Sustainability's Uncertain Path

Balancing Challenges for Materials Execs -

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In recent years, sustainability has been hailed as the key to future-proofing business strategies across industries, with promises of both environmental and economic returns. However, the current business climate presents a more complex picture for materials executives. Recent developments suggest a need for a critical reassessment of the assumptions linking sustainability initiatives with guaranteed financial success. This post delves into the trends in sustainability and their implications for materials investments, urging executives to re-evaluate their strategies amid changing economic and policy landscapes.

The Shifting Landscape: Recent Developments

Several notable events are examples of the ongoing reassessment of sustainability-linked investments. British Petroleum (BP), once a champion of renewable energy transition, has recalibrated its strategies, highlighting the challenges associated with green investments. This shift is reflective of a broader trend among financial investors who are reevaluating the anticipated returns from sustainability projects including Blackrock. Moreover, high-profile setbacks, such as battery manufacturer failures and Ford's decision to idle its electric F-150 plant among others, underscore the difficulties facing the electric vehicle sector despite substantial investments.

On the policy front, fears of de-industrialization in Europe due to energy transition policies dominate European political discussions. Canada’s rollback of its carbon trading price to zero, coupled with uncertainties surrounding wind and solar projects in the US further complicate the sustainability narrative. These developments point to a broader reality: the long-held belief that sustainability aligns with financial returns is under scrutiny.

Contextualizing the Challenges

To understand the implications of these sustainability trends, it is essential to contextualize them within the global materials business environment.

Distinctly separate from sustainability trends, and as we detailed in a previous newsletter issue, the global chemicals industry, a cornerstone of industrial production, is experiencing a significant downturn due to oversupply in Asia. Some believe that without significant capacity rationalization, this downturn could be decade-long making it unprecedented in recent history. With compressed margins, reduced volumes, and constrained investment funding, materials executives must navigate a challenging economic landscape. 

Actionable Insights for Materials Executives

Given these economic realities within the materials sector, and sustainability shifts more broadly, these developments necessitate a re-examination of growth assumptions tied to sustainability investments. The fundamental, pressing question is how these investments fare across different economic and policy constraints. We think executives must reassess their initiatives through several different lenses:

1. Cash-Constraint: In a landscape where financial resources are limited, it is crucial to evaluate how sustainability solutions perform in a cost-competitive environment. Do they deliver enough value to justify their cost?
2. Capital-Constraint: Today's sustainability technologies often involve higher than normal upfront investments. Executives need to consider whether the capital requirements align with those of incumbent solutions and the feasibility of securing necessary investments.
3. Policy-Constraint: With the possibility of fluctuating policy support, such as credits and subsidies, materials leaders must assess the viability of their business models in less favorable policy climates. We encourage business leaders to always use as a baseline scenario, the absence of any policy support.
4. Across the Value Chain: this critical evaluation extends up and down the value chain. Leaders must question how these constraints impact all segments of the value chain they participate in. For example, capital investment requirements in other parts of the value chain and their likelihood must be factored in.

Evaluating Sustainability Initiatives by Risk

Sustainability investments vary distinctly and that must be factored into the assessments. We categorize sustainability initiatives into three distinct risk pools, each warranting a tailored approach:

• Productivity, Efficiency, Performance, and Safety: This low-risk category reflects traditional materials industry initiatives that enhance productivity and performance. Examples include innovations that use less energy and/or material such as thin-gauging and light-weighting of plastics as well as materials with improved health and safety profiles, such as alternatives to PFAS. These initiatives are likely to continue thriving, as they align with established industry practices.
• Circular Economy: This category involves more complex business models aimed at using renewable or recycled feedstocks. Examples include bioplastics and plastics recycling technologies. Here, the focus must be on scrutinizing cash and capital dynamics, as these initiatives often involve intricate new value chains. Simpler models with fewer conversion steps and costs, and those that recycle into higher-value applications, are likelier to succeed. In addition, low capital investment profiles for new value chain players will be favored.
• Energy Transition: The highest-risk category involves transitioning to renewable energy sources and the materials and systems supporting them. Examples include electrification (batteries, EVs, solar, wind) and carbon capture. The challenge here is that materials play a supporting role, and so leaders must re-examine the fundamentals of the transition dynamics on the adjacent playing field. Given the viability concerns and investment scrutiny facing many energy options, materials leaders should temper growth expectations and focus on niche areas where these technologies offer unique value.
  An insightful article in Foreign Affairs, authored by S&P Global Senior Vice President Daniel Yergin and his colleagues, underscores the formidable trade-offs between economic development, energy security, and low-carbon scenarios. At the core, a historical precedent for a linear, seamless transition to renewables is lacking, suggesting that a more slowly-developing coexistence between renewable and conventional energy sources is a more likely outcome.

The current sustainability landscape presents both challenges and opportunities for materials executives. The key will be to rapidly re-assess previous growth plans, retrench to those segments where growth is still viable, and then look for new opportunities that fit the new context. By re-assessing the fundamentals at play, materials leaders can make informed decisions that align with both sustainability goals and financial realities. Leaders who are slow to respond, and stick to prior plans risk disappointment and under-performance.

Until next week,

Kendall -

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