But in the blistering summer of 2018, there was nothing celebratory about the Rhine. As Germany faced the hottest and driest weather since measurement began in 1881, the Rhine’s riverbed was reduced to a desiccated landscape of mudflats and dead fish. German industry, which uses the Rhine as a transportation lifeline, also suffered. The shrivelled Rhine of 2018 became a harbinger of the devastating impact that climate change will have on the backbone of the German economy.

Chemical giant BASF, whose headquarters and integrated chemical complex – the largest in the world – sit on the shores of the Rhine in Ludwigshafen, was hit particularly hard. Historically, some 40% of the raw materials entering the site do so by freight ships. In the summer of 2018, these were scraping bottom; cargo traffic was reduced to a trickle, and ships could be only partially laden. The river’s water was too warm to effectively cool BASF’s reactors. In total, production and delivery shortfalls caused by the 2018 heat wave cost BASF some €250 million (US$280 million), while its profits in the last quarter of the year were down nearly 60%.

Low water levels continue to plague BASF – and all the other major German chemical players that are concentrated along the Rhine. As they shift to shallower barges that carry only a fraction of the freight and less efficient rail and truck transport, they see their costs rise and their deliveries slow.

You’d expect a company so directly affected by climate change to be jumping on the decarbonization bandwagon. On the face of it, it is. To its iconic tagline, “We create chemistry,” BASF now adds “for a sustainable future.” But behind the scenes, Germany’s chemical industry – and BASF in particular – is proving to be exceptionally obstructive.

The British think tank InfluenceMap, which tracks corporate lobbying activity on climate policy, recently ranked BASF the third most “negative and influential” corporation in the world, following American oil giants Chevron and ExxonMobil in the first and second spots.

BASF resists the characterization, pointing to its track record – since 1990, the company has reduced its greenhouse gas emissions by 50% – and its objective to achieve net-zero by 2050 (five years later than the German national target of 2045). It has publicly endorsed the Paris Agreement on climate change as well as the EU’s target of being net-zero by 2050. And its product carbon footprint program, launched in 2020, allows customers to calculate the emissions generated “from cradle to gate” – through extraction, manufacturing and production – for all BASF products.

There is no question that the company is making moves in the right direction. In 2021, BASF purchased a major share of the world’s largest wind farm – Hollandse Kust Zuid – which is currently under construction in the North Sea, some 50 kilometres off the Dutch coast. The green electricity generated there will help power BASF’s European production sites, including Ludwigshafen.

Furthermore, the €10-billion engineering plastics plant BASF is now building in Zhanjiang, China, is slated to run entirely on renewable energy; the company is billing the facility – its third-largest globally – as a “role model of sustainable production both in China and around the world.”

But InfluenceMap looks beyond mainstream indicators to more subtle metrics: not only what companies present publicly in their annual reports, social media and public relations, but also the kind of research they sponsor, how they engage with regulators and elected officials and, importantly, the “indirect” lobbying they do through the industry associations they belong to. Taken together, InfluenceMap refers to this activity as a company’s “carbon policy footprint,” a kind of Scope 4 emissions.

Their analysis shows how common it is for a company’s outward claims to be at odds with its inner convictions. Eighty percent of the 25 companies deemed by InfluenceMap to have the most negative policy footprints look good on paper; like BASF, they have made net-zero commitments, and many, including BASF, scored A- or higher on Carbon Disclosure Project’s 2021 climate change disclosure scores, widely considered the gold standard of environmental reporting.

In exposing the gap between words and actions, InfluenceMap is not just looking to name and shame. The hope is that greater transparency will ultimately lead to a closer alignment between industry on the one hand and science-based policy benchmarks, like those articulated by the Intergovernmental Panel on Climate Change, on the other. And for the most part, that’s what’s happening.

According to Will Aitchison, EU strategy manager for InfluenceMap, some sectors of the German economy – even its automotive industry – have started to genuinely reconcile themselves with Paris targets and support legislation in that direction. But the chemical industry is a standout, and for good reason. The largest industrial consumer of energy of all sectors, in Germany it has relied on an ample supply of cheap Russian gas. BASF’s facility in Ludwigshafen represents 4% of Germany’s total gas consumption: roughly as much energy as a city of one million people. Half of that gas is used as feedstock – a raw material – in the production of chemicals. The other half is used to generate electricity.

“The chemical sector is anchored in fossil fuels,” says Aitchison. “And its lobbying reflects that.”

The industry has a lot to lose from a rapid transition away from fossil fuels, and BASF more than most, thanks to its 67% stake in Wintershall Dea, the oil and gas producer that it co-owns with the Russian company LetterOne. Wintershall Dea is one of the five co-funders of Gazprom’s Nord Stream 2 pipeline – whose certification Germany halted following the Russian invasion of Ukraine – and remains invested in several Russian gas fields, producers and network operators.

It’s no wonder that BASF is the most “engaged of European chemical companies” in its climate lobbying, according to Aitchison. And BASF, the largest chemical company in the world, with €78.6 billion in sales in 2021 and 110,000 employees worldwide, has a lot of weight to throw around.

Taking a run at climate regulations

So how does it do that? For one, it quibbles with climate-related regulations. Take, for instance, Europe’s proposed carbon border adjustment mechanism. The measure, a central plank of the European Green Deal, will impose tariffs on carbon-intensive imports into the European Union as a way of preventing “carbon leakage” – the relocation of production to less climate-ambitious jurisdictions – while also encouraging non-EU countries to introduce carbon pricing.

Looking at its own product palette, BASF sees primarily the downsides to the mechanism. It uses its roughly €3.5-million annual lobbying budget in Brussels to repeatedly ask the European Commission to exempt ammonia, nitric acid and the products along its value chain: essential components of the polyamide, polyurethanes and amines that BASF feeds to the textile, automotive, agriculture and pharmaceutical industries. Fearing its own products will no longer be cost-competitive on global markets, BASF reminds the European Commission that its commitment is not only to climate neutrality but also to economic growth.

Likewise, BASF opposes the legislation of energy savings targets, arguing instead for greater energy efficiency and a transition to renewables. The position is reinforced by the Federation of German Industries (Bundesverband der Deutschen Industrie, or BDI), the umbrella organization that represents some 100,000 companies – including BASF – and acts as the loudest mouthpiece for German industry. It advocates for energy reduction regulations only as a “last resort” and calls the EU’s proposed 1.5% energy savings target “unrealistic.”

Hiding behind industry groups

Companies frequently “get their industry associations to do the dirty work,” as InfluenceMap spokesperson Simon Cullen puts it. While most customers will recognize the name BASF, fewer will be following the BDI, or Cefic (the European Chemical Industry Council) or VCI (Verband der Chemischen Industrie) – all groups BASF belongs to and in which its executives play leading roles.

The relative anonymity of industry associations makes it much easier for them to push for policies that reflect their own vested interests. BDI, for instance, opposes the 2035 zero-emissions vehicle standard proposed by the European Commission and is lobbying the German federal government, in light of Russian gas shortages, to extend the use of coal and to facilitate a transition from gas back to oil.

Likewise, VCI is pushing for the EU to water down its taxonomy of sustainable finance to include economic activity involving gas. Currently, only 11% of BASF’s revenue is considered eligible for consideration under the EU Taxonomy. VCI and Cefic are both advocating against key elements of the proposed carbon border adjustment mechanism and in favour of a continuation of emissions allowances, which effectively forgive emissions for some producers.

This is the line that BASF walks: endorsing climate policy, unless or until it affects its own economic performance. “We are convinced that climate neutrality and sustainable resource use are not possible without a competitive chemical industry,” writes BASF spokesman Philipp Rosskopf in an email.

The implication is clear: BASF will be part of the solution, providing that its bottom line doesn’t suffer.

Investor pushback

Investors are paying attention. Since the asset management division of French banking group BNP Paribas began looking more closely at climate-related lobbying in 2018, it has seen “a rapid uptick in engagement on this issue by institutional investors,” according to spokesperson Claire Schiff. Together with a group of investor networks and other asset managers, BNP Paribas has established a global standard of responsible climate lobbying: a compendium of 14 indicators that can be used to assess how consistent a company’s advocacy work is with Paris targets.

“If there is misalignment, we expect corrective actions to be taken,” says Charlotta Sydstrand, spokesperson for Swedish public pension fund AP7, one of the instigators of the global standard. In 2018, AP7 asked BASF to review its own climate lobbying and publish a list of its memberships in industry associations. It obliged. The disclosure that BASF provided was given a failing grade by InfluenceMap. But the process at least created greater transparency and the beginnings of what people in the field refer to as “engagement” – the gentle tug of war between the forces of corporate self-interest and global responsibility.

A close look at BASF’s books suggests that these two objectives may not be so far apart after all. BASF distinguishes between what it calls accelerator sales – from products that are biodegradable, energy-saving or emissions-reducing, that make a “substantial sustainable contribution” – and the rest of its revenue. By BASF’s own calculations, revenues from its accelerator sales have grown at 69% over the last three years, as compared to 18% for the rest of its portfolio. And accelerator sales, currently 31% of the total, constitute an ever-growing share of BASF’s business.

The tide also seems to be turning at fellow chemical giant Bayer, which in the last year has endorsed the climate provisions in the U.S. Inflation Reduction Act and is pushing Germany to accelerate its expansion of renewables, rather than reboot fossil fuels, in the wake of Russian gas shortages.

With this kind of momentum, BASF shouldn’t feel the need to practise double-talk much longer. And the sooner it stops, the better.

The chemical sector is anchored in fossil fuels. And its lobbying reflects that.

-Will Aitchison, EU strategy manager for InfluenceMap

“If what you are saying to your investors does not line up with how you lobby, you have a big problem,” says Peter Damgaard Jensen, who for 19 years was CEO of one of Denmark’s largest pension funds and has served as chair of the Institutional Investors Group on Climate Change (IIGCC), a European body whose members – mainly pension funds and asset managers – collectively manage more than €51 trillion in assets.

Damgaard Jensen has listened to many companies distance themselves from their industry associations or claim that they have no choice but to go along. He has no time for such excuses. Membership in associations is rarely mandatory, and companies like BASF have considerable sway over the ones to which they belong. It behooves them to lead, not to follow. And investor coalitions like the IIGCC are only getting more assertive.

“They won’t change us,” Damgaard Jensen says. “It’s us that will change them.”

It won’t happen overnight. Damgaard Jensen calls the process a “long dialogue” in which European companies tend to be moving faster than American ones, with BASF a notable exception. He acknowledges that the transition away from fossil fuels poses a particular challenge for the chemical industry; demand for its products continues to grow, while its most critical input is under threat.

But companies won’t meet the challenge by dodging it, or lobbying themselves into a corner, surrounded by their own stranded assets. They must exercise model corporate behaviour: basing today’s decisions on where they see themselves 20 years down the road and talking to everyone – government, shareholders and their peers – out of one and the same side of their mouths.

The post The Climate Blockers: BASF quietly lobbies against strong climate policy while talking a big game appeared first on Corporate Knights.

Alberta Innovates – a Crown agency – says the biggest opportunity lies in the production of carbon fibre, a high-strength material that can be used in wind turbines, automotive applications and the aerospace industry. The agency has launched a $15-million “Grand Challenge” in which 20 laboratories around the world are participating in research to commercialize the production of carbon fibre from the heavy asphaltenes contained in bitumen, in the so-called bottom of the barrel.

“We are finding new ways to use bitumen not as transportation fuel but as value-added non-combustion materials that are worth more than transportation fuel but with a low GHG emissions – products like carbon fibre,” said John Zhou, vice-president of clean resources at Alberta Innovates.

Zhou participated Wednesday in a virtual roundtable hosted by Corporate Knights and the German embassy in Canada, part of a series on rebuilding a cleaner, more sustainable economy as we recover from the COVID-19 pandemic.

He said that while technological challenges remain “very, very significant” to a commercializing bitumen-derived carbon fibre industry, progress is being made.

There are skeptics, however. Wolfgang Seeliger heads up Leichtbau BW, a German consortium of companies developing and deploying lightweight materials that reduce costs and greenhouse gas emissions in transportation and industrial processes. He said that carbon fibre production cannot compete with other lightweight materials on either cost or environmental footprint, noting that it takes more energy to produce auto parts from carbon fibre, for example, than is saved by the use of the lighter material.

Alberta Innovates estimates that diverting 30% of oil-sands production to industrial uses would reduce GHG emissions by 126 megatonnes (Mt) a year. That’s because the carbon from the thick, asphalt-like component of the bitumen would be locked in the industrial material, rather than combusted as transportation fuel or petroleum coke.

It also estimates the industry could earn $84 billion by 2030 from those industrial markets – including $44 billion from carbon fibres – while reaping $27 billion from the sale of the remaining crude.

However, the “bitumen beyond combustion” strategy would not lower emissions from oil-sands extraction and processing in Alberta. The sector currently produces more than three million barrels per day. It accounted for 77 Mt of GHG emissions in 2018, or 10.5% of the country’s total.

Canada has pledged to reduce GHGs by 30% from 2005 levels by 2030, and the federal Liberal government now says it will introduce an even-tougher 2030 goal along with its commitment to get to net-zero emissions by 2050.

Seeliger said carbon fibre will be relegated to a niche market for some time because carbon fibre is expensive and its introduction into markets like automotive, construction and aerospace will require complicated changes to certification standards. However, Zhou said the opportunities will expand dramatically if the province succeeds in driving down the cost and the environmental footprint of producing it. Alberta Innovates believes industry can reduce the cost of producing carbon fibre by more than 50% below that of current methods and reduce the carbon intensity of production by up to 90%. It estimates that a 50% cost reduction in carbon fibres would boost demand tenfold.

Suncor’s Carrie Fanai said Wednesday that Canada’s largest oil and gas producer is focused on the “need to transition to a greener economy.” Suncor has pledged to reduce the emissions intensity of its oil and petroleum products by 30% by 2030, while other companies, notably Cenovus Energy and Canadian Natural Resources Ltd., have set “aspirational” goals to have net-zero emissions at their oil-sands plants.

“For us at Suncor, that has meant not only focusing on improving the GHG intensity of our existing production but looking at new products, energy sources and related lines of business,” said Fanai, who is the company’s lead on bitumen value-chain optimization.

She noted that it is still early days in the journey to commercialization and that producers will have to work with chemical companies and manufacturers to ensure they maintain focus on potential customers.

Marcelo Lu, president of BASF Canada, said the opportunities for carbon fibre “are very large if we can crack the innovation to take the impurities out of the bitumen stream,” which is heavy in sulphur and metals. He said the massive bitumen resource represents a high concentration of low-cost feedstock for carbon fibre that could drive market developments in a way not seen before.

Alberta Innovates hopes to see a commercial-scale demonstration plant for producing carbon fibre from bitumen by the end of 2024.

If it succeeds in reducing the cost of production, the province could produce 326,000 tonnes per year of carbon fibres from the asphaltenes contained in one million barrels per day of bitumen, which would be worth an estimated $44 billion annually in today’s prices, the agency estimates. It says there is also potential to produce activated carbon and asphalt binder from the asphaltenes in another two million barrels per day of production.

The total value of the “non-combustion” products would be $84 billion. At the same time, industry would sell higher-quality crude, “de-asphalted” oil for $27 billion. Total value: $111 billion a year, compared to the $27 billion a year the sector expects to earn by selling three million barrels a day at $25 per barrel.

As part of its Build Back Better series last spring, Corporate Knights recommended that the federal government provide $1.4 billion in funding over five years to help the industry commercialize carbon-fibre production. Environmental groups have called for an end to subsidies for the fossil fuel industry, arguing that government efforts should be focused on the transition off oil.

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

With the support of the Embassy of the Federal Republic of Germany in Canada.

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The recent cabinet shuffle in Ottawa has placed an intensifying focus on a green and caring recovery, one that will likely tie stimulus support and investment to corporations meeting climate goals and contributing to society. This will be a bold move. If there is a time to do it, it’s now. But how can we objectively measure and monitor what companies are doing and give them the incentive to move in the right direction?

For almost 60 years, the core of accounting principles has remained unchanged. Basically, it captures the revenues and costs of a company’s direct economic activity. It does little to account for, in monetary terms, the company’s societal and environmental value contributions and impacts, namely jobs created, wages paid, climate impact, water usage, et cetera. 

At this point, companies disclose these components differently, with varying measures, focus and metrics. To capture the “true” value contribution of business to society, environment and the general economy, this needs to change. Corporate impacts need to be measured and valued using standardized methodologies. Putting a dollar value on impacts on water, air, workers and more (both positive and negative) and stating it in a financial report, would unlock billions in potential sustainable investment. Most importantly, it will make accounting for environmental and societal impacts part of the fiduciary duty of companies’ boards of directors – thereby rewarding measured decision-making, bold actions and accountability.

BASF recently became a founding member of the Value Balancing Alliance (VBA), a non-profit organization whose goal is to change the way company performance is measured and valued. Under the directive of the European Commission, the VBA has been mandated to draft a new set of green accounting principles to support the implementation of the EU Green Deal. More specifically, it will standardize a common method to assess the value a company brings to society, provide a framework for comparability within sectors, enable scalability of adoption, and incentivize a “triangular” approach to business steering and decision making. 

With the convergence of these new management accounting principles, companies will be driven to define and measure their often otherwise abstract statements of purpose and disclose progress on them. These principles will also benefit companies that have had difficulty communicating their positive impact under current financial reporting. This includes energy companies in Canada that are among some of the most innovative and heavily invested in communities and, surprisingly to some, the environment. These new standards will help lure a new generation of investors who will reward companies for considering their total value and impact on society, the environment and the economy, rather than just their profits. 

While many believed that climate change and ESG (environmental, social and governance) metrics would be dismissed during the pandemic-induced downturn, a large number of companies have doubled down on their commitments. COVID-19 has reminded the public and investors what it means to be a company for the good of society. That means protecting and ensuring the safety and jobs of employees, meeting tax responsibilities and responding to crisis with actions, not words, and having purposeful strategies that can weather societal, environmental and business uncertainties.

What’s also clear is that companies that have successfully tied their mission statements to the 2030 UN Sustainable Development Goals agenda have a lot to gain with the transparency that will emerge out of a triangular-shaped recovery.

In the wake of the pandemic, a major reset is coming to all businesses. We need a formal departure from the old ways of accounting. We need companies to work closely with the federal government and international standard setters to align on a new reporting standard that shows a company’s real total contribution to society. Europe has a model that’s worth considering. We should embrace this time of change to leapfrog beyond old norms and adapt quickly to the new challenges we face ahead. It’s time to put numbers where numbers are due, weighing impacts on society and the environment at par with a company’s bottom line. 

The new finance minister may be surprised by how open businesses are to making this change. If it is done in a collaborative way, we may truly see a seismic shift in reporting and decision making that puts Canadian businesses back in the global lead.

Marcelo Lu is president of BASF Canada.

Christian Heller is CEO of Value Balancing Alliance.

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