and greenhouse gas emissions, as well as biodiversity”. We also believe that Europe’s efforts to set environmental standards for imported products (e.g., from Mercosur) will be a significant driver of this process.

GR leaders and their business colleagues in the Chemicals industry can look at the tobacco, alcohol & fizzy drinks industry for inspiration on how best to respond to the expected tightening of environmental standards. These industries – often in close collaboration with the government and in recognition of the damage inflicted by their products – were able to develop, get approval and expand the market for new products (e.g., smoke-free products, soda with less sugar and flavored water). There is no reason to believe the Chemicals industry cannot do something similar.

Decoupling of Global Value Chains

Covid-19, the Ukrainian-Russian conflict and the China-US stand-off drive market participants and governments to scrutinize free trade and international value chains more than ever before. Governments in the West increasingly view the Chinese hold on strategic raw materials and commodities as more than an economic threat. Corporates have responded. Apple has steadily steered Foxconn (from Taiwan) to improve and increase production capacity for the IPhone in India rather than China. For the Chemicals industry, investment proposals that used to look great from a Net Present Value perspective suddenly look much less attractive when factoring in risks to the security of supply, industrial nationalism, and the world’s volatile geopolitical order. The consequence is that Chemical companies will make safer near-shore bets, which will be less profitable. The good news is that Governments have been willing to increase public spending to revitalize national industries, reduce foreign dependence and support employment. However, their ability to do so is being curtailed by the high-interest environment the world has entered. To prevent being caught off-guard, Chemicals companies will seek to intensify collaboration with (their) government.

GR leaders are increasing their facetime with government officials across departments to offer strategies that show how decoupling, and near-shoring can happen and to understand their role in the competitive games between governments. In addition, in order to be effective, GR leaders and their teams must become much more targeted and efficient in their approach. They must look hard at selecting and rolling out monitoring technologies that bring them the right information at the right time (e.g., Policy tracking software, Stakeholder management AI).

Value Management

According to a McKinsey study from 2020, Asian and Middle Eastern companies expanded into base chemicals over the last 20 years at the expense of Western conglomerates. They took advantage of low-cost feedstock, low-cost labor, proximity to faster-growing consumer markets and lighter regulatory regimes to build significant production capacity and gain market share. It drove Western Chemicals companies to bring down costs, increase efficiency and develop new products. Asian and Middle Eastern Chemicals companies face headwinds today as high oil prices and changing regulations accelerate the process of customers moving away from virgin plastics. Consequently, GR professionals in the Chemicals business everywhere will be under pressure to add more value at the lowest cost possible.

We often see business leaders expecting GR to allocate resources towards defending existing policies only and retain the status quo. The sustainability trajectory the world is on is irreversible and requires the Chemicals industry to anticipate developments in the industry and relevant policy areas. We expect GR departments in the Chemicals industry to increasingly do so and at the same time develop new ways of working that allow them to spend more time advocating for the highest value objectives. This means saying no to ‘mission impossible requests’ aka ‘keep the status quo’ and finding creative ways to demonstrate new (business) opportunities.

Transparent lobbying and influence

Civil society no longer tolerates obscure, non-transparent dealings between governments and businesses to drive the policy agenda. The US, Canada, the EU, and the UK demand that relevant costs incurred, donations made, and meetings held are disclosed as part of the public record. The absence of such rules elsewhere or the lack of enforcement allows bribery and corruption scandals to persist, especially in regions with weaker institutions. Western countries will continue encouraging other nations to adopt similar regulations and record-keeping practices to create a level playing field. In addition, because board members are more frequently held to account personally and ethical standards tighten across most sectors, shareholders will become even more concerned with compliance than they are now.

We believe companies will prepare to disclose more information about their advocacy activities as part of the public record. Therefore, they will tighten their information management policies to improve record-keeping and allow auditors to test practices. It means GR professionals may need to report more details about their engagement activities, adopt more robust guidelines that drive their external engagement practices, and formulate programs that allow them to meet the expectations.

Nature of regulatory change

As the energy transition gathers pace, the regulatory environment is likely to react to increasing pressures in unpredictable ways. Every country, and within every country, every industry, is fighting to minimize the costs of policy adjustments. In the Chemicals sector, there is a looming possibility of a sudden wave of regulatory changes. In fact, a reform to the 2018 version of REACH (the EU’s regulation to ensure the safety of chemicals for human health and the environment), is expected to be adopted by the European Commission by Q1, 2023. It is likely that the revision will translate into stricter administrative requirements for companies to allow authorities to control chemicals compounds. Whether it will also lead to a reduced compliance burden for the industry as a whole remains to be seen. In the U.S, after failing to do so twice before, California’s landmark SB 54 legislation targeting single-use plastics managed to surprise industry when it finally passed in 2022.  And in China, the Action Plan on New Pollutants Governance, launched in May 2022, will set out a regulatory roadmap to control new chemicals and develop an environmental risk management system, which Is looking to expand China’s existing regulatory programs in this area before the end of 2025. We conclude that regulatory bodies relevant to the Chemicals industry are acting fast and broadening the scope of compounds included in their legislations.

We believe that in today’s high-pressure political climate, the pace of change in the regulatory framework will increase and impact the Chemicals industry disproportionately. GR Leaders notice that regulatory change has become a messy process and see the pace of change negatively influencing the quality of legislation. Because more is at stake, we believe that Government Affairs and Public Affairs as a function, alongside Sustainability, will become strategic differentiators especially for an industry such as Chemicals. We expect Chemicals companies will adjust their organizational structure accordingly.

What can GR-IQ bring to the table?

At GR-IQ, we believe there is tremendous value to be unlocked when government and the private sector in the Chemicals industry truly understand each other and collaborate more effectively. Our contribution? We use our GR expertise to identify opportunities to allow the corporate GR function to operate more effectively and efficiently whilst being culturally sensitive and experienced in guiding change. Are any themes in this note applicable to your situation, or would you like to exchange thoughts on other challenges? We’d love to hear from you and exchange ideas in a strictly confidential conversation. Feel free to reach out!

This article was co-authored by Enrico Cipelli.

Paul Beijer
Managing Director & Founder GR-IQ B.V
Phone: +31 6 5512 6017

Posted on November 15, 2022.