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 Stone Richard Verity Partner Partner London Riyadh McKinsey & Company McKinsey & Company 2 2
Context Petrochemicals has suffered two simultaneous, shocks: Covid-19 and the oil price reduction 2007-09 2014-16 2019 Petrochemical value pool driven by high utilization Higher oil prices support value pools through steeper cost curves Falling oil prices also alert our customers to trigger price negotiations Finally, lower oil prices put A. Oil price pressure on profitability of B. Demand integrated O&G 1. Global ethylene chain utilization Source: IHSM McKinsey & Company 3
Even without these shocks, we forecasted lower growth… xx GDP 2 Petrochemicals 1 Petrochemicals growth vs. GDP Petrochemicals market growth 2019-2030 High % CAGR ≤ 3.8 ≤ 2.8 1.4x 1995-2005 2005-2019 Linkage remains same 4.7 No slowdown in demand 3.7 1.5x 3.2 1.4x 2.7 2019-2030 Low ≤ 3.1 ≤ 2.8 1.1x Increasing maturity of end markets and potential demand reduction 1. Total consumption of 85 petrochemical products 2. Baseline scenario for forecast Source: McKinsey Economic Analytics Platform, ICIS Supply & Demand, McKinsey analysis McKinsey & Company 4
These predictions do not yet include the impact of recycling Total coalition for Demand Mechanical Recovered Recovered feedstock Virgin Polymer Aggressive scenario – multi stakeholder push for recycling from change volume reduction 2 recycling monomer (plastic equivalent) feedstock CAGR 2050 share, Global polymer demand 2016-50 from waste recovery in million tons 2016-50, in % % of total 1 500 1,310 Ø 3 Σ 100 1,030 7 30 1 000 875 790 18 7 585 560 17 22 500 1 41 0 2016 20 25 30 35 40 45 2050 1.2x 1x Polymer to GDP growth 1 1. Actual growth after demand reduction, assuming global GDP growth of 3.1% (IHS) 2. IHS forecast, demand if current IHS projections until 2027 for plastic growth continue through to 2050 Source: McKinsey plastic waste stream model McKinsey & Company 5
What will be the next “value story” for Petrochemicals into the 2020s? Total return to shareholders (TRS) TRS USD, indexed, 100 = Dec 31, 2000 Compound annual growth rate, percent Dec 00- Dec 08- Dec 13- Dec 17- 800 Dec 19 Dec 19 Dec 19 Dec 19 700 600 10 13 7 -1 500 All Chemicals 1 400 300 200 100 MSCI world 6 12 9 9 0 01 03 05 07 09 11 13 15 17 19 Overall chem 1 MSCI world 1. Based on 194 chemical companies (excl. pure fertilizer) Source: CapitalIQ McKinsey & Company 6
ESG is a “megatrend” that is re-shaping the value-creation landscape 1 ESG is not just a “reporting exercise” – it requires CEO-level commitment and shapes all decisions in the organization 2 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 3 ESG leaders tap into multiple sources of value creation – i.e. purpose AND profit 4 The post-COVID-19 “next normal” will see rising government and societal expectations of corporates , elevating ESG even further on the agenda 5 ESG transformation is hard – requiring substantial trade-offs, authenticity (from the very top), and focused execution 6 There is a “tried and tested” methodology to design and deliver an ESG transformation focused on embedding ESG into the DNA of an organization McKinsey & Company McKinsey & Company 7 7
What is ESG? NOT EXHAUSTIVE Environmental Social Governance Climate change Human rights Bribery and corruption Resource depletion Modern slavery Executive pay Waste Child labor Board diversity and structure Pollution Working conditions Political lobbying and donations Deforestation Employee relations Tax strategy Water use Diversity & inclusion Transparency McKinsey & Company 8
ESG is no longer a “niche” topic in the capital markets Global sustainable investment assets, USD trillions 30.7 15% p.a. 22.9 18.3 13.3 2012 2014 2016 2018 33% Share of global 21% 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 McKinsey & Company 9
Returns are not compromised – rather the opposite Results from 2,000+ studies Share of 62.6 positive findings No clear advantage for Share of 8.0 any of the E, S or G negative findings factors Higher share of positive 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 findings for emerging markets Sophisticated strategies that combine ESG performance measures with sentiment measures to identify over/undervalued stocks can generate returns at the high end Effect consistent over time Source: ESG and financial performance: aggregated evidence from more than 2000 empirical studies; Gunnar Friede, Timo Busch and Alexander Bassen; Deutsche Asset & Wealth Management McKinsey & Company 10 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
ESG-leading companies tap into multiple potential sources of value Sources of value from a Primary strong purpose (examples) stakeholder Value created (examples) Example initiatives Attract B2B & B2C customers at a Customers Exploring rental / Topline 80% of consumers would switch price premium, with more sustainable “circular economy” growth to a brand supporting a cause if products and a highly differentiated brand business model to price and quality are equal unlock growth Policy & Achieve greater strategic freedom Policymakers 30-50% of EBITDA is at stake Demand supported through “win-win” regulatory and regulators by gov’t mandates regulatory from policy and regulatory changes outcomes and incentives for electric vehicles Reduce cost through sustainable Investors Verbund sites drive Cost 19-23% reduction in input practices (e.g., lower energy value through efficient reduction costs from “circular economy” consumption, lower water consumption) use of resources practices “Pioneering progress” Productivity Boost employee motivation and attract Employees 4pp uplift in RoA for companies a rallying cry for talent through greater sense of purpose uplift moving from bottom to top decile employees on clarity of purpose Investment Enhance ROI by leaning into societal Investors 1.1pp lower WACC for ESG Lower debt financing “tailwinds” (e.g., sustainability) cost by issuing & capex leaders over ESG laggards “green” debt Unlock a lower cost of capital by tapping into ESG/“green” finance Source: McKinsey ESG Practice; McKinsey Strategy & Corporate Finance Practice; IBM Analytics; Harvard Business Review; World Economic Forum – Ellen McKinsey & Company 11 MacArthur Foundation
The 4 tenets of world-class ESG engagement Engage boldly 4 1 Map your world Embed in Define your the business 3 2 contribution McKinsey & Company 12
2: DEFINE YOUR CONTRIBUTION Prioritization is crucial – you can’t be all things to all people Sample output of initiative mapping Impact and stakeholder trade-offs Stakeholder Win-win initiatives benefit High Societal/environmental impact Stakeholder(s) that benefit the most Theme 3 Employees Environment Suppliers Medium Investors Customers Low Theme 2 Theme 1 Very long term/ no Medium term or indirect Short term positive Immediate, direct positive impact positive profit impact profit impact positive profit impact (Moonshot/ Philanthropy) Shareholder impact McKinsey & Company 13
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