The chemicals industry, which contributes trillions of dollars to the global economy every year, is undergoing a significant transformation due to recent social and political trends.

A key driver of this growth is the increased focus on green initiatives from governments, stakeholders and consumers, which is accelerating investment in sustainable technologies. According to Deloitte, more than 75% of the emissions-reduction technologies needed to achieve net zero by 2050 rely on the chemicals sector.

The demand for chemicals and materials required to fuel those technologies is certain to rise. Whether it's the NMC and LFP used in batteries to store electricity generated by renewables, or the chlorine used to manufacture wind turbines, we can expect demand to go up and prices to follow suit. That’s great timing for the chemicals industry, after a year of slow activity held back by U.S. inflation and the European recession. 

The situation presents something of a paradox. Chemical producers are among the biggest contributors to carbon outputs, and they face their own pressures to make production processes cleaner and more sustainable. This could prove a challenge in the face of rising demand.

An Evolving Landscape

U.S. policies such as the Infrastructure Investment and Jobs Act, CHIPS and Science Act and Inflation Reduction Act are aimed at reducing dependency on China to meet the country’s energy needs and drive homegrown production.  

These policies are infusing more than $500 billion dollars into sectors that can drive clean-energy generation, including semiconductors, lithium-ion batteries and solar panels.

Despite this huge increase in sustainability investment, only a small fraction has been earmarked to fund decarbonization technologies for heavy industries such as chemicals and materials producers.

The International Energy Agency reports that in 2023, roughly $2.8 trillion was invested in energy, with 60% of that put toward clean-energy technologies like renewables, electric vehicles and battery storage. But financial and legal incentives aren’t the only factors in play. The changing attitudes of people, and a collective shift in recognizing the importance of sustainability, is also driving the need for change.

How to Drive Change

As the pressure increases for companies to replace fossil fuels, sustainable supply teams across industries will be looking at ways to lower emissions while still controlling costs.

Energy transition requires a significant amount of investment into technology and land, as well as transmission, distribution and storage solutions. Starting with short-term quick wins will be a go-to strategy for most.

Companies need to start by finding the right suppliers for their green initiatives. Data from Deloitte tells us that Scope 3 emissions contribute to more than 70% of most organizations’ total emissions, so re-strategizing supply chains to ensure that suppliers are using best-in-class sustainable production and distribution methods becomes key.

For the chemical companies set to play a key role in the renewable future, this poses both a challenge and an opportunity. Many are investing heavily in greener production, with products like blue ammonia and blue hydrogen, and alternative chemicals like lithium iron phosphate that can replace cobalt and nickel.

Other technologies such as carbon capture solutions, advanced recycling and even nuclear process electrification are also on the rise. Additionally, it’s been reported that members of the American Chemistry Council are dedicating around 25% of their budgets to sustainable manufacturing.

The environmental and reputational benefits of this new approach will provide a genuine competitive advantage for chemicals and materials manufacturers, in a market where organizations increasingly seek environmentally friendly collaborators.

Some of the costs of this clean production will inevitably be passed on to customers, but a combination of brand benefits and government grants and incentives should make for an investment that pays dividends for both producers and buyers. 

For organizations looking to meaningfully pursue sustainability initiatives, and those that rely on chemicals to produce sustainable technologies, gaining insight into the manufacturing processes and supply chains of those who produce chemicals and materials is essential. Chemicals and materials providers that are transparent about their processes stand to gain an advantage in this area as well, as potential clients become more rigorous in their strategies around short, medium and long-term supply partners.

Chemicals and materials producers should track technology advances and industry developments to ascertain which materials and production processes are most likely to be required to meet both short and long-term sustainability needs. Further, category intelligence should be used to assess supply and demand dynamics of the sustainable materials.

On both sides of the equation, expert market insights can play a significant role in managing change and optimizing the results.

Uday Raj Bisht is assistant manager of The Smart Cube.