When the stock market closes today, the DowDuPont merger will officially be finalized and the new entity will start trading under the ticker DWDP (as of September first). This is the most recent – and certainly one of the most significant – mergers in an industry that has seen unprecedented consolidation. But what are the social and environmental ramifications of this consolidation and does it risk changing the industry’s ESG risk profile?
Chemical companies are struggling to create value through organic growth due to weaker economic conditions, which have impacted margins and reduced demand. This has resulted in increased shareholder pressure to create value through consolidation. The total value of merger and acquisition activity in the chemical industry increased from US 31.8 billion to USD 231.1 billion between 2013 to 2016 (see our ESG Spotlight: ESG compatibility: a hidden success factor in M&A transactions to learn more about the link between company ESG ratings and the financial success of M&A transactions).
The USD 130 billion DowDuPont merger follows the announced mergers and acquisitions of Clariant and Huntsman Corporation, Syngenta and ChemChina and Bayer and Monsanto. Moreover, in 2017, AkzoNobel, a leading global paints and coatings company based in the Netherlands rejected three unsolicited takeover bids from US-based PPG.
ESG Risks from Consolidation in the Chemical Industry
Consolidation means bigger companies with fewer competitors. This is likely to translate into greater political influence, which can become a concern when it comes to the regulation of hazardous chemicals that impact both our health and the environment. Dow, Dupont, Bayer, Monsanto and Syngenta increased their lobbying expenditure by $1.6 million in Q1 2017 compared to the same period last year. According to Bloomberg, this increase is not primarily driven by the M&A activity, but rather by high-stake bills, such as the Endangered Species Act, and other regulation.
Dow’s influence has enjoyed special media scrutiny, because of CEO Andrew Liveris’ close relationship with Trump. Liveris personally donated $1 million to underwrite Trump’s inauguration ceremony and was appointed to lead the American Manufacturing Council, which was disbanded on August 16th. While it is difficult to objectively assess the impact of lobbying efforts and personal influence; there are several developments that have raised eyebrows.
In February 2017, Trump handed Liveris the pen he used to sign an executive order to create a task force to roll back government regulation. In March, EPA administrator Scott Pruitt reversed Obama-era efforts to bar the use of Dow’s chlorpyrifos pesticide on food even after peer-reviewed studies revealed that limited exposure could hampered the development of children’s brains. In April, Dow and other pesticide manufacturers urged the administration to “set aside” governmental studies that showed that chlorpyrifos and other pesticides posed a risk to nearly 1,800 critically threatened or endangered species, claiming the studies were scientifically unsound.
As a result of the consolidation in the industry, chemical companies’ bargaining power will increase, which may become problematic under certain circumstances. In the US, the merged DowDuPont entity now controls 40% of the country’s soy and corn seed market, which greatly increases farmers’ dependency on a single supplier. Price pressures could affect their livelihoods or lead to higher costs, which will most likely be passed on to consumers.
Consolidation also has several potential benefits. Mergers can create economies of scale and improve efficiency while the pooling of resources could stimulate research and development. The benefits to the company are, however, dependent on the success of the integration and whether these benefits get passed on to society depends on the presence of healthy competition in the relevant market. Weaker competition could reduce the need to innovate to keep a competitive edge over competitors. This could mean companies may end up spending less on finding safer or more environmentally friendly alternatives to current products and ingredients.
Many investors have benefited significantly from the M&A activity in the chemical industry, but this consolidation is also creating potential social and environmental concerns. Investors will need to be conscious of these risks as they navigate an uncertain future in the pursuit of long-term value creation.
Investors Seek Meaningful Scope 3 Emissions Targets to Evaluate Climate Transition Plans
Climate concerns continued to dominate proxy voting in the 2022 proxy season. With more clarity on sectoral commitments required to achieve the global net zero goal, shareholders’ requests have become noticeably more specific. A larger number of resolutions asked companies to adopt and report on emissions reduction targets and transition plans that reference the latest forward-looking guidance.
Post-COP15 Outlook: Evolving Investor Responsibilities in Biodiversity
Awaiting COP15’s Global Biodiversity Framework negotiation outcomes, financial market participants could face new regulatory pressure sooner than expected to integrate biodiversity assessment into their investment, decision-making processes.