Impact Investing in Chemicals
The Capulets and the Montagues?
Not at all! Impact investing in chemicals might well become the marriage of the century…
Covid-19 has undoubdtedly covered up at least in part the start of a spectacular new love affair. Nevertheless, I can hardly express how interesting and enriching the past few months have been, trying to pitch an idea – or an ambition for the greater good really – to a variety of stakeholders.
The basic concept is the following. We seem to have not one but two obstructions in rapidly transitioning to a sustainable chemical industry. On the one hand, there is – and allow me to generalize without wanting to downplay the many efforts of a great deal of experts – the inherent slow moving industry. On the other hand there is a very rigid financial market place to distribute a (large) surplus of available investment volumes. I will explain both more in detail in what follows.
The good news is that both can be remedied through a combination of proper sequencing and some creativity on how to blend approaches, paradigms and in its raw essence…people.
A sputtering engine of change
I will describe portfolio dynamics of innovation in more detail in an upcoming blog post, but the key take-aways are as follows:
- Most chemical subsectors are driven by volumes and occupacity levels
- Linked to this is a heavy and expensive asset base that promotes the first point
- Consequences are commercial & financial pressure and operational excellence drills
- Production sites and EHS understandably have very limited appetite to ‘try something odd’
- Technology experts often stay within their known field out of fear to lose their expert status
- Many chemical giants are still making loads of money with very high IRR, RONA and EBITDA%
Given these circumstances, how on earth would you rally internal support for groundbreaking changes to facilities, processes, product portfolios or business models? From my own experience I can tell you that this is indeed very hard and in some occasions it even leads to career suicide.
Nevertheless, the challenges we are all facing, as an industry but also as a society require for us to perhaps throw overboard some of the straightforward objections and allow for experimentation in a controlled environment. Climate change and plastic waste pollution will not be reversed with mere incrementalism.
I suggest 2 variations that can lead to scalable solutions and also these mechanisms will be explained in an upcoming (but different) blog post, but I can summarize as follows:
- Set-up a venture like structure that remains independent from but in collaboration with the major player in the sector (or a specific value chain network)
- Apart from start-up participations work with pre-competitive industry consortia
- Organize content based structures and economics on the inner layer and independent financial leverage from blanded (capital) sources on the outside layer
This last point touches upon how to fund – for lack of a better but very abused word – disruption… This leads us to the second topic: rigid financial markets or at least its inherent professionals.
To pigeonhole or not to pigeonhole…
Again I have to apologize for the generalization, because there are plenty of financial experts trying to adapt or move forward a dominant system that unmistakenly has (had?) its merits. However, nobody with any knowledge of the sector can claim there is NOT a very clear divide between regular equity investments and the impact investing world.
I can tell you that it has been a cruisade almost to find the appropriate terminology to describe Triple Helix. Each evident but inaccurate term is immediately burdened with a legacy and quasi-causal conclusions as to what can and cannot be logically or even technically mentioned within the same business concept. My triple Helix partner Eelco will describe this divide and a potential merge at a later stage in this blog section, but I can state this for a fact: true change in turning industries towards higher levels of sustainability and circularity will only happen if returns are or approach those of regular market activity.
This is why we suggest to use impact investor profiles at the start of the process, but tap into the ‘regular usual suspects’ at a later stage to combine the best of both worlds. I think we have found a way to escape from the pigeonhole induced false conclusions denial of our plans. Going forward we wish to share this knowledge and experience as we go along to all those willing to make an impact but struggling with the same dominant logic in a seemingly firewalled financial investor pool.
A suggested solution framework
The beauty of marrying venture-like thinking with blended financial investments from impact investors and regular equity or capital firms is that everyone end ups being better off. It is the zero plus game in real life. I can hear what is on your mind…what about risk? Well, indeed, all of the above is true provided one condition… The oversight and overall management needs to be in the hands of independent and very senior sector insiders on executive and technical level.
Here’s why. Normally, an investment strategy is defined by a clear focus and even more clear financial performance criteria. Investment managers are then ‘released’ to go and finds the right deals, honestly not always with a lot of sector specific knowledge. Here we operate the other way around. Our love affair between venture logic and economically viable impact investments starts from a very clear content driven mission. This clarifies exactly what needs to happen and who is required to realize this. This allows for a profiling step and a long listing of potential participations that are only then subject to standard financial scrutiny and due dilligence. Having captains of the very same industry at the steering wheel not only secures this process, it also provides knowledge that is not written down.
All of the above makes me believe that we have found a very powerful framework within which truly disruptive and impactful transformation on industry level can take place.
Please stay tuned for follow-up blogs on the topics described above and do not hesitate to contact us for more information.