Archive for the 'chemical industry' Category

Sustainability and organic growth

Sustainability and organic growth

It has always struck me that managers do not really like organic growth. Entrepreneurs of new start-ups do but, when the entrepreneur is replaced by a manager, when the CEO no longer has any commercial background, but is an accountant or a lawyer, the focus seems to shift to mergers and acquisitions and constantly restructuring and reorganising the complicated org-charts.

What is wrong with organic growth? Nothing, it is just difficult to get ever more out of a business unless the business is constantly reinvented, reinvigorated by innovation.
In the May 2012 issue of the Harvard Business Review, Ken Favaro, David Meer and Samrat Sharma (all of Booz & Company) describe how to refocus on organic growth. The article merits reading in detail but let me give you some highlights that are relevant in relation to sustainability.

Sustainability is the new growth market

1. Corporate leaders have to be actively involved in the business. I.e. it is not the right approach to be setting targets in the plush comfort of HQ and demanding detailed reporting on progress. It leads, according to Favaoro and associates, to managers of operational units who “would rather succeed conservatively than fail bravely. This might be good for their careers but does little for growth.” Corporate leaders have to ensure that the areas of growth are identified and acted upon.

This is where I think, sustainability comes in. Sustainability is the new growth market. Corporate leaders will have to ensure that the operational managers transform their product development and sales efforts in such a way that the company becomes more sustainable (in more ways than one). This will mean investing in new products, new processes, new staff and training of existing employees.

Anti-cyclical investment in sustainability

2. The need to invest is counter to the austerity Pavlov reaction shown by most managers when faced with a slow down of the economy. Favaoro and associates  call this, “Fight the Business Cycle”.

It is now the time to invest in growth by investing in sustainability. Production companies should actively look at bio-based resources, and service companies should look at reducing their carbon footprint and redesigning their product offering to include sustainability.

Wärtsilä and sustainability

The latter brings me to an advertisement at the back of the Elsevier (a Dutch weekly magazine).
Wärtsilä offers to reduce the ecological footprint of ships in operation. It really is a sign of the times if a main producer of ship engines offers clients not just a fuel efficient engine but offers its clients total solutions including ballast water treatment and oily water separators. Wärtsilä has taken the message to heart that to sell it has to focus on so the solutions customers want and nowadays that includes sustainability.

Felix Gruijters

Innovate or reduce?

In this blog:

  1. Politicians should use the carrot and the stick, force energy saving in the short run and encourage innvation for the long term.
  2. A carbon tax putting a floor in the oil price or giving an advantage to low carbon products would be  a long term incentive to innovation.
  3. Irrespective of our (somewhat inert) politicians companies are introducing low carbon policies. They do this because they know their clients want it.
  4. Research has shown that companies which focus on low carbon policies are better at innovation creating their own future.
  5. It is therefore not surprising that PPR, owner of luxury brands Gucci and Yves Saint Laurent, announced it would follow Puma’s lead and present a full Environmental Profit & Loss account by 2015.

1. Question: Innovation OR reduction? Any problem has two solutions. Forego the wanted-end-result and stop causing the unwanted effect or achieve the same end result without the unwanted effect. In other words stop doing what you did or find a new way of doing it. Apply this to climate change and it explains why we have two competing climate policies.

1. On the one hand governments (its environmental arm), our finance departments and most environmentalists encourage us to use less energy. Saving on energy consumption does indeed reduce our green house gas emissions but if it leads to less production it erodes the economic fundamentals of a company. Reduction also does not fundamentally change the process, it means that we still emit green house gasses, reduction therefore only delays a process it does not stop it.

2. On the other hand the same governments (its industry and trade arm) and marketing departments will urge us to innovate. Innovation will create lasting new solutions to the challenges offered by climate change. The problem with innovation is that its occurrence and its effect cannot be predicted and forced. It is more a belief that it will occur. This uncertainty makes it less popular with the profits of climate doom and the environmentalists.

Answer: Innovation AND reduction! In the Harvard Business review of April 2012 these two approaches to climate change have been described and analysed. Roger Martin and Alison Kemper rightly conclude that to save our planet we will need both strategies. Innovation is obviously for the long term whereas reduction is to create a breathing space for a longer term solution. As both stratagies are necessary what should governments do? The answer form Martin and Kemper is clear: put a floor in the price of oil guaranteeing a long term outlook for new technologies.

2. Introduction of a carbon tax?

William Nordhaus the famous Yale professor in Economics and the environment has termed the Kyoto’s mechanism “inefficient and ineffective” and urged their replacement with a global carbon tax that would force consumers and companies, not governments to innovate. A floor in the price of oil or a global carbon tax will encourage innovation and, for the short term, encourage energy saving.With governments running out of cash, continued subsidising clean technology is under threat, a tax on, for instance, the carbon footprint would be a sensible alternative. This would be in line with the suggestion of the ACEA to use tax incentives to encourage the purchase of cars with low CO2 emissions.

3. Climate change has created its own momentum 

It is clear though that climate change has created its own momentum.
1. Irrespective of direct government regulation companies are adapting low carbon policies. This is in line with the findings during the 2012 Davos World Economic Forum: Rising GHG emissions are the third most important topic according to the particiapants. (Severe income disparity and chronic fiscal imbalances came respectively first and second).
2. According to a recent client survey performed by Rackspace, a datacentre in The Netherlands, clients preferred “sustainable partners” in their value chain as sustainability of a link in that chain reduces risk, improves efficiency and increase reward.”
 
4. Focus on climate change makes companies perform better!
 
Interestingly there is a very important side effect to this shift to low carbon policies. Focus on CSR increases innovation,
 
A survey conducted by Xueming Luo, Professor of marketing at the University of Texas and published in  HBR of April 2012 found that companies with a stronger than average focus (top third) on CSR brought out on average, 47 new products a year while companies in the bottom third brought out only 12. This effect is attributed to the fact a focus on CSR strengthens relationships with external stakeholders, including customers, suppliers, nonprofits, and governments. The focus on CSR provides access to a wide body of knowledge which help a company ton stay ahead of  shifts in market preferences, incorporate new technologies and facilitates creative leaps.
 
5. PPR is not afraid to be transparant about its environmental policies.
 
Already at the end of 2011 PPR announced that it would by 2015 provide a monetary valuation of the environmental impacts of its business operations and its supply chain. PPR expects, in line with the survey quoted above, that this approach will serve as a catalyst for the development of a truly sustainable business model.
 
 
 
 
 
 
 
 

Sustainability in the European Chemical Sector

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This blog is intended to as a contribution to the debate regarding the future of the chemical industry in The Netherlands (see http://www.heeftdechemietoekomst.nl). The topic is large and this blog will only touch on the main trends.  The trends now visible in society are clear and have already been spotted by senior politicians and by companies and industry bodies. In other words, this blog does not present some science fiction, way out, abstract, high level, view. No, on the contrary, this view of the developments relevant for the chemical industry are based on the current reality.

The chemical industry would appear to be between a rock and a hard place. On the one side the rock or shale of the US with all its cheap gas,and on the other side the hard reality of the booming economies of the East. For an international chemical company, it is not an immediate and natural choice to invest in the slow growing European economy.

Let me give you some numbers. The reserves of shale gas in the US are at larger than the current reserves of Russia and the price of gas on the Henry Hub Nymex Spot is approximately  € 5,7 per MWh which is  80% lower than the price in on the European TTF gas market and 50% lower than Asia. The economies in Asia are growing at an enviable pace, comparable to the growth rates in Europe in the 1960’s. To make matters worse, reports involving Ikea and Tata in the US would indicate that labour costs in the US and its “right to work states” are on their way down, faster than in Europe.


The fact is that the European market remains important, if only because of the number of consumers, and there should be nothing that stops European companies from benefiting from the economic growth in the rest of the world. But if you want to sell in competition, you will have to have a unique selling point. Where can the Europeans take a lead on their competition?

The economic situation is challenging, but, irrespective of the economic situation,  it is common sense that, to take a lead, one has to innovate. The lead created is greater if the innovation is more fundamental and if the innovation can be used to cater for a latent present demand. If on top of that government regulation were to favour that particular innovation, things can move quickly. So quickly that if a company is not at the fore front of it all, it will be left far behind.

Two things are important here: Firsty, innovation based on a major invention can create a giant leap forward. I will first focus on this giant leap in the first part of my presentation. Secondly, we all know that companies cannot sit still waiting for the next quantum leap. This means that in the mean time innovation by small steps is an absolute necessity to stay ahead of the competition.
Based on the trends as discussed below, it is a realistic possibility that the chemical industry in Europe will move quickly towards sustainability. Not only because its employees have the talent, but  because it will give them the lead required to win in the international competition.There are 5 big trends which together form the building blocks of the next quantum leap: the fundamental greening of the European economy.

The first major development is that it is the value of nature and all its resources that has been calculated by the World Bank and PWC. The value of all different aspects of nature from clean water to coal reserves, from pollination to mangrove forests, it has all been given an economic value. The total sum is 44 trillion dollars. Now that it is measured it can also be managed. We expect the cost of  environmental externalities to become a standard part of accounting. Chris Knight is one of the leading accountants in this field. He gave a succinct overview of the actvities of PWC, WAVES (Wealth Accounting and Valuation of EcoSystems) and the TEEB report (The Economics of the Environment and Biodiversity) during his presentation at the “Ecosystems Comes to Town” Conference in London on 18 October 2011. Examples from Volkswagen and Puma clearly show that the environmental impact of companies can be measured and given a monetary value. In Puma’s case PWC calculated that the impact it has on the environment is valued at 94 mln euro. Puma currently does not have to pay for these externalities but if it had to, it would halve its annual profit. Puma was the first company, but definitely not the last, to publish an Environmental Profit & Loss account. Companies that adapt their production taking into account nature and its value, will have an advantage over other companies.

The second major development is that we now know how much CO2 has been emitted to put a product on a shop shelf (or in a letterbox). Just as with the valuation of nature, this is supported by thorough scientific research sponsored by trustworthy institutes such as The British Standard Institute. Even better: independent apps such as the The GoodGuide App are available enabling customers to compare which products have emitted more or less compared to other products in the same category. Here too, we now have a way to measure and subsequently a way to manage. Reducing the CO2 emissions caused by the production of a product will become a competitive advantage.

The first and second mega trend together mean  that we can now calculate the value of a forest based on their ability to sequestrate CO2,and we can calculate how much CO2 has been emitted producing a product.  The importance of  this new possibility depends on the consumer, the politician and the investor. It is clear from the policies of companies such as DSM, AkzoNobel, Teijin Aramid and BASF that they have all recognized the importance of sustainability. The Dutch chemical industry association, the VNCI, described in its recent report on the future of the Dutch chemical industry, a future scenario in which third generation biomass will, in 15 years time, account for more than 15% of total feedstock for the chemical industry. The chemical industry in this scenario reacts to demand from the market. “Triggers for this scenario are the continued greening of consumers and the marketing strategies of consumer business companies like Nestlé, Philips, Unilever and the The Coca Cola Company.” The Coca Cola Company uses FIRA to verify its sustainability reports adding impartiality and trustworthy expertise to the report.

These companies are reacting to the third mega trend, a growing demand from customers for a reduction of CO2 emissions. Demand from customers is driven by emotion, not necessarily facts. In Europe, climate change is now the second most important topic according to a EU Poll. In the Netherlands we will, in the next 10 years, be faced with the consequences of the melting North Pole. It is now possible to sail to the North Pole at the height of summer in August , and the North Pole ice cap has retracted so far that Cairn Energy has started drilling test wells for the exploration of oil and gas in Greenland.  The rising water can be as much as 1,30 m for countries around the North Sea. As a consequence the iconic images of the next 10 years, here in North West Europe, will be the polar bear jumping from ice slate to ice slate to find the last bit of solid North Pole ice and, of citizens carrying sand bags to keep their feet dry. These consumers will want products and services with a lower CO2 count, giving an advantage to companies that take the environment into account when producing these products or delivering these services.

This emotion will be used by our politicians, they are the fourth mega trend. They will demand accounting principles which take the costs of externalities into account, and they will consequently use the fact that the carbon footprint can be calculated, to tax that footprint. A carbon tax on the carbon footprint will be a fair tax as it will tax the polluter. It will be accepted by the voters emotionally influenced by the perceived effect CO2 has on the climate, and it will be a welcome and necessary source of revenue for our governments chronically short of cash. The French government has taken the lead with Grenelle 2. Under Grenelle 2, 170 companies will give their products a carbon label as discussed above. The law states that this will be obligatory for all products sold in France. The recent decision by the European Parlaiment to reduce the allocated CO2 emission rights also proves the point.

It is possible that politicians will opt for an alternative measure, for instance a global introduction of cap and trade. This is less likely as it requires global rather than just European agreement. The result on consumer prices however will be the same. Producers creating less carbon will be at an advantage.

Finally the investor, the shareholder. Maybe I should have started with the pressure the shareholder are exerting. Currently, sustainability is an important aspect in the choice of investors. A point in case are the investment policies of major pension funds. All the funds are looking for long term security of income and have come to realise that companies rated highly in the Dow Jones Sustainability Index are a better investment than companies with a low or none DJSI rating. So far $ 8 billion has been invested in Dow Jones Sustainability Indices. It would not surprise me if the recent publication in Science regarding the production of plastics from biomass will attract a lot of attention from investors and that Dow Chemicals as one of the sponsors of the project will benefit most.

To summarize: some think that all the talk about climate change is a hype. The fact is that major clients of the chemical industry, the clients of those clients, politicians and investors all consider sustainability important. Therefore, a company able to use the fact that the carbon footprint can be exactly calculated, to fundamentally innovate its processes, its products and its services, will be the winner. It might well be that this change comes first to the EU and that Asia and the US will follow. Once they follow though, they will have a disadvantage.
Felix Gruijters

Amsterdam, spaklerweg 20

Phone     +31652091041
Email     felix.gruijters@nuon.com
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