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Graham Carey: Hello and welcome to Emerald Innovation Insights. I’m Graham Carey. Today I’ll be speaking with Dr. Wolfgang Falter, the Global Chemical Lead for Deloitte Consulting, and we’ll be speaking on the topic of chemistry 5.0. Wolfgang, it seems like chemistry 4.0, the move to industrial digitalisation… It seems like that started just yesterday. What is chemistry 5.0 and what’s driving the chemical industry into this new phase of its existence?
Wolfgang Falter: Yeah, it is like yesterday. Chemistry 4.0… So the digitalisation started about 10 years ago. When you would look at chemistry 3.0, that was 40 years ago, chemistry 2.0, that was 70 years ago, and chemistry 1.0, that was about 155 years ago. So why are we now already in chemistry 5.0, de-carbonisation and sustainable solutions? Because there is a lot of change. De-carbonisation, because the industry is built on fossil hydrocarbons and it is generally accepted that CO2 must be reduced, there is an agreement that by 2050 the industry wants to reduce its CO2 footprint, but it’s a difficult to abate subject because the CO2 is part of the feed stock, and so it’s not as easy just to electrify things. And the other part of the chemistry 5.0 is sustainability and sustainable solutions. So classically, the chemical industry, like almost all industries, have been working in a linear economic system, producing stuff, chemicals, materials, selling it, and not too much caring about it. But we more and more see that we approach planetary boundaries, and we cannot just continue to produce things in a linear fashion, but we have to think about circles and imitating nature and keeping the things in circles. No longer looking at producing kilograms and liters in dollar per unit, but try to be rewarded for the solution or for the problem finding. And that’s what chemistry 5.0 is all about. So, it’s a fundamental transformation of the resource base and the way we are doing business, and the chemical industry is the linking industry between the natural resources and energy industries and almost all consumer and customer downstream industry. So, it’s an important linking pin that connects them. So that’s why I think the chemical industry, per se, has an elemental role in finding solutions for those global problems. And so I think it’s justified to call it 5.0, although it’s indeed a short timeframe.
Graham: Absolutely. Now, and it fits with the broader trend which we seem to see in the news every day, of companies, investors, governments making increasing noise about commitments and reporting on ESG targets, environmental, social, governance. It’s growing in interest but in many respects, the concept still seems to be somewhat poorly defined across industries, and there’s not the standardization or regulation to these sorts of commitments that you see in financial reporting, for instance. What should a chemical company, either a large existing player or a small innovative start-up today… What should they really focus on from ESG reporting in order to drive real lasting change under this framework?
Wolfgang: It’s correct. Unlike in financial reporting where we have… Everything can be added up in US dollars, in Euros, or Renminbi, we here are dealing with a lack of standards, a lack of time horizon, a lack of reporting standards. There is regulatory compliance, so we have non-financial reporting directives in Europe, we have other regulation that must and should be obeyed. Then there are… like, the Global Reporting Initiative and other… I would say, reporting frameworks that give an indication, but they are not binding and there are many of them in parallel, so there is no clear governance. So, I think the recommendation we give, follow the leaders in this one. Make sure that the data quality of what you have, scope one, fall within four walls of your own enterprise. Scope two, the energy that you buy. But also scope three, upstream, what you purchase and transparency in the supply chain. And scope four, downstream, what your customers do with it and where ultimately your products, chemicals, and materials end, that you have clarity and transparency around that. That is a good starting point. At the same time, there are initiatives like the Value Balancing Alliance and other initiatives that are trying to find this, not only an impact assessment, but also an impact accounting. And to find also the social and environmental value and put adequate terms behind that. But that is in early stage and people are looking for the, I would say, non-financial IFRS solution for the industry, and they are working on that, but it will take another, I would say, at least a couple of years until we will see a potential non-financial standard emerging. And until then, I think, do your homework, follow the leaders in the reporting. Doing nothing is not a good recommendation in this stage.
Graham: During your presentation during the European Venture Fair, you mentioned that… This transition to a carbon-free or a de-carbonized sustainable chemical industry, this is not a cheap proposition by any means. It will entail costs. When we think about balancing the environmental and the social components of ESG, how do we collectively avoid passing those costs on disproportionately to those who are at least able to bear it? What should the industry or government be doing today to balance those factors?
Wolfgang: Yeah, I think regulators try to be fair, but someone has to take the cost. And so currently, it is about an internalization of externalities. If we say the macroeconomic value of a metric ton of CO2 currently is… I don’t know, 80 euros per metric ton, someone has to bear the costs. And the regulator can put a corrective tax on it, they can have a trading scheme, they can have a subsidy, but ultimately someone has to pay for it. And if you’re looking about packaging and then you pay 5-10 cents more for a package or a milk bottle or so, that might be still okay. But if you are talking about green fuels and changing air traffic from kerosene to a green hydrogen-based fuels, we are not talking 10%-20% higher ticket prices, but five, six, seven times the airfare. And then it becomes a social issue, because then you have the question, who can still afford to travel by air and who cannot? And do we have a social separation in there? So those questions will come, but they come automatically, because the lack of air, water, resources, arable land. And if we will start pricing that into what we consume, we will ultimately have to somehow pay for that. And I think that is the basic challenge, and that’s also the challenge in who takes the lead on those and how can we avoid unwanted migration and grey import effects into that. So that’s a big discussion in Europe, will de-carbonization not only lead to a de-materialization, but if we don’t pay attention to a de-industrialization of what we are doing here. And I think the answers are in an infant stage and not fully thought through. But people see also, you cannot negotiate with nature on climate change and on resources, and you have to do something if you want to really be serious about what it is that we want to achieve for the next generation. And you see that most of the publications speak about 2030, 2040, 2050. And if I talk to my 21-year-old daughter and she says, “Well, that is your future when you are going to retire or to die, why don’t you speak about 2070, 2080, 2090?” And so I think that’s the issue that we are looking at.
Graham: Absolutely. To wrap up our discussion today, do you see any key pain points or bottlenecks here as we move to Chemistry 5.0 where small innovative companies, startups, could have a real outsized impact on this shift?
Wolfgang: Yeah, I think if you see the whole initiative and a de-carbonization and sustainable development is driven by consumers and regulators. So, we see that the customers and customers customers of the chemical industry are moving and want to move faster than the industry, which is looking into investment cycles of 20 plus years. And so, they are, by nature, a heavy regulated, high entry, high exit barriers by nature of the industry. They are not agile, and they’re not supposed and set up to be agile when you are doing massive investments in carbon structures. So, there is the opportunity for startups for agile companies, for digitally enabled companies, to follow the speed of the customers and customer customers and offer superior, more sustainable solutions. Partly by themselves, partly also probably in combination with the traditional players, because there is also a reason why it is capital intensive, it needs heavy lifting, you need to have the infrastructure in place. So, there’s probably a corporation also between innovative new formats teaming up and accelerating the traditional players.
Graham: Fantastic. Wolfgang, thanks so much for your time and for your expert insights on this topic today. This has been Emerald Innovation Insights, and we look forward to the next session.
Wolfgang: Thank you very much, Graham.