BASF Upgrades Climate Transition Plan

BACKGROUND AND CONTEXT

Last year, in support of the Climate Action 100+ investor initiative, Planet Tracker published a series of Climate Transition assessments featuring seven companies in the chemical sector: BASF (BAS), Bayer (BAY), Dow (DOW), Incitec Pivot (IPL), Air Liquide (AI), LyondellBasell (LYB) and Toray Industries (3402: Tokyo).

One of these companies was BASF (BAS), with the main gap in its Net Zero journey being the lack of a Scope 3 target. This is highly relevant as 83% of BASF’s CO₂ emissions came from Scope 3 in 2022. In addition, while being highly exposed to the emissions of its suppliers, the management strategy at the time was to ‘retain and engage’ suppliers which ‘deviate’.

Also, we found that to achieve its Net Zero target by 2050, BASF is highly reliant on technological solutions such as scalable Carbon Capture and Storage (CCS), electrification, and renewable energy supplies. Yet, at the time of our analysis, BASF invests 10 times more in capacity expansion compared to GHG emissions mitigation. However, BASF management would point out that a large proportion of the company’s capex is spent on topics that impact the wider transformation, e.g., battery materials for electric vehicles. We note that BASF’s spending on wind farms or PPAs for clean power are not considered under capex.

Thus, our main recommendations were to (1) set a Scope 3 target with projections, (2) engage suppliers so they’ll assist BASF in reaching its Net Zero goal, and (3) disclose a clear investment plan for its climate transition with quantified expected GHG mitigation.

On a positive development, since our report publication, the company released additional steps progressing towards what we consider to be a more credible transition, as detailed below.

UPGRADED TARGETS AND STRATEGY

Following Planet Tracker’s analysis and engagement efforts, in December 2023 BASF held an Investor Update presentation with additional disclosures, aligning with our recommendations.

One of the main highlights is that on top of the CO₂ emission targets of reducing Scope 1 and 2 emissions by 25% by 2030 from a 2018 baseline, the company also intends to reduce specific Upstream Scope 3 “Purchased Goods and Services” GHG emissions by 15% by 2030 from a 2022 baseline. With this updated target BASF aims to achieve Net Zero by 2050 for its Scope 1, 2, and 3.1 (i.e., Scope 3 “Purchased Goods and Services”) CO₂ emissions.

However, it is noteworthy, that to determine its Scope 3.1 baseline, the company used industry averages and engaged around 2,000 suppliers which account for approximately 70% of its relevant Scope 3 “Purchased Goods and Services” emissions. Moreover, BASF has only validated primary data for over 25% of its relevant Scope 3.1 emissions. Therefore, this baseline could be prone to changes as more accurate data might become available in the future.

As part of the Investor Update, the company also reported on enhancements to its product categorisation, referred to as the “TripleS” (Sustainable Solution Steering) method. This approach, aimed at increasing the measurability and transparency of companies’ products’ sustainability, was adopted by the World Business Council for Sustainable Development (WBCSD) when developing its Portfolio Sustainability Assessment (PSA) methodology. Hence, according to BASF, TripleS is aligned with the industry standard for product portfolio assessments.

Under this new approach, the company analysed the positive and negative impacts of 45,000 products over their full life cycle and assigned them to one of five categories: Pioneer, Contributor, Standard, Monitored, and Challenged. According to the company’s disclosures, ‘Pioneer’ products contribute significantly to sustainability and exceed the market standard. Meanwhile, by introducing the new ‘Contributor’ category, BASF argues it can better show the contribution of products that meet the market standard while still making a positive contribution to sustainability.

It is worth noting, that while this methodology is not directly related to the company’s emissions targets, it aims to show the proportion of sales from products that contribute to various sustainability categories. The company expects these two categories – Pioneer and Contributor – to represent around EUR 24 billion (USD 26 billion) in sales in 2023. This is the equivalent of 42% of sales that are in the scope of TripleS. Furthermore, BASF defined a new KPI, the “Sustainable-Future Solutions” (SFS), as the sum of Pioneer and Contributor sales and aims to increase the SFS sales from 42% in 2023 to more than 50% by 2030. In addition to sustainability considerations, this target is also driven by the fact that the margin of products in these two categories (Pioneer and Contributor) is up to 10% points higher than for the rest of the portfolio in scope. Also, in the past, the sales of these products grew faster than the rest of the portfolio.

From an emissions perspective, reducing the company’s specific Scope 3.1 emissions by 15% from 2022 to 2030 across the portfolio would represent a decrease from 1.57 to 1.34 kilograms of CO₂ per kilogram of raw material bought. Accordingly, as stated in its latest disclosures, BASF will focus on raw materials for those products for which the customers are prepared to pay a low carbon premium (i.e., primarily Pioneer and Contributor products). Furthermore, the company aims to increase the sourcing of raw materials from suppliers which can provide CO₂ emission data and who offer raw materials with a lower CO₂ footprint. Also, the company assures to continuously review the technical and economic feasibility of its climate transition projects, adjust its project list, and shift projects away from regions with unfavourable regulatory conditions. The main projects for carbon abatement include eFurnace – a demonstration plant funded by the EU in Germany to start this quarter – water electrolysis – again located in Germany with a planned start-up in 2025 – and CCS projects in the US (under evaluation) and Belgium (for a 2027 start).

Nevertheless, as explained at the Investor Update presentation, BASF is not prepared to share publicly a granular roadmap with project timelines and capex projections for its Net Zero pathway; and while the company might argue competitive reasons for this decision, the lack of disclosure could bring into question the feasibility of BASF projects and its climate transition credibility. BASF management’s response is that they have “to continuously review the technical and economic feasibility of these projects due to the large number of regulations being introduced and the constantly changing framework conditions”.ⁱ

It is possible that management’s hesitancy in further detailing net zero transformation is to ensure that it has the flexibility in free cash flow to pay a rising dividend to shareholders. The 5-year dividend yield for BASF shares has been 5.6% and the present forecasted yield is between 7-8%.

BASF stated in its Investor Update (December 2023) that one of the major levers for capex reduction in BASF’s net zero transformation will see the overall investment scope maintained “with a clear focus on CO₂ reduction, renewables and recycling” but fund “certain investments, such as wind farms, via project financing, which will require less capex.”ⁱⁱ In addition, management mentioned that it “will strike the right balance between power purchase agreements and own investments in the production of green electricity.” Top of the list for capex reduction was postponing non-critical projects and flexing the scheduling of growth project investments.

INVESTORS INTERESTS AND FINANCIAL IMPLICATIONS

Reviewing BASF’s Investor Update Q&A session five main themes emerged:

1. Market Conditions: The investors inquired about current demand trends, particularly in regions like China, and the impact of potential changes in government policies in different regions, such as the US and Europe.
2. Financial Performance: The investors raised questions regarding BASF’s financial performance, specifically about the EBITDA guidance, the impact of different business segments on overall financial results, and assumptions for future performance.
3. Business Strategy: The investors were curious about BASF’s strategic plans for different business units, such as the Wintershall Dea business and agribusiness. They also asked about potential sales, strategic options, and the integration of new businesses into BASF’s overall strategy.
4. Industry Dynamics: The investors questioned the management regarding the competitiveness of the European chemical industry, BASF’s steps to address its competitive challenges, the performance of customer industries, and their impact on BASF’s business (e.g., the automotive industry).
5. Policy Environment: The investors were also concerned about the impact of political and regulatory changes on BASF’s operations, including the European Net-Zero Industry Act, the Carbon Border Adjustment Mechanism (CBAM), regulations related to forced labour, and the impact of energy policies on BASF’s production facilities.

As can be observed in the main subjects covered above, only one theme, the ‘Policy Environment’, covered to a limited extent the climate transition topic. At Planet Tracker we find this surprising, especially since according to BASF around 40% of the company’s sales come from sustainability-aligned products. Moreover, according to the company, these products have around 10% higher margins than the rest of the products in the portfolio, and their sales grew faster than the rest. Therefore, it would seem desirable for investors to focus on questions related to the expansion of this range of products while phasing out the low-margin ones. Also, if sustainable characteristics, either in line with or exceeding the market standard, are the reason for these economic advantages, investors should inquire about developing and maintaining said characteristics. Otherwise, the company might risk losing its unique selling proposition to the competition.

CLOSING COMMENTS

In summary, it is encouraging to witness the positive steps taken by BASF, which align with our Climate Transition recommendations. We find the company’s commitment to upgrading its targets and strategies commendable.

Management appears keen to protect future dividend payments, but capex delays and flexing cannot go on forever, especially if the execution on the net zero transformation is to take place by 2050. Because of long lead times on projects, an early commitment to climate projects is needed. For example, the Antwerp CCS project is scheduled for start-up in 2027. If there is no marked rebound in global growth for chemicals, BASF management may have to choose between a reduced payout to shareholders or failing to deliver on its climate transition plan.