ESG considerations for rating chemicals companies: stakes are particularly high for pivotal sector

Confronted with high CO2 emissions and the dangers of plastic waste and chemical spills, Europe’s chemical companies are having to rethink production processes and how their products are used, presenting credit challenges and business opportunities.

The sector faces significant ESG challenges throughout the industry value chain amid increasingly intense scrutiny from regulators, policymakers, investors, and customers, says Scope Ratings.

In the context of rising costs, chemical companies have little choice but monitor the environmental impact of their facilities and products more closely with a view to reducing their harmful effects, Scope says in its latest study looking at the ESG considerations for rating different industrial sectors.

Social factors such as health and safety in the production process are gaining further prominence as they can significantly impact corporate performance.

“Few industries are as integrated into every segment of the economy as the chemical industry. Its complex value chain encompasses not only consumer goods and agriculture, but also energy, transportation, and infrastructure,” says Ivan Castro Campos, analyst at Scope.

The industry’s main environmental issues, pollution and health and safety risks, are material to their credit ratings. Failure to address them can impair their competitive position and creditworthiness – today or in the future.

“Conversely, chemical corporates that already made long-term sustainability a priority might be able to strengthen their credit profiles if these efforts result in better profit margins or higher cash flow generation,” says Eugenio Piliego, analyst at Scope.

Scope has identified four interdependent ESG themes most relevant to the chemicals sector:

Air, water, and soil pollution: Inefficient processes or inappropriate use of chemicals often lead to pollution of natural resources and/or toxic waste. Forced disposals and litigation costs can tie up significant financial resource or result in reputational risk that can drive changes in our business-risk analysis.
GHG-emissions and climate transition risk: Regulatory changes and public pressure present transition risks for chemical companies that could impinge on their creditworthiness, most notably in Europe with the introduction of the European Union’s Green Deal in 2022 aimed at a carbon-neutral economy by 2050.
Resource efficiency, innovation, and circular economics: The chemicals production process often requires large quantities of fossil-fuel-based raw materials, as well as significant amounts of energy and water. Investments to improve the resource efficiency across the value chain can also improve cost efficiency. Furthermore, avoidance or minimisation of single-use plastics contributes to a leaner cost structure in the long term by optimising transportation and storage costs.
Health and safety of employees: Safety concerns regarding the production processes of chemical corporates have dramatically increased over recent decades in reaction to chemical accidents (e.g., explosions, fires, spills). Severe reputational damage and its consequences, such as making recruitment harder, can negatively impact a company’s credit rating.

Download the report