WORKING PAPER SERIES

CSM/WWF Research Project: The Business Case for Sustainability

CHEMICAL INDUSTRY Sector Report Claudia Schindel IMD 2003-7

Claudia Schindel Research Associate/PHD Candidate Forum for Corporate Sustainability Management International Institute for Management Development (IMD) 23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne Tel: +41 21 618 0111 Bonnerstrasse 29, D-80804 München Tel: + 49 89 3000 5670 Fax: + 49 89 3000 5670 E-mail: [email protected]

Copyright © 2003 Schindel All Rights Reserved

Executive Summary: Building a Robust Business Case for Sustainability in the Chemical Industry

The potential and nature of a business case for sustainability in companies in the chemical sector have been investigated through surveys and interviews with representatives of chemical companies and stakeholders of the chemical industry. The goal of the research was to determine in how far improved environmental and social performance beyond compliance can be beneficial for the company. An analysis of competition in the chemical industry has lead to the conclusion that the high degree of rivalry is mainly based on quality and price competition. This is also due to the mostly industrial customers, who are often in a quite powerful negotiating position and are rarely willing pay a premium for more sustainable products. While the threat of substitution products, mainly driven by regulation, is quite high and encourages the development of more sustainable alternatives, the threat of new entrants into the market is rather low due to the high investments required. The weaker bargaining power of the industry’s suppliers gives chemical companies the possibility to improve their sustainability performance. Along the supply chain of the chemical industry there are many potential product and production related effects on the environment and society. Many of these sustainability issues have an important economic relevance for the companies, mainly because of additional costs, fees and litigation. These are usually due to reduce the concerns of stakeholder groups, like the health of consumers, neighbouring communities or environmental protection. The way companies manage corporate sustainability issues varies with the prevailing organizational goals and values. While a more technically oriented business culture does not necessarily stimulate the integration of sustainability thinking, the historically strong safety, health and environment culture represents a sound basis to be expanded to other sustainability concerns. The strategic approach to sustainability is often a mixture of avoiding the negative consequences of the general trend towards sustainable development and an active search for business opportunities. The organizational structures, procedures and systems to manage such strategic goals are quite different from company to company. The main thread appears to be clear support by the board, the appointment of a responsible sustainability officer and the involvement of and networking by the key people in all business functions and business units, in order to consistently take into consideration sustainability concerns in their decision making. The assessment of the business case for sustainability in the chemical industry has revealed that the integration of sustainability thinking in the decision making can lead to many new opportunities. The potential for efficiency gains still has not been fully exploited, and by developing more sustainable products, product use and production alternatives companies can improve their competitive edge and set new market standards, before governments do so with new regulations.

Building a Robust Business Case for Sustainability in the Chemical Industry 1

GOAL OF THE RESEARCH......................................................................................... 2

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INDUSTRY AND COMPETITIVE ANALYSIS .......................................................... 2

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SUSTAINABILITY ISSUES AND THEIR ECONOMIC RELEVANCE ................. 4 3.1 3.2 3.3 3.4 3.5

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SUPPLY FOR THE CHEMICAL INDUSTRY ....................................................................... 4 PRODUCTION PROCESSES OF THE CHEMICAL INDUSTRY.............................................. 4 PRODUCTS OF THE CHEMICAL INDUSTRY .................................................................... 5 STAKEHOLDERS’ CONCERNS AND ACTIVITIES ............................................................ 6 ECONOMIC RATIONALE FOR CORPORATE SUSTAINABILITY......................................... 7

CORPORATE SUSTAINABILITY MANAGEMENT................................................ 8 4.1 PREVAILING ORGANIZATIONAL GOALS AND CULTURE ............................................... 8 4.2 GENERAL SUSTAINABILITY STRATEGY ....................................................................... 9 4.3 ORGANIZATIONAL PROCESSES, STRUCTURES AND SYSTEMS ...................................... 9 4.3.1 First Steps – Creation of a Sustainability Officer .............................................. 9 4.3.2 Sustainability-related Processes in the Business Functions ............................ 10 4.3.3 Implementation and Maintenance of Integrated Sustainability Processes ...... 14 4.3.3.1 Sustainability Officer ................................................................................... 14 4.3.3.2 Sustainability in the Line Management........................................................ 15 4.3.3.3 Sustainability Organization .......................................................................... 15

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ASSESSMENT OF THE BUSINESS CASE ............................................................... 16

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CONCLUSION............................................................................................................... 17

Graphs Graph 1: Industry Analysis ........................................................................................................ 3 Graph 2: Field of Sustainability Issues ...................................................................................... 4 Graph 3: Sustainability Strategy Approaches ............................................................................ 9 Graph 4: Business Functions.................................................................................................... 10 Graph 5: Sustainability Organization....................................................................................... 14

Building a Robust Business Case for Sustainability in the Chemical Industry “Yet another management system taking up resources in bureaucratic administrative work…” These words may well express the prevalent views amongst general managers once confronted with the concept of sustainability management. Many people have seen and still view sustainability management as an issue very similar to quality management. In fact, the topic of sustainability is far more complex than that of quality. Even with our restriction of sustainability to social and environmental issues in the context of business, where economic survival with the creation of profit is generally acknowledged to be the primary condition, a conventional management system will find it difficult to deal with the complexity of this concept in a meaningful way. Is this good or bad news? Definitely, the explicit integration of social and environmental aspects to the concept of sustainability is a challenge with which industry is confronted today.

1 Goal of the Research We have investigated the building of a Robust Business Case for Sustainability (BCS) – meaning in our context the development of a strategy enabling a company to create value by means of improving environmental performance (e.g. by increase eco-efficiency or reducing pollution) and social performance (e.g. engage in community development) beyond compliance. Thus, the basic research question underlying this research project has been: Is there a business case for sustainability that is clearly reflected in company strategies and operational activities and is open to assessment, reporting and monitoring? And if so: What does it look like? Besides the study of related literature, we have gathered empirical information about the practice and experience of sustainability management in three different ways: We have conducted in-depth interviews with 23 representatives from 12 companies in the chemical industry, and with six representatives of three related stakeholder organizations. Further, a questionnaire has been completed by sustainability officers in chemical companies, and finally, general managers have revealed their attitudes to sustainability management via a separate questionnaire. The term “general manager” refers to all managers that are not explicitly involved in sustainability management. The proceeding and results have been regularly assessed by an Advisory Council composed of seven experts in the field of sustainability management.

2 Industry and Competitive Analysis Virtually every man-made product is manufactured using chemicals. The products as well as the companies in the chemical industry are diverse. In this study, the chemical industry is defined as comprising commodity chemicals, specialty chemicals, consumer care products and life-science products. However, life-science stands for agrochemicals and biotechnology, while pharmaceuticals are treated in a separate study due to their particular role in social development. Weak Threat of New Entrants

Weak Supplier Bargaining Power

Strong Degree of Rivalry

Strong Customer Bargaining Power

Weak Threat of Substitutes

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Graph 1: Industry Analysis

Degree of Rivalry The degree of rivalry is generally high in the chemical industry, which in the commodity business has lead to domination by price considerations and pressure to increase productivity. Furthermore, there is a strong incentive to innovate for increased efficiency on the one hand, and for differentiation in the specialty chemicals and biotech businesses on the other hand, which in some cases have led to the development of niche markets with less rivalry. This is also reflected in the extensive array of company types, with certain chemical companies belonging to the largest companies in the world, but the majority of chemical companies being relatively small in size. With the larger companies producing major quantities of a variety of chemicals, and the smaller companies manufacturing only a few or even one single special product, the large corporations account for the major volume of chemicals sold, with the total of small producers accounting for the majority of different types of chemicals sold. As globalization is still intensifying, the chemical industry has seen a lot of restructuring, mainly within the top companies as well as for the whole industry, leading to an increased concentration of the industry. The complexity of the relations within the chemical industry is further reflected in the trade balances between the producing companies and countries. A major part of the national chemicals production is sold locally and another big part is sold within OECD countries. Most of the purchases and in particular the sales by non-OECD countries have only been rising significantly within the last two decades. Threat of Substitutes One of the main promoters of substitution processes for the chemical industry is regulation. By restricting or prohibiting the use of certain chemical substances or processes, authorities encourage the development of alternative substances. An influence in this direction is to be expected with the current review of the EU chemicals policy. The advancing shift to a focus on providing solutions instead of products shows that the chemical industry is somehow on its way to incorporate the threat of substitution products into the industry. This approach is opening the borders to new activities, new technologies and new alliances. Buyer Power The large range of products of the chemical industry from bulk chemicals, specialty chemicals to consumer products implies a variety of customers. Many products are sold to other chemical companies, other products to manufacturing industries, others directly to households. The chemical industry is characterized by complex production chains. For many products there are powerful buyers, such as auto manufacturers for paints, and price competition is dominating the mature markets of basic chemicals. In the markets for specialty chemicals and biotech products there are often niches in which the company and its client are strongly interdependent. Overall, in the developed world the growth of the consumption of chemicals is slowing down, while in developing countries the demand for chemicals is continuing to increase strongly. Supplier Power The suppliers to the chemical industry are in general rather weak, given that the input for the chemical industry mostly consists of raw materials like oil, coal, gas, air, water and minerals. Many of the chemical substances derived from these raw materials are input for further chemicals production, making the chemical industry an important supplier to itself. These standardized basic raw material products are often subjected to strong price competition. Barriers to Entry

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The chemical industry is generally defined by specific technological know-how in research and process engineering, further by a large capital and management capacity, and finally by a skilled and technically competent workforce. The markets for commodity chemicals are easy to enter with the limited brand franchise and generally common technologies used, but a threshold is the very large scale and the huge investments required. With regard to specialty chemicals and biotechnology the weight of these factors is quite different, requiring in the first place patented or proprietary know-how with a relatively low scale threshold. For all sub-sectors entrance is difficult due to the specialized assets and the inter-relatedness of the business.

3 Sustainability Issues and their Economic Relevance Only the disappearance of the chemical industry overnight would make today’s society realize to which extent chemicals are integrated in our world and our daily lives. But on the other hand, throughout the life-cycle of a chemical product there is a potential for negative environmental and/or social impacts, which could lead to increased costs for the producing companies. Production Processes

Supply

Products

Chemical Industry Environment + Society Customers Competitors

Investors

Regulators

Industry Initiatives

Internal Drive NGOs

Media

Graph 2: Field of Sustainability Issues

In the following, a general picture will be drawn with regard to the effects the activities of the chemical industry along its supply chain on the environment, as well as directly on the well-being of society, human health and wealth. The impact of environmental pollution on human health is not mentioned separately.

3.1 Supply to the Chemical Industry Environment Raw materials – As a major user of raw materials for input, the chemical industry can significantly impact the depletion of non-renewable resources. With its size, the chemical industry can influence its supply markets and influence the rules of these markets, including the demand for the development of alternative resources. The development of alternative solutions relying on renewables can help companies increase their own power as buyers of materials which become scarce and therefore more expensive. Society Health – Health standards of the suppliers can sometimes be influenced by the buyers. Wealth – The importance of the chemical industry in their supply markets has an influence on the development of the wealth in various regions of the world, and can create new markets for the industry.

3.2 Production Processes of the Chemical Industry Environment

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Spills and accidents – This industry has a particular history of incidents due to the hazardousness of substances and processes handled, and accidents can be very dangerous for the workforce and have a huge impact outside the company’s premises. Incidents occur during the production processes and also during transportation between processes, stocks or companies. With the increase of restrictions and fees as a consequence of domestic or foreign incidents, safety has become such an important issue for the chemical industry that the evolution of safety standards has lead to the creation of the initiative Responsible Care to improve the performance of the whole industry. Energy – The chemical industry is a major energy consumer, with chemical companies sometimes operating their own energy production facilities, giving them another impact on the use of nonrenewable resources and making them partly independent on the general energy market and oil prices. Water – Although the consumption of water in the chemical industry is high in comparison to other industries, it should be remembered that agriculture uses more water than all manufacturing industries together. A problem with the use of water for cooling processes arises when the water is returned to a river warmer than it was when taken out, and this can damage the ecosystem. The use of water has therefore become a cost factor, and chemical companies are obliged to treat the water before returning it to nature. Emissions – The chemical industry has often been in the spotlight for its emissions of chemical substances to the air, water and soil. The general noise level of the industry, however, has never been an important issue. The high consumption of energy and the combustion of hydrocarbons during production processes result in the release to the air of the "greenhouse" gas carbon dioxide, volatile organic compounds and nitrogen oxides, contributing to the building of tropospheric ozone (smog). In order to protect society and nature extensive regulation has been developed, and more is still to come, forcing industry to develop solutions with reduced emissions. Waste and by-products – The production of chemicals can create hazardous waste or by-products. These can pollute the environment if they are not treated, stored or disposed of safely. Waste disposal produces additional costs, and related pollution can lead to the payment of fees, whereas the re-use or sale of such substances can be of benefit to the producing companies. Society Health - Hazardous pollutants can be emitted during the processing of chemical substances, e.g. through smokestacks. Workers handling pollutants may be exposed to a health danger by constantly absorbing substances, which may only turn out to be harmful after a certain quantity has accumulated in their bodies, or after a certain period of time. Payments and litigation costs related to harmed employees or affected populations can be the consequence. Wealth – The chemical industry is a major employer, which gives it the means to provide good working conditions, including salaries and ethical standards, and also the possibility to earn good money for many people. However, many chemical companies have reduced their workforces in 2001 and in 2002, largely as a result of recent mergers in order to improve their financial performance. Chemical companies can contribute to the economic development of the poorer regions of the world as potential markets, with their potential positive impact of creating an infrastructure for wealth creation and democracy, and also the potential negative impact of creating a dependence through industrial mono-culture and pollution.

3.3 Products of the Chemical Industry Environment Product use – Products of the chemical industry can be harmful to the environment and society through their use. The design of the products and services sold together with them can help improve the safety and efficiency of the chemicals used in customers' manufacturing processes and contained in consumer products. Adverse effects from product use can lead to the payment of fees, compensations, decontamination costs and provoke an increase of regulation.

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Product disposal – The disposal of chemical products can cause problems through the release of pollutants into the environment. By improving the re-cycling capabilities of chemical substances and developing non-polluting alternatives the chemical industry can reduce the environmental impact of its own and other industries. Companies can also take back used products for re-cycling or re-use and thereby lower their costs, and sometimes they can even create income by offering take-back or closedloop systems to their customers. Society Health – Some chemical products may endanger the health of their users, causing allergies or intoxication, while other protect them from dangers and illnesses. By offering safer chemicals, in particular when contained in consumer products, companies can have a competitive advantage. Wealth – With chemical engineering being the driving force of innovation for many products, the industry can provide developing countries with cheaper products in particular foods, e.g. with chemical substances to improve the agricultural productivity and expand their markets.

3.4 Stakeholders’ Concerns and Activities According to the company representatives interviewed in this study, there are no particular stakeholders exerting pressure on them. Certain pressure appears to be coming equally from all parties and also from inside the companies themselves. Customers The main customers, which are the chemical industry itself and the manufacturing industries, demand the best quality/price ratio. Industrial customers are willing to pay for services delivered with the product, which usually help them to save product usage and costs. In the market for consumer chemicals there are a few niches for particularly environmentally friendly products, but even the final consumers are still reluctant to pay more for a more "sustainable product". Investors The capital markets do not represent any particular motivation for more sustainable behavior of the chemical industry up to now. Nevertheless, ecological and ethical funds are slowly growing and represent some 5-10% of today’s investors. What counts for investors is the general reputation of a company and how promising or risky its strategies are and, obviously, both these factors can be influenced by environmental and social aspects. Regulators The relationship between an important economic force like the chemical industry and the respective governments is, not surprisingly, very complex. It is characterized by collaboration on the one hand, and the public desire for more precautionary regulations versus the desire for self-regulation by the industry on the other hand. The chemical industry is one of the most regulated industrial sectors and regulation still keeps increasing, with the emissions trading system and the elaboration of a new EU chemicals policy striving for more transparency of the hazardousness of the chemicals in the market and a replacement of the more dangerous ones. Competitors Depending on the sub-sector within the chemical industry, companies compete strongly on price and quality leadership above all in basic chemicals, and differentiation through particular products and services or "solutions". Industry Initiatives A huge industry like the chemical industry does have historically strong industry initiatives on national and international levels. It is important to mention again that the majority of chemical companies, and therefore the main groups or "clients" of these associations (VCI, CEFIC, ICCA, etc.) are small and medium-sized companies.

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There are important chemical companies participating and sharing social and environmental success stories in sustainability related initiatives like the WBCSD, Econsense, and Global Compact. Still, the most important is the initiative Responsible Care, which is concerned with continuously improving environmental safety and health performance of the industry worldwide. Internal Companies of the chemical industry recognize an internal drive for making their businesses more sustainable, mainly due to an increasing knowledge about the risks and opportunities arising from the integration of sustainability thinking. NGOs Environmental NGOs did play an important role with alarming campaigns in the past but are not perceived as an active threat at present. Some NGOs work together with chemical companies, mainly at a local and very specific level, such as to save a local species of birds. Major recent campaigns have concerned the topics of GMOs and green biotechnology. Media Media are considered important by chemical companies, because negative media campaigns have proven to have the potential to harm the publicly known and very valuable brands of chemicals or chemical companies.

3.5 Economic Rationale for Corporate Sustainability Now, what do these beneficial or detrimental social and environmental impacts of the chemical industry and the demands of its stakeholders mean to a chemical company? How can a company create tangible (cost savings, innovation, risk, investment) or intangible values (brand, reputation) from this situation? Clearly the opportunities and threats arising from sustainable development vary with products and regions, so in the following only an overview is given of the value drivers and barriers to sustainability management in the chemical sector. Internal View Looking at the value chain, it is clear that cost reductions through the savings on raw materials, savings on energy, substance re-use or re-cycling, avoidance of disposal fees, avoidance of litigation, and the avoidance of fines, deliver tangible benefits as soon as the savings are greater than the costs incurred to achieve them. Cost savings are among the most important value drivers at present. For the chemicals business, environmental risks play a particularly important role and have long been integrated in the overall risk management of chemical companies. The responsible management of risks is a self-evident part of today’s management. The traditionally innovation-driven industry sector can in the future harvest the benefits from first-mover advantage by investing in the development of alternative, more environmentally friendly process or product alternatives. External View Probably one of the best reasons for a company to behave as a responsible citizen is to not only maintain its license to operate (LTO), but also to have a trustful relationship with the local government and community. This can make life much more comfortable and save resources for the company. Regulations' influence on the contribution of the chemical industry to sustainable development is twofold. On the one hand, regulation or even the expectation of regulation can trigger innovation through (potential future) punishment. On the other hand, very tight regulation that does not leave room for industry to find effective ways for performance improvement can impair the competitive situation of the industry. However, regulation like the new EU chemicals policy clearly does support the development of alternatives.

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The importance and vulnerability of chemical brands varies naturally between commodities and specialty or consumer products. The names of the chemical companies and their brands usually stand for quality, even if not necessarily for sustainability. Still, the environmental dimension and the health aspects of the social dimension are closely related to the perception of quality, and bad news in this respect can have a particularly negative impact on brand. The reputation of a company as an employer is determined by more than its name or brands. Unfavourable headlines concerning environmental or ethical misbehavior do indirectly have an influence on the company’s general reputation and the credibility of its proclaimed values. Therefore, a company avoiding negative news does not scare off employees who do care. As the financial markets are only starting to ask for environmental and ethical investments, this stakeholder does not at the moment represent much of a driver for the incorporation of environmental and social aspects by the chemical industry. Given that the financial markets highly value short-term financial success, they can rather be regarded as a hindrance. Wrap up Classic environmental protection issues related to the production processes of the chemical industry can often be solved, creating tangible values at the same time, through increases in efficiency, and are today rather well managed. Also, principles about the employees’ rights and work ethics have long been introduced in various ways. The education of a responsible workforce is an ongoing task, which is adapted and optimized in accordance with changes in company policy. More recent is the extension of assessing environmental and social impacts created by the chemical industry to the input of raw materials on the upstream side of production, and to product use and disposal on the downstream side. An important challenge which the industry is currently working on concerning the integration of environmental and social aspects is the difficulty of measuring qualitative values. Without the possibility to measure sustainability performance, it is perceived very difficult to promote sustainability through the organization. Other areas are still very controversial for ethical reasons and because their potential hazards are not yet fully known, such as concerning the use of green biotechnology and genetically modified organisms. While some questions remain at present, like the responsibility of companies for contributing to the north-south convergence, it has become clear that the trend of sustainable development holds opportunities beyond efficiency increases.

4 Corporate Sustainability Management This chapter outlines approaches and experiences of present company practices concerning the integration of sustainability aspects, meaning social and environmental aspects, into the business of the chemical industry. First, the fit with typical organizational goals and company culture is discussed, followed by the strategic attitudes taken by companies to deal with the issues of sustainability. Then, the sustainability tasks or processes allocated to different business functions are highlighted, as well as ways to discover, implement and maintain such tasks.

4.1 Prevailing Organizational Goals and Culture Traditionally, chemical companies are very much technology driven. Creativity is basically concentrated to the Research & Development department. Product and process innovations are key to satisfying the demands of their customers. Further, tight financial control has been applied to reach the ambitious financial results promised to the shareholders of the mostly publicly quoted companies. The public image of the chemical industry is still not very good, as a consequence of mainly single polluting incidents. The reluctance to invest more in external communication to convince the general

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public of the much improved environmental performance indicates that the public pressure on the chemical companies, which sell mostly industrial products, is relatively low. The chemicals industry is highly regulated, and although the innovation effect of some regulative restrictions can benefit companies, the natural desire of the industry is to be as free as possible to do business in its own way. Due to the many dangers of the chemical industry’s activities, the industry has a long history of developing its health and safety culture. Characteristic are values like product excellence and the health/safety of employees.

4.2 General Sustainability Strategy Before a company decides on the priority it wants to set for environmental and social aspects, it usually evaluates the concept of sustainable development for its business, and determines its role in overall sustainable development, and in how far its business has potential to support and/or prevent sustainable development. Consensus on the general approach to sustainability depends essentially on the company specific limitations and opportunities with regard to the prevailing goals and company culture. The approaches of companies to integrating sustainability essentially fall between two extremes: - only as much as necessary to avoid the negative consequences of the general trend towards sustainable development, changing as little as possible in the company’s strategy and operations, or, - as much as possible to realize opportunities arising from sustainable development thinking, including the re-thinking of the company’s business model, values and culture. Maximum Focus on realizing opportunities

Minimum Focus on avoiding disadvantages

Graph 3: Sustainability Strategy Approaches

The company creates a vision of itself in relation to the environmental and social aspects of its business, such as to be the most responsible and least polluting company among its peers. This vision is reflected in the desired positioning of the company in respect to customers, investors, legislators, employees, suppliers and society. After determining how it wants to be perceived by society and what types of investors it wants to attract, the corporate goals are developed. These goals are intended to be clearly understandable, open to monitoring and to be applicable for single business units.

4.3 Organizational Processes, Structures and Systems The decision to review the company’s sustainability management taken at top level is then carried out by a sustainability officer. He explores the present and potential integration of environmental and social aspects creating value for the company, and initiates the search for further opportunities arising from sustainability management.

4.3.1 First Steps – Creation of a Sustainability Officer Usually, the decision to investigate the relevance of sustainability for the company is taken at board level, leading to the delegation of the responsibility for this task to a person, who we call here sustainability officer from now on, and who might have his own task team.

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The sustainability officer becomes responsible for the coordination of the company’s sustainability considerations, activities, and issues, ensuring completeness and avoiding redundancies. One of his major tasks is to initiate dialogue between the various competence levels of the company, establish formal communication networks and foster informal communication for the development of ideas for improving social and environmental performance, while at the same time creating value for the company . The company representatives unanimously agreed that top management commitment is crucial to get the middle management engaged in developing and accepting a specific company approach to sustainability. This commitment is reflected by the communication of corresponding CEO statements and the explicit integration of the topic sustainability as one of the board resorts.

4.3.2 Sustainability-related Processes in the Business Functions Social and environmental aspects can be found in many processes of various business functions. Business Development/Strategic Planning Finance Research & Development Controlling Purchases

Production/ Logistics

Marketing/ Sales

Human Resources Internal Communication External Relations (Internal) Consulting Services

Graph 4: Business Functions

Business Development/ Strategic Planning As outlined further above, a strategic approach to sustainability is chosen. The company’s vision, mission and guiding principles are reviewed, and possibly modified, with regard to social and environmental aspects. The values behind the envisaged corporate identity and company culture are also checked. The use of the corporate identity to influence company culture is often very limited at present due to the frequent restructurings, mergers and acquisitions in the chemical sector. The strategic planning relies on a risk management system and an early awareness system, which take social and environmental risks/information into account. Environmental risks and concerns are nothing new to the chemical industry, so it is essentially only an expansion to take the new and arising risks into account. Adequate management of the activity implies thorough assessment, prioritization, communication and monitoring. Looking for new business opportunities includes looking actively for opportunities arising directly from the overall efforts to move towards sustainability, such as the recycling industry. The environmental and social risks and developments are reflected in the investment policies of the company, and due diligence proceedings include an assessment of environmental and social aspects. Companies may have an issue management system at different company levels. The information stored in this database comes from all parts of the company. Ideally, there is an international issues network with a database at corporate level. Companies distinguish between a widely accessible database for early awareness of general trends and more confidential databases, such as for the internal revision department.

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Companies complained that their issue management systems often are more reactive than proactive, or that they have no formal issues management system at all. Besides collecting information from outside the company, an incident and emergency reporting system brings locally detected problems at company sites to central attention through an information service, and are also stored in a central database. Following up on trends also includes conducting regular public opinion surveys, conducting regular internal opinion surveys, collecting employees’ ideas with sustainability or innovation awards, and cultivating contacts with outside experts, associations and governments. All this information is analyzed, prioritized and forwarded in adequate form and scope to key persons. This information service can be more or less formalized and aims to ensure that at least top management has a shared overview about political, economic and social developments. Finally, a yearly top-down sustainability plan is vital for aligning the whole organization. Finance In the financial area, sustainability performance can be of importance if particular investors are targeted, which invest in ethical or environmental funds. As this demand is still relatively low, representing only some 5-10%, it is favourable to have a good rating in sustainability indices – so long as the financial performance is convincing. The financial targets set for the investors determine the weighing of priorities between economic, environmental and social aspects in many decisions. The present short-term orientation, aiming to convince financial analysts every quarter of the year, is limiting long-term investment in R&D, and to a certain extent social and environmental commitment is related to the financial situation of companies. Research & Development The R&D function is a key function to leverage the sustainability performance of the chemical industry through innovations improving products and production processes in terms of eco-efficiency, safety, emissions, energy-efficiency, replacement of depleting raw materials by renewable materials, etc. It is supported by integrating sustainability criteria into the principles for product and process development on the one hand, and people working on solutions for particular sustainability problems on the other. The concept of product stewardship, promoted by the industry initiative Responsible Care, refers to the responsible and ethical management of the environmental, health and safety aspects of a product throughout its life cycle, from the extraction of raw materials to the disposal of the final product. Analyzing the potential impacts of a product at different stages of its life cycle through a Life Cycle Assessment has been widely introduced. Life Cycle Management is often used as a tool for reviewing existing products. Guidelines for product stewardship have been introduced in R&D to allow for investment decisions for an increasingly “sustainable” product portfolio. In general, beyond the shared standards through Responsible Care, each company develops its own tools, often in dialogue and joint research partnership with scientific institutions.

An exception to this is the Eco-Efficiency Analysis developed by BASF which is publicly available. The objective of this analysis is to identify products with optimum usage combined with good environmental performance and at low cost. The analysis provides indications for possible improvements in products and processes. The gap between potential new products and existing solutions can be determined through analyses, scenarios and variants.

The optimization of the efficiency of use of materials, such as measuring the first pass yield of input materials, is not new but can be applied to analyze the consumption of hazardous or rare raw materials.

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New metrics to measure the eco-efficiency or sustainability of products and processes are constantly being developed. Controlling At corporate level, the environmental and social goals, such as emissions and accidents, are defined in a yearly plan used to monitor and review the key goals. These goals are allocated and distributed to the business units, which can then apply them for single operational sites. Every business unit reports its performance, which is compared to the goals, and the goals for the following year are determined. The performance concerning the main sustainability goals are usually connected to the overall incentive system. New controlling metrics to measure the sustainability performance of businesses are constantly being developed, but it is a challenging task as social and environmental impacts and their benefits for the company are rarely quantifiable. Or they have, taken by themselves, a limited meaning, such as increased market share for eco-efficient products. The auditing and reporting of environmental and social performance data is often based on using and adapting the criteria developed by the Global Reporting Initiative, GRI. The substance for external and internal environmental reporting is basically EHS data (materials management, incidents/illnesses, resource consumption, waste and water discharges, air emissions, waste management) measured in production with EHS management systems, monitoring the environmental, health and safety performance in the production processes. The data produced through the application of management standards like ISO14000, EMAS or SA8000 or company own developments provide useful information for the justification of investments, enable benchmarking, give guidance to the setting of priorities and targets, and improve the resource allocation for an optimal cost/benefit ratio. Purchases Although this is not a particular problem for the chemical industry, some companies have started to develop and implement supply policies, to indicate that they are only buying from suppliers on the condition that no child or forced labor has been used. More elaborate are the efforts to ensure that suppliers apply the same environmental standards. Many chemical companies offer their suppliers a consulting service for advice, and they may even perform supplier audits. Production/Logistics In the production and transportation of chemical products it is essential that all tasks are carried out responsibly and safely to avoid accidents, injuries, deaths, spills and accidental emissions, while keeping productivity and efficiency high. This is mainly ensured through Environment Health and Safety standards for production processes and transportation. Marketing/Sales A chemical product rarely sells because it is "greener". While sustainable product features may be indicated to the representatives of the customer, the label "green" is a nice addition to the basic functional product attitudes, which convince the customer. Selling additional services for the chemical products, from performing the transportation to the selling of closed loop systems, or performing a manufacturing process stage for the customer, has a great potential for improving the sustainability performance and create economic value at the same time. Human Resources The Human Resources department is key to setting guiding principles for corporate values and ethics. The HR function controls that company principles of diversity are understood and applied. The HR department conducts frequent employee surveys to determine the employees’ understanding of the company’s vision, mission, and guiding principles.

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Also, the HR department has the responsibility to check the job satisfaction of the employees and the quality of their interaction. This can be done in the form of general surveys or periodical ratings about leadership qualifications of their superiors, satisfaction with the guidance given and the working environment, identification with the company and the company culture, and so on. The HR department also runs incentive systems, not only related to financial objectives but also to social and environmental rules, in order to influence employee behavior through mostly financial rewards and punishments. Usually this is done through the integration of sustainability parameters, such as number of accidents/incidents, when defining managers’ or directors’ bonuses. Internal Communication Initiated by the sustainability officer, a regular dialogue between key people is established, and informal communication about sustainability aspects is encouraged. Top commitment and concrete goals are communicated, and employees are informed about the concept of sustainability, what it means for the company and for themselves in their work. Information is provided about related success stories, news about ethical and environmental policies, and other social or environmental activities of the company and the continuous enforcement of the corporate identity and the related values. External Relations The transparency of chemical companies is increasing, with most companies publishing annual reports with a chapter on sustainability considerations as well as extra reports about their social and environmental performance. There is also a trend to have the sustainability reports verified for their truthfulness and coherence by external certifiers, leading to external certification. Chemical companies have long been in dialogue with the local communities of their plant locations and they have started to demonstrate their social engagement in various ways. Activities include Consumer Advisory Panels (CAPS), involvement in education, the establishment of neighbourhood circles, and engaging in dialogue with NGOs, mostly local associations or WWF, Greenpeace and Friends of the Earth. The proactive publicity about companies' social and environmental efforts and the performance by their public relations or communications department is not overly developed. As most chemicals getting to the households represent only a small part of the overall product, they are usually not directly connected with the manufacturer. For this reason big-scale advertising campaigns to improve the image concerning the companies’ efforts to move towards sustainability are rare. Still, those who are interested in the social and environmental performance of a company will find information in company reports, on the company's web-site, in company magazines or newsletters sent to customers and other interested parties, or find sporadic articles about accidents and success stories. A great deal of dialogue is also going on between chemical companies in the sector’s industry associations like CEFIC, ACCA, ICCA, the initiative Responsible Care and in cross-industry initiatives such as WBCSD, Econsense and Global Compact, the latter having also a direct link to politics. Consulting Services While smaller companies often employ specialized consulting agencies, the big chemical companies have their own internal service department for the management of Environment, Health and Safety. The task of this service is to establish EHS policies and guidelines, do best-practice benchmarking and train the workforce to observe the company policies. The corporate EHS department also organizes and performs the development and transfer of knowhow, provides general basic training like fire prevention, as well we site specific training. It helps implement standardized or the company’s own EHS systems and instructs business units to do self-audits. EHS management systems start with simple housekeeping rules and are usually developed

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from Responsible Care standards. Social audits are still being developed and concern occupational health, stress profiles, pension plans and labour standards. A corporate EHS audit team checks the EHS management by business units, with regard to their continuous performance, but also on cause-related occasions. This unit can also extend its services of advice and auditing to suppliers.

4.3.3 Implementation and Maintenance of Integrated Sustainability Processes As outlined above, sustainability related principles are best anchored in all units and business functions of a company. Ideally, taking sustainability aspects into account is self-evident for every employee and every function. The strong anchoring of safety concerns in the minds of people working in the chemical industry is a good starting point, and people here are relatively more open to widen their conception of personnel safety, in comparison to other business sectors. Chemical companies have already long seen social and environmental aspects as part of their business. So what is new about sustainability management? Basically, it means an integration of the separate processes related to environmental and social aspects and an active approach to realizing value for the company through improving environmental and social performance of the company itself and of other organizations and systems related to the company. Sustainability Officer: driving force

Sustainability in Line Management: in all relevant functional processes

Sustainability Organization: mainly communication network

Graph 5: Sustainability Organization

Integrated sustainability management usually consists of three main elements: the sustainability officer, sustainability aspects as part of operating line processes, and separate sustainability related processes.

4.3.3.1 Sustainability Officer The responsibility for coordinating and following up the various sustainability related tasks is usually delegated to one person in the company, who we here call the sustainability officer. This person takes the initiative to discover, implement and maintain various sustainability tasks. The sustainability officer does not necessarily perform these tasks alone, but may have delegated staff for setting up the business case, a committee for the management of the implementation or even his own permanent team. The SO follows up the appearing and development of new environmental and social issues inside and outside the company. The Early Awareness System of a company can be highly professional, but often consists of following the news and specialized media and the dialogue with external experts. The impregnation of the whole organization with sustainability thinking, the integration of sustainability aspects into the company’s processes, the building of additional processes and the shaping of the company culture, are implementation tasks the sustainability officer will be confronted with. The SO and his team is usually the main contact for employees with their ideas and concerns. The sustainability officer is the first source for explaining the concept to employees in order to raise the general awareness and knowledge. A thorough understanding of the concept of sustainability is the basis to build ideas about the application of the concept to the company and its business functions.

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Besides creating additional structures and integrating sustainability criteria into existing business processes such as performance measuring and incentive systems, another objective of the sustainability officer is to enhance creativity and motivation of the employees, e.g. through sustainability innovation awards. The effective use of communication processes, formal and informal, are key for sharing ideas and motivating the workforce.

4.3.3.2 Sustainability in the Line Management All processes integrated in the line management, that aim to improve the social and environmental performance of the company, are part of the sustainability management. In theory, responsibility for coordinating, monitoring and reporting on sustainability could be allocated to one member of every business unit and every department. This would probably not be very efficient, as each responsible for sustainability would have a complex task, and such a system would be bureaucratic and create much work overlap. In practice, the management of sustainability should be divided more by the tasks involved to manage the current and future sustainability issues of the company. Like many other tasks, these are often jointly dealt with in networks involving more than one department or business function. For example, Business Development can work closely with R&D to determine if a potential business opportunity is promising or not, and R&D can then be in dialogue with the Sales Department to develop products and services to evaluate the market. Generally, the integration of sustainability management in line management means that managers take social and environmental aspects into account when making decisions, which are supported by corresponding guidelines or concrete sustainability objectives. And at strategic level, integrating sustainability management is reflected by the addition of particular social and environmental goals to the annual planning.

4.3.3.3 Sustainability Organization The backbone of active sustainability management is a communication network and the appointment of a responsible person at high corporate level, such as a vice president for sustainability. The topic of sustainability can also be divided into environment, health and safety on the one hand and society on the other. For the different questions and tasks, people come together from various levels to exchange ideas and develop solutions. It is important to include the knowledge and ideas of employees with different backgrounds, because sustainability issues are usually complex and have economic, social and environmental impacts at the same time. It is also important to get the agreement and acceptance from the key persons who will have to apply and supervise the new standards and policies, once they have been developed. Sustainability management is mostly not a clear top-down process but it benefits much from initiatives from the employees. Therefore, beside bringing people together in various committees, councils and working groups, it is important to encourage informal communication, bringing people in contact who may have similar problems, or who complement each other in finding solutions. Depending on the size and business of the company, it may have established a corporate service where sustainability-related knowledge is accumulated and later transformed into training programmes, or where particular sustainability elements are developed which are to be added to the existing management systems. The usual form for this is a corporate service for consulting on Environment, Health and Safety matters, performing training and audits. Main Barriers to Sustainability Management The difficulties of measuring qualitative values created with social and environmental improvements and the lack of meaningful data are perceived as a barrier to communicating, promoting and

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motivating engagement in sustainability matters. Various ways of classifying qualitative issues help to make most of them measurable, and some of them even comparable. The trend for sustainable development is generally accepted and there is no great resistance in companies any more. Still, there remains a certain inertia in the mindset of managers or directors of production plants with profit responsibility. The best way to overcome resistance is usually through the right dosage of change. Also, improvement of the understanding of the sustainability concept and the publication of success stories help to convince skeptics. More explanation of the concept of sustainable development, supported by a practical application in the company’s business activities, including the setting of tangible objectives, help to overcome the sometimes still very vague knowledge, and help to convince employees that the basic idea of the concept is not only temporary. A reduction in corporate financial performance can delay the social and environmental engagement, even if the company’s core values stay the same. In principle this makes sense, because the company can not ignore its “natural” hierarchy of needs. The impact on sustainability engagement can be softened by showing clear long-term thinking also on the financial side and focusing on long-term investors. Some companies reported encountering resistance when applying their ideas of sustainability management to other countries, such as the US. National differences in management and working styles can not be ignored. Similarly to industry regulation by governments, the corporate centre will probably best attain its objectives by setting clear objectives and giving basic rules, and then leaving some room for the subsidiaries to find their own ways to reach the goals. The same holds true for transforming a technically oriented company culture into a culture of responsibility and creativity. This will take time, as it is difficult to change management and leadership styles. But the path to follow is clear, aiming at controlled empowerment of employees, providing them with clear objectives, guidance and then leaving the limits as wide as the fulfillment of the task allows. Key Factors for Successful Integration of Sustainability Management Know the company’s main sustainability issues and stakeholder relations, and their economic relevance to the company Implement sustainability thinking throughout the organization o Get top management support o Create and distribute knowledge o Ensure leadership example o Create clear goals and responsibilities o Foster a culture of responsibility and creativity o Review and adapt existing tools throughout all functions o Detect and overcome barriers Convert your LTO into an ITO – Invitation To Operate and business success o Realize opportunities for value creation by managing the company’s sustainability issues and stakeholder relations o Convert outside pressures into partnerships for collaboration

5 Assessment of the Business Case Now that the possibilities to exploit the Business Case for Sustainability have been outlined, let us take a look at its future potential. The trend towards sustainable development is continuing, and leaves the companies in the chemical industry with two principal choices: follow the trend or shape the trend.

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With growing demand for chemicals, and the assumption that there are limits to the efficiency of energy and materials use, the demand for energy and raw materials can be expected to increase.

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The production and consumption of ozone depleting substances are expected to be phased out, as agreed in the Montreal Protocol.

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The emission of known hazardous substances is expected to decrease in OECD countries, leaving an information gap with regard to other chemical substances on the market as well as emissions in non-OECD countries. This lack of information will be addressed by governments and international institutions.

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Public influence on decision making in the industry is expected to increase, in parallel with increasing demand for transparency.

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Chemical risk management will be further developed, taking into account environmental and socio-economic factors.

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Partnerships between the chemical industry and governments, as well as partnerships between the chemical industry and academia or NGOs are providing transparency and accelerating the development of sustainable industry solutions.

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The assessment of high production volume (HPV) chemicals is continuing and will probably be complemented by the assessment of other groups of chemicals, i.e. those with a particular hazard potential.

These developments present or entail many obvious limitations for the activities of the chemical industry – for companies that try to resist such changes. But these developments also present at least as many opportunities – for companies that actively seek them. It is time to re-concentrate on innovation and the attraction and education of responsible employees. The next steps after introducing end-of-the-pipe solutions have been to combine cost reductions and efficiency increases with improvement in environmental performance. Another important argument for sound management of social and environmental issues is to minimize the risk of having to pay fees for non-compliance and get into litigation for non-regulated damages. Currently much attention is given in this respect to the re-working of the EU chemicals policy. But companies can do more for their own benefit. By demonstrating a true and strong commitment and investment in transforming itself into a more sustainable industry, chemical companies can use their know-how to set new industry standards, in line with their sometimes long innovation cycles – and avoid having to comply with uncomfortable regulations by governments. Successful innovations can reward companies with first-mover advantages in the marketplace, and set new industry standards which competitors will have to follow. A successful innovative company with a good reputation concerning its social and environmental conduct is also prone to attract talented and responsible employees. Chemical companies, not directly selling consumer products, can stimulate the end consumers to demand high quality and more sustainable product components by creating strong brands for their products and by indicating its presence and attributes on the final consumer product. Eventually, the objective of the survival of the company itself is the best reason for a company to contribute to sustainable development, which basically is about ensuring future input, future production facilities and employees, and future markets for its products.

6 Conclusions There are many possibilities for minimizing possible negative effects of the trend for sustainable development, and there are also many possibilities to discover opportunities for value creation. The creation of intangible values can only be transformed into economic values if recognized and appropriately communicated.

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Although it seems impossible to create one overall measure for the improvement of the sustainability performance of a company, the active coordination and integration of the multitude of activities related to social and environmental aspects can help to avoid future problems, find new fields of opportunities and allocate resources to activities that best exploit these opportunities. Every company can build its own business case for sustainability and explore its individual opportunities. Implementing and managing the complexity of the subject helps realize benefits through sustainability management, taking account of potential barriers and focusing on key factors to realize opportunities.

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