What “Sustainability” Means for Energy and Chemical Companies

Abstract

Sustainability has become the most important philosophy for success in business and industry, and a deciding cri­teria for customers and investors alike.. Several international energy and chemical companies have aligned their corporate sustainability goals with the UN’s SDGs. Many are making progress towards formulating and executing well-thought-out strategies to improve and manage sustainability proactively.

Introduced in 2015, the UN Sustainable Development Goals (SDGs) represented an agenda for sustain­able development. While very general, the goals outlined the aim to achieve a better and more sustain­able future for all. With UN Resolution 70/1, the UN General Assembly established 2030 as the target year for achieving the following sustainable development goals (Table 1).

United Nations Sustainable Development Goals

Across industry, sustainability is now front and center for customers and investors alike. Several inter­national energy and chemical companies have aligned their corporate sustainability goals with the UN’s SDGs. Many are making progress towards formulat­ing and executing well-thought-out strategies to im­prove and manage sustainability proactively. Leading industrial companies such as ExxonMobil, Dow, Saudi Aramco, and Shell have publicly announced some­what different sustainability approaches.

ExxonMobil, for example, has articulated a com­mitment to producing the energy and chemical prod­ucts that are essential to modern life, economic devel­opment, and improved standards of living and for pro­tecting people, the environment, and the well-being of communities near its operations; and to employ ad­vanced technologies to improve the sustainability of  its current businesses. Dow is collaborating with like-minded partners to advance the well-being of human­ity by helping lead the transition to a sustainable plan­et and society. Dow, one of the world’s leading materi­als science companies, has expressed a commitment to using science-based solutions and acting collaborative­ly to help lead the transition to a more sustainable so­ciety, employing a circular economy paradigm. Shell’s sustainability approach is built on a foundation of safe, efficient, responsible, and profitable operations. According to Shell, it will strive to produce and deliv­er energy responsibly, and in a way that respects peo­ple, their safety and environment. At the simplest lev­el, this means “doing no harm,” and involves a portfo­lio shift toward renewables.

Saudi Aramco’s approach involves pushing the limits of creativity and technology to drive down the carbon intensity of energy products. To this end, the company is increasing research into new, carbon-neu­tral feedstocks to provide meaningful solutions to the energy and climate challenges.

Sustainability Goes Beyond Environmental, Social, and Governance

People and organisations outside the industry want to better understand how the energy and chem­icals sectors are evolving. This includes the impact of these sectors’ activities on people and the environment and the associated risks, opportunities, and trade-offs. One of the ways companies respond to these requests is through corporate reporting, specifically non-finan­cial, environmental, social, and governance (ESG) re­porting. ESG criteria provide a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

The environmental criteria considers how a compa­ny performs as a steward of nature. Social criteria ex­amines how it manages relationships with employees, suppliers, customers, and the communities in which it operates. Governance criteria considers factors such as transparency of reporting on sustainability progress, embedding sustainability culture throughout an or­ganisation, reporting on how investor dollars are ap­plied, and how an organisation manages its data to pro­tect customers and minimise cyber risk. Sustainability, however, is broader than ESG and extends to meeting the business and other needs of the present, but with­out compromising the ability to meet the needs of fu­ture generations.

Parties in the supply chain – suppliers as well as customers – are also refining their expectations of transparency. Purchasing tenders now often integrate sustainability as a pre-qualification item. High quali­tyreporting can make the difference in gaining valu­able contracts from companies that have similar val­ues. Companies can also mitigate supply chain risks of poor social and environment practices by encouraging transparency throughout their procurement processes.

Based on ARC Advisory Group’s Research

During the first half of 2020, ARC Advisory Group conducted research to gain a better understanding of the current state of sustainability and “green initiatives” in the chemical and energy industries. Specifically, we wanted to learn where companies are focusing their ef­forts, what challenges they face, and ultimately, how they believe digitalisation and other technologies can advance their sustainability initiatives.

The research findings show that 90 percent of glob­al energy and chemical companies have sustainability initiatives in place. In general, the sustainability initia­tives at energy companies focus on the transition to a lower carbon future, while chemical companies focus these initiatives on producing more sustainable prod­ucts. In other words, products that meet the increasing customer demand for a more circular economy, with increased recycling and reuse of products and materi­als. For both industry segments, improving operation­al safety also plays a vital role, since for many compa­nies this is part of the license to operate.

Government regulation and mounting consum­er pressure are driving the investment in sustainable products and lower-carbon energy through carbon taxes, fuel standards, and a ban on single-use plas­tics. In addition, one of the world’s largest investment firms, BlackRock, with nearly $7 trillion under man­agement (including huge stakes in leading industrial manufacturing and energy companies), recently an­nounced that sustainability issues would be at the cen­ter of its investment strategies moving forward.

Key findings relative to sustainability initiatives in­clude:

• Lack of capital and resources and aging assets are top barriers to meeting sustainability objectives
• Customer buying preference drives company sus­tainability programs and access to capital
• Improving operational safety is a key element of most sustainability initiatives
• Digitalisation plays a key role in ensuring progress in meeting sustainability objectives

 Importance of Digital Transformation to Achieve Sustainability Goals

ARC believes digital transformation spans industri­al products, operations, value chains, and aftermarket services. It augments people and knowledge through expanded use of sensors, data, and analytics. Most in­dustrial process companies globally will undergo a dig­ital transformation to some degree or other, with ma­ny already actively using technology to improve both business and environmental performance and sustain­ability. Digital enablement of new business models and finding new ways to bring products or services to mar­ket is a key capability in sustainable manufacturing. Below are findings from ARC’s survey (Fig 1).

How Valuable Are These Digital Capabilities for Improving Sustainability?

Seventy-five percent of survey respondents believe digital transformation is extremely important or very important for achieving sustainability goals. The fol­lowing digital capabilities were ranked in order of their importance to improve sustainability:

• Supply chain optimisation to coordinate, man­age, and improve the transparency of connected processes across different organisational silos; and coordinate processes to improve supply chain de­mands or product customisation and satisfy cus­tomer needs for sustainable products.
• Advanced process control (APC) to reduce process variability, minimise costly product giveaway, opti­mise processes against constraints, and support au­tonomous operations (wherever appropriate). APC based optimisation can also coordinate multi-unit dynamic process optimisation to help close the gap between plan versus actual production.
• Energy and utility optimisation using process modeling and simulation technology to improve the process design, optimise energy efficiency andprocessing, and improve maintenance.
• Predictive and prescriptive maintenance to im­prove asset utilisation and return on capital by use of machine learning and advanced analytic s to shift maintenance operations to predict failures and avoid process disturbances and equipment down­time.

ARC’s interviews with industry leaders revealed that operations management systems are a high pri­ority. Human reliability and knowledge management through state-based control and other approaches have greater importance in the context of sustainability ob­jectives. Product waste and energy losses often occur when workers do not have a good grasp on procedures and operational competency. For example, performing process startups, shutdowns, or other critical activities require established procedures that tie back to the ex­perience level of workers and the operations manage­ment systems in place.

Barriers to Meeting Sustainability Objectives

In general, the larger the company, the better its ca­pability to pursue sustainability objectives aggressive­ly. Because hypothetically at least they have more re­sources to devote to those objectives. However, sever­al people we spoke with in­dicated that funding deci­sions are made at the board level at larger companies, and many board mem­bers might not have clear insights and visibility to properly address sustain­ability. This is especially true given the age of much of the asset base in the ener­gy and chemicals industry.

The majority of infra­structure for heavy indus­try was designed and builtwithout sensitivity to sustainability goals or the devel­opment of more recent business models. In fact, most facilities were built prior to digital technology, and are designed principally around operational philosophies that date back to the 1980s. Unfortunately, it is not rea­sonable to think that industry will somehow change overnight or be supple enough to react to even the sim­plest of outside pressures for sustainability concerns. Older plants or facilities typically lack the base of sen­sors, instrumentation, and digital systems needed to optimise efficiency. The justification for modernisa­tion can be difficult, and the conversion and installa­tion process usually must be completed during a turn­around or shutdown.

The economics of driving complex change into highly energised and potentially dangerous assets that need to run at high levels of reliability are challeng­ing. Owner operators in general, and field operations, are often very resistant to change, whether upgrading manufacturing assets or introducing digitalisation, be­cause when they introduce change, they also need to go through a rigorous engineering design process to ensure integrity.

Management of change (MOC) processes tend to stifle innovation for sustainability, creating a huge gap between what the head office people think is possi­ble and desirable versus what field operations people think is possible and desirable. Head office staff such as IT, central engineering, or other centralised project or improvement type roles are constantly exposed to vendor conferences and information sources that form their perspective about what is possible. Workers in the field, however, often do not receive that same ex­posure to information. This gap between what field personnel understands about digital innovation, ver­sus what the home office understands creates an addi­tional barrier to improving sustainability.

Chemical companies are preparing for a customer driven trend for stronger and more sustainable mate­rials for the auto industry. This changes market strate­gy with differentiating products. The physical proper­ties of what is sold is of greater importance now; spe­cifically, how physical properties satisfy the need for re-usable products and products which are ‘circular’ in their ability to be re-used in a supply chain. The in­creased use of recycled resins can create a dilemma for automotive designers. There is a growing initiative to increase recycled materials content in products global­ly, and traditional methods of recycling polymeric ma­terials in both thermoplastics and thermosets can lead to degradation of engineering, mechanical, processing, and/or aesthetic properties of the resin. In an era where product quality rules, this situation forces designers to accept a much lower percentage of recyclate than they might otherwise wish to use or risk unacceptable prop­erty loss in molded parts. This is something no auto­maker can afford. Hence, a valuable feed stream of ma­terials (polymers) often ends up destined for a landfill once many consumer products are broken down and more easily reusable or recyclable materials are repur­posed.

To help address the increasing pressure they face from the investment community and energy consum­ers, energy companies, in turn, are focusing on how they can continue to meet the world’s energy de­mands, while transitioning to wind, solar, geothermal, hydro, and other renewable and non-polluting energy sources.

Conclusion

Clearly, sustainability within the global energy and chemical industries is a multi-faceted concept that en­compasses more than just environment, safety, and governance. Overall business sustainability through operational excellence and margin optimisation re­main important objectives. In addition, due to the dif­fering challenges each of those industries face, each has a somewhat different objective and focus for its sustainability initiatives.

While the vast majority of global energy and chem­ical companies have sustainability initiatives in place, based on ARC research, it appears that the sustainabil­ity initiatives at energy companies focus largely on the transition to a lower carbon future via increased use of wind, solar, hydro, geothermal, and other renewable energy sources; while chemical companies tend to fo­cus their sustainability initiatives on developing and producing more sustainable, circular products charac­terised by low-carbon footprint and extensive use of renewable and/or recycled raw materials that can sup­port reusable and/or recyclable end products for cus­tomers. For both industry segments, improving oper­ational safety also plays a vital role, since, for many companies this is part of the license to operate. And for both industry segments, digital transformation is seen as an important enabler for business and ESG sustain­ability. A combination of regulatory pressures, cus­tomer pressures, and pressures from the investment community are forcing energy and chemical compa­nies to move forward with their respective sustainabil­ity initiatives.