Big Oil bets big on plastics as investors sound alarm on stranded-asset risk

New report from As You Sow digs into the risks of overinvesting in petrochemical infrastructure

Lila Holzman is the senior energy program manager at shareholder representative As You Sow.

Conrad MacKerron is senior vice president at As You Sow, where he manages the waste and plastic pollution programs.

As the world transitions to cleaner sources of energy in response to the climate crisis, the energy sector is facing significant reduction in demand for fossil fuel products. To hedge against shrinking demand from the power and transportation sectors, oil and gas companies like Exxon and Chevron are allocating significant resources to boost production of petrochemicals – especially plastics.

Proposed investments in expanding petrochemical infrastructure require enhanced scrutiny by investors as financial and ESG (environmental, social and governance) risks grow. Investors must ask whether this plastic-based bet will pay off, or whether the fossil fuel giants are clinging to an inherently flawed business model as a global plastic pollution crisis turns public opinion against cheap, wasteful, single-use plastics.

To shed light on this emerging topic, shareholder representative As You Sow today released a report, Plastics: The Last Straw for Big Oil?, addressing the competitive, ESG and stranded-asset risks of overinvesting in petrochemical infrastructure.

In the U.S., much of the petrochemical build-out is concentrated in two geographic hubs: the Gulf Coast and the Ohio River Valley, where proximity to low-cost ethane has historically provided a competitive advantage, especially over international producers. However, U.S. profit margins have narrowed significantly. Overcapacity from the previous wave of plastic investment, paired with assumptions about demand that are potentially overly optimistic, threatens the economic feasibility of planned and existing projects.

As overcapacity builds, plastic pollution has become one of society’s most intractable problems, with staggering volumes of plastic waste mismanaged. Current recycling systems and newer technologies like “advanced” recycling, in which low-quality plastics are broken down to make fuel, new plastics or other chemicals, fall far short in curbing the global plastic pollution problem. As a result, momentum is growing among consumers, markets, governments and other stakeholders to reduce plastic consumption, hold brands and manufacturers responsible for plastic pollution, and transition from a linear make-take-dispose plastic model to a circular economy where plastic materials can be efficiently collected at scale, in high volumes, and recycled many times over.

A recent study by The Pew Charitable Trusts and SYSTEMIQ calls for consumer goods companies to cut plastic demand by at least one-third. Major consumers of single-use plastics like Unilever and Procter & Gamble have already agreed to reduce use of virgin plastic by hundreds of thousands of tons. In 2016, the Ellen MacArthur Foundation launched its New Plastics Economy project, a platform for businesses and governments to make a range of commitments focused on a circular economy for plastics – more than 250 businesses have committed to 100% reusable, recyclable or compostable packaging by 2025. The World Economic Forum reports that 170 nations have pledged to “significantly reduce” consumption of single-use plastics by 2030, and China is set to ban and restrict single-use and disposable plastics over the next five years. Plastic producers have yet to take this momentum into account, which may deflate expectations for virgin plastic demand.

The world’s pursuit of a circular economy also aligns with our Paris Agreement climate goals of transitioning to a net-zero emissions economy. The petrochemical industry emits significant greenhouse gas (GHG) emissions across its entire supply chain, from extraction of fossil fuels through the end-of-life of petroleum-based products. The plastic lifecycle alone may be on track to consume 19% of the world’s remaining carbon budget by 2040 under business-as-usual. While the plastic industry narrative touts the GHG benefits of light-weight plastics over certain alternatives, company disclosure of emissions associated with the full plastic supply chain are lacking, especially as company activities, such as steam cracking of ethane into ethylene (a building block for plastics), stretch across sectors, blurring accountability boundaries. While companies typically disclose their Scope 1 emissions – those emitted directly by the company’s operations – and emissions from a company’s use of purchased electricity (Scope 2), other indirect supply chain emissions (Scope 3) are less well recorded. When assessing corporate GHG disclosures and targets, it’s critical for investors to understand which activities are “in scope” and which are left unaddressed.

Finally, planned investment in petrochemical projects is increasingly at odds with long-term environmental justice issues – people of colour are twice as likely to live within a fence-line community, immediately adjacent to and affected by a company facility, such as a cracker plant. These facilities use and emit dangerous chemicals with documented negative health effects and face growing opposition from grassroots organizations and community groups. Health risks are further heightened by climate change-induced extreme storms in the Gulf Coast – where most existing and planned petrochemical production capacity is located – causing dangerous chemical leaks.

Last year, shareholder resolutions filed by As You Sow requesting disclosure on the public health impacts of chemical releases associated with extreme storms garnered a majority vote at Phillips 66 and strong votes at Chevron and Exxon. These three companies own a large portion of petrochemical plants and assets throughout the Gulf Coast, with plans to build more. Chevron Phillips Chemical Company (a joint venture of Phillips 66 and Chevron) responded to the resolutions by publishing enhanced information about physical climate risk management, but meaningful discussion of community health impacts is still lacking.

For the first time this year, As You Sow filed a resolution with ExxonMobil requesting clear and targeted reporting on the risk of stranded assets related to its petrochemical investments in consideration of the public, market and governmental responses to plastic pollution, community health and climate change. Unfortunately, the U.S. Securities and Exchange Commission allowed Exxon to omit the resolution from its proxy this year, a decision at odds with investor concern and requests for transparent disclosure on this issue.

Given the multitude of ESG issues, investors need to provide ongoing and heightened scrutiny to assess whether industry’s proposed increase in fossil-plastic production will be a saving grace or a stranded asset in the making. Raising critical, timely questions serves as a starting point for more robust investor engagement on this evolving issue, before the plastic build-out is locked into place.

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