Meeting Customer Demand Through Sustainable Innovation

When considering opportunities for investment within the specialty chemicals industry, one of the most transformative trends at top of mind for chemical industry leaders is sustainability. Companies are prioritizing environmental impact as a key driver of strategic decisions in their own operational design, in how to serve customers and in how to drive value for investors. L.E.K. Consulting’s recent survey of specialty chemicals industry leaders shows a growing strategic interest in sustainability goals over the next five years (see Figure 1).

Chemicals companies across the economy are making critical investments in sustainability, and those serving the consumer sector — particularly beauty and personal care, apparel/textile and footwear, and house and home brands — are further along in development and execution of sustainability strategies versus other end markets.  

End user demand for green ingredients and inputs is a key driver of the adoption of bio-based and greener chemical inputs, as this pull-through demand drives a higher willingness to pay the premiums associated with many “green" alternative solutions. A significant share of consumers report an increased willingness to pay a premium for sustainable versions of products, including price premiums of up to 30% for beauty and personal care and closer to 40% for packaged and fresh food and beverage items (see Figure 2).

Further fueling the urgency to invest and innovate in sustainable solutions is an expectation that end user demand will continue to grow — 90% of chemicals manufacturing leaders see green chemical demand increasing over the next three years (see Figure 3). Additionally, 45% of leaders in the personal care, house and home, and other consumable chemical categories designate sustainability investments as “very important,” nearly double the number indicating the same in non-consumer-facing sectors.

Company size also appears to influence investment in sustainability, with midsize companies ($500M-$1B revenue) investing at a higher rate than very small or large-cap companies (see Figure 4). Midsize firms often have a specialty or premium offering that justifies the investment in sustainable innovation. Over time, we expect larger firms to follow with innovation as sustainable options penetrate larger market segments, such as the increase seen in biopolymers in consumer products.

The importance of sustainability strategy in the specialty chemicals market has increased since 2021. Chemicals industry leaders indicate that recycling, energy transition/emission reduction and waste reduction have been the most important goals over the last 12 months (see Figure 5).

In addition to bio-based and green chemical technologies, using recycled inputs to achieve sustainability goals is increasingly popular within the industry. Recycling and circular economy solutions often have lower barriers to scale relative to new technologies.

Going forward, chemicals firms should expect to face increased levels of innovation and investment by their peers and adjust strategic outlooks to remain competitive and increase differentiation.

This article is part of a series highlighting the results of an L.E.K. survey of specialty chemical producers across the value chain. In upcoming articles, we will review chemicals companies’ prevailing strategic priorities in depth, including where firms are investing in digital strategy and optimizing supply chain.

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