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ESG - a competitive advantage for Petrochemicals? Discussion Document June 2020 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited Quick introductions Matt
CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission
June 2020
Discussion Document
McKinsey & Company 2
Matt Stone
Partner London
Richard Verity
Partner Riyadh
McKinsey & Company 2
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2019 2014-16
Context 1. Global ethylene chain utilization Source: IHSM
2007-09
Petrochemical value pool driven by high utilization Higher oil prices support value pools through steeper cost curves Falling oil prices also alert
price negotiations Finally, lower oil prices put pressure on profitability of integrated O&G
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2019-2030 High 2019-2030 Low 2005-2019 1995-2005
Source: McKinsey Economic Analytics Platform, ICIS Supply & Demand, McKinsey analysis
GDP2 Petrochemicals1
Petrochemicals market growth
3.2 4.7 2.7 3.7 ≤ 2.8 ≤ 3.8 ≤ 3.1 ≤ 2.8 1.4x 1.1x % CAGR Linkage remains same No slowdown in demand Increasing maturity of end markets and potential demand reduction 1.5x 1.4x
Petrochemicals growth vs. GDP
xx
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1 500 500 1 000 2016 30 20 25 560 585 2050 35 45 790 40 1,030 875 1,310
Source: McKinsey plastic waste stream model
Polymer from Total coalition for change volume Mechanical recycling Recovered feedstock (plastic equivalent) Demand reduction2 Recovered monomer Virgin feedstock
CAGR 2016-50, in %
18 7 17 22 1 41 7 30 Ø 3 Σ 100
Global polymer demand 2016-50 from waste recovery in million tons 2050 share,
% of total 1x 1.2x Polymer to GDP growth1
Aggressive scenario – multi stakeholder push for recycling
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100 700 200 300 600 400 500 800 19 01 03 05 07 09 11 13 15 17 Overall chem1 MSCI world 10 6 All Chemicals1 MSCI world
Source: CapitalIQ
Total return to shareholders (TRS)
USD, indexed, 100 = Dec 31, 2000
TRS
Compound annual growth rate, percent
Dec 08- Dec 19 Dec 13- Dec 19 Dec 00- Dec 19 Dec 17- Dec 19
13 12 7 9
9
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ESG is not just a “reporting exercise” – it requires CEO-level commitment and shapes all decisions in the organization
The post-COVID-19 “next normal” will see rising government and societal expectations of corporates, elevating ESG even further on the agenda There is a “tried and tested” methodology to design and deliver an ESG transformation focused on embedding ESG into the DNA of an organization
ESG leaders tap into multiple sources of value creation – i.e. purpose AND profit ESG transformation is hard – requiring substantial trade-offs, authenticity (from the very top), and focused execution
ESG is a negotiation between the company and wider society – your legitimacy derives from how you embed it and how you are seen to live it
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Social Governance Environmental
Climate change Resource depletion Waste Pollution Deforestation Water use Human rights Modern slavery Child labor Working conditions Employee relations Diversity & inclusion Bribery and corruption Executive pay Board diversity and structure Political lobbying and donations Tax strategy Transparency
NOT EXHAUSTIVE
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Global sustainable investment assets, USD trillions 13.3 18.3 22.9 30.7 2012 2014 2016 2018
15% p.a.
Share of global professionally managed assets
Note: Growth 2012-2016 somewhat understated as definition for what is accounted for as sustainable investing strategies is narrowed down in Europe since 2012 Source: Global Sustainable Investment Alliance
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Results from 2,000+ studies
ESG factors can improve equity returns by 2-7% p.a. using both tilt and momentum strategy; forming the basis for long-term sustainable performance Sophisticated strategies that combine ESG performance measures with sentiment measures to identify over/undervalued stocks can generate returns at the high end 62.6 Share of positive findings 8.0 Share of negative findings
Source: ESG and financial performance: aggregated evidence from more than 2000 empirical studies; Gunnar Friede, Timo Busch and Alexander Bassen; Deutsche Asset & Wealth Management Investment, Frankfurt am Main, Germany; School of Business, Economics and Social Science, University of Hamburg, Hamburg, Germany (2015). Khan, Serafeim & Yoon, 2016; Nagy, Kassam & Lee, 2015; Eccles, Ioannou & Serafeim, 2014; Serafeim, 2018; Witold Henisz
No clear advantage for any of the E, S or G factors Higher share of positive findings for emerging markets Effect consistent over time
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Source: McKinsey ESG Practice; McKinsey Strategy & Corporate Finance Practice; IBM Analytics; Harvard Business Review; World Economic Forum – Ellen MacArthur Foundation
Sources of value from a strong purpose (examples) Primary stakeholder Value created (examples) Example initiatives
Topline growth
Attract B2B & B2C customers at a price premium, with more sustainable products and a highly differentiated brand Customers
80% of consumers would switch
to a brand supporting a cause if price and quality are equal Exploring rental / “circular economy” business model to unlock growth
Policy & regulatory
Achieve greater strategic freedom through “win-win” regulatory
Policymakers and regulators
30-50% of EBITDA is at stake
from policy and regulatory changes
Cost reduction
Reduce cost through sustainable practices (e.g., lower energy consumption, lower water consumption) Investors
19-23% reduction in input
costs from “circular economy” practices Verbund sites drive value through efficient use of resources
Investment & capex
Enhance ROI by leaning into societal “tailwinds” (e.g., sustainability) Unlock a lower cost of capital by tapping into ESG/“green” finance Investors
1.1pp lower WACC for ESG
leaders over ESG laggards
Productivity uplift
Boost employee motivation and attract talent through greater sense of purpose Employees
4pp uplift in RoA for companies
moving from bottom to top decile
Demand supported by gov’t mandates and incentives for electric vehicles Lower debt financing cost by issuing “green” debt “Pioneering progress” a rallying cry for employees
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Sample output of initiative mapping
Stakeholder benefit Stakeholder(s) that benefit the most Employees Environment Suppliers Investors Customers
Impact and stakeholder trade-offs
Very long term/ no positive impact (Moonshot/ Philanthropy) Medium term or indirect positive profit impact Short term positive profit impact Immediate, direct positive profit impact Societal/environmental impact Shareholder impact
Theme 2 Theme 3
High Medium Low
Theme 1 Win-win initiatives
2: DEFINE YOUR CONTRIBUTION
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Source: McKinsey Culture Scania holds an annual “Climate Day” and stops
line with their purpose to “drive the shift towards a sustainable transport system” Talent Aetna raised the pay of low-wage workers in line with their purpose to “promote wellness, health, and access to high-quality health care for everyone, while supporting the communities we serve” Governance & performance management Toshiba measures its success of 2030 strategy against SDG goals in line with its purpose to “make and do things that lead to a better world” Operations Unilever aims to reduce environmental impact (greenhouse gases, water and waste) by 50% by 2030 in line with purpose to “make sustainable living commonplace” Supply chain Walmart introduced “Project Gigaton” in 2017 , with the
greenhouse gases from the global value chain by 2030. Hundreds of suppliers are now on board, and get credit from Walmart for the progress they make on sustainability. External engagement Unilever ceased to publish quarterly reports, to encourage longer-term decision making in term with purpose to be “sustainable” Capital allocation Microsoft levies an internal carbon tax, with funds reinvested in reduced energy consumption, increased purchasing of clean energy, and offset project investment, in line with purpose to “change the world for the better” Product and customers CVS Health exited tobacco products, which represented $2bn of their annual revenues – they didn’t align with CVS’ purpose to “help people on their path to better health” Portfolio Rio Tinto exited from coal production in line with their purpose to “produce materials essential to human progress”
7 5 1 3 9 6 8 2 4
Ways of working Core business activities Corporate strategy 3: EMBED IN THE BUSINESS
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1 While CDP is commonly attributed as a standard, it is not but a questionnaire and specialist system for corporations to disclose environmental sustainability information 2 E.g. Impact on business strategy execution, financial performance, value creation
Scope of environmental information only Incorporates forward-looking elements
Framework Principles for “how” a corporate report is to be structured
Type of instrument
Standards Detailed requirements on disclosures, i.e. “what” to be reported for each topic SASB GRI IR CDBS Externalities Business material information Disclosure of matters with effect on business2 Disclosure of matters with impact on society/environment
Reporting focus
1
TCFD CDBS SASB EPIC Integrated Focused
Source: Team Analysis; Expert interviews; documents of each reporting standard/framework
Simplified view
~1,600 ~400 ~1,000 139 n/a ~2,700 ~11,000
# corporations who have adopted xx
4: ENGAGE RADICALLY
Matt Stone matt_stone@mckinsey.com Richard Verity richard_verity@mckinsey.com