WPC 2021: Industry investors look toward ESG, decarbonization

00:07 AM | March 10, 2021 | Vincent Valk

Investment firms are emphasizing decarbonization themes, including energy transition and environment, social, and governance (ESG), along with traditional parameters such as growth and margins, in evaluating chemical assets, according to a panel discussion during the IHS Markit World Petrochemical Conference (WPC) 2021 earlier today. Investors are seeking out assets with a strong decarbonization story and benchmarking ESG performance. Meanwhile, there is a growing interest in infrastructure around chemical facilities, and high asset valuations are expected to persist.

ESG is a routine part of the investment calculus for Partners Group (Baar, Switzerland), a private investment manager. “When we look at a new investment opportunity, we look at 12 to 14 key dimensions across environment, social, and governance, and we benchmark against those dimensions on the way in [to an investment],” says Todd Bright, partner and head of Americas private infrastructure at Partners Group. “Then we look to bring all of those dimensions up to best practice by the time we exit.”

Energy transition is also a key investment theme, as renewables are widely seen as gaining share at the expense of traditional energy sources in the coming years. “We are at the point where people are starting to talk about peak demand for thermal sources of energy,” says Tomas Peshkatari, managing director with BlackRock (New York, New York), an investment fund manager. “Whether that is 10, 15, or 20 years from now, it is something that is going to happen within the life cycle of some of the assets we invest in.”

The energy transition, and how companies will handle it, is a major consideration for investors in energy-intensive industries, including chemicals. “The market is going to demand lower carbon intensity on industrial products,” Bright says. “It is going to be a key performance indicator for companies, especially in energy-intensive industries.”

But decarbonization also creates opportunities, and investors are keen to put capital to work on these areas. Many of them directly involve, or are adjacent to, chemicals production, including battery materials, green hydrogen, and materials that can enable energy efficiency. “What’s interesting is the way chemicals are moving beyond traditional fare,” says Tanveer Rahman, head of chemicals, Asia, and head of oil and gas, Southeast Asia, at HSBC (London, UK), an investment bank. This includes areas such as “green hydrogen, electric-vehicle battery chemicals, and bioplastics,” Rahman adds. Asian firms have taken the lead in some of these areas, with many leaders in battery materials, for example, located in China, South Korea, and Japan, Rahman notes.

“It’s opened up more sectors to us than it has closed off,” Bright says. “Decarbonization, for example, is a major ESG theme, but can also open up new sector opportunities for us around carbon capture, water sustainability, and energy efficiency. You want to try to put yourself on the right side of these trends.”

Capital assets

Infrastructure-focused investors, including those at BlackRock and Partners Group, have also seen value in logistics and infrastructure around chemical production. BlackRock, for example, last year formed a joint venture with Vopak to acquire three chemical storage terminals on the US Gulf Coast from Dow.

“We are seeing corporates and boards in chemicals having more discussions [about separating infrastructure assets], as they see some of the value that separating these assets and capitalizing them can bring,” Peshkatari says. A company like Dow “certainly can earn a higher return on capital in areas where they specialize more and have a competitive advantage,” he adds.

Meanwhile, the panelists said they expect high asset valuations and low interest rates to continue for the foreseeable future. “We are in a low-interest-rate, high-valuation environment and have been here for some time,” Peshkatari notes. While it briefly looked as though the COVID-19 pandemic might bring that to an end, that has clearly not come to pass, and both financial markets and M&A activity are looking rather buoyant. “Now we see that M&A activity has picked up significantly despite COVID-19,” Rahman says.