MIT Sloan Management Review
Reaching net-zero emissions demands cooperation across industries. BASF and Henkel, two leading chemical companies, are working together to reduce emissions across their supply chains. By aligning their goals and sharing resources, they demonstrate that collaboration is crucial for achieving sustainability, even in complex sectors, and making real progress toward climate targets.
The Way to Net Zero: Reducing Emissions Takes Teamwork
Authors: Martin Glaum, Alexander Gerybadze, Thomas Müller-Kirschbaum, Ralph Schweens
Whether driven by regulation or by conscience, many large companies have made commitments to reduce their greenhouse gas emissions as part of worldwide efforts to limit global warming. Doing so is particularly challenging for industrial companies that have energy-intensive production processes or sell products that consume a great deal of energy during their use.
European Union programs and directives have put the identification, monitoring, and mitigation of carbon emissions unequivocally on the corporate agenda. As compliance with those regulations compels EU-based organizations to tackle the transition away from fossil fuels with greater urgency than many of their peers in North America, advances in practice are emerging.
Our study of two of Europe’s largest chemical companies, BASF and Henkel, reveals that even in an especially challenging industrial context, it’s possible to achieve meaningful progress on reducing greenhouse gas emissions. In this article, we’ll show how high-level climate goals, set at the corporate level, can be translated into policies that are implemented in companies’ divisions and business units — and, importantly, be achieved in collaboration with partners in the value chain.
The Chemical Sector’s Carbon Problems
According to the International Energy Agency (IEA), the chemical sector is the largest industrial energy consumer and the third-largest producer of direct CO₂ emissions among industry subsectors. While chemical companies’ high dependence on energy-intensive processes plays a significant role, the IEA has also noted that about half of the subsector’s oil and gas use is for raw material inputs rather than as a source of energy.
Furthermore, value chains in the chemical sector are highly complex and heterogenous, which makes assessing carbon footprints and developing strategies for carbon reduction challenging. And because they supply a broad range of materials to all other sectors of the economy, chemical companies influence the CO₂ footprints of companies in downstream industries and service sectors.
This interconnectedness via supply chain relationships underscores the importance of collaborative thinking and cooperation along entire industrial value chains, from producers of primary goods to the end consumers of products and services. To illustrate this idea, we will delve into the strategies pursued by two German companies: BASF, which has a broad portfolio, and Henkel, a more specialized, downstream company. We’ll also discuss how the chemical companies worked together on a joint project to reduce emissions in downstream products and how they solved some of the challenges that arose.
Tackling Sustainability in the Chemicals Value Chain
Both of the companies we studied have long-term commitments to reducing emissions in order to slow global warming.
BASF is the largest chemical company in the world, with annual revenues of 68.9 billion euros ($76.1 billion) in 2023 and roughly 110,000 employees. From 1990 to 2018, BASF reduced its CO₂ emissions by almost 50%, in part by decommissioning coal-fired power plants and improving the efficiency of its integrated production system. It has recently made significant contributions to emission reductions by making continuous process improvements in existing plants, switching to a renewable electricity supply, electrifying its steam supply, and investing in new technologies such as low-emission hydrogen generation, and it continues to work toward a goal of net-zero emissions by 2050.
Henkel makes industrial adhesive, sealants, and functional coatings as well as consumer products for laundry, home, and hair care; it reported 21.5 billion euros in revenue for 2023 and has about 47,750 employees. Henkel cut its emissions by 61% per ton of products manufactured from 2010 to 2023 by improving its energy efficiency, increasing its use of digital technologies, and making the switch to green power. To make further progress, its recent science-based net-zero roadmap outlines three targets: a 42% reduction in absolute Scope 1 and 2 greenhouse gas emissions by 2030, a 30% cut in Scope 3 emissions by the same year, and an overall decrease of 90% across all scopes by 2045, all measured against a 2021 baseline. By 2023, 89% of Henkel’s externally purchased electricity was coming from renewable sources, and the company wants to be using only green electricity by 2030. In addition, the switch to CO₂-neutral fuels, such as biogas and biomass, will contribute to carbon-neutral production.
The two companies leave very different carbon footprints. Scope 1 CO₂ emissions (those directly caused by company activities) and Scope 2 emissions (those resulting from the production of energy that the company purchases) are typically seen as easier to monitor and track; in 2023, they added up to 17.9 million tons for BASF and 0.328 million tons for Henkel. Scope 3 emissions, which include relevant emissions generated by suppliers and customers, totaled 85 million tons for BASF and 32.5 million tons for Henkel in 2023. (See “Why Scope 3 Emissions Are Challenging to Manage.”)
While the large differences in the two companies’ CO2 emissions are partly the result of the size difference between them, those gaps are mostly due to where they sit on the value chain: BASF manufactures a broad range of chemical products, including basic chemicals, while Henkel purchases chemical raw materials to incorporate into its final products.
The bulk of BASF’s emissions occur early in its production processes. Most chemical products are derived from basic organic chemicals, which are obtained from the primary product, naphtha, by an extremely heat- and energy-intensive process called steam cracking.1 Most of its Scope 3 emissions result from the purchase and transport of naphtha and other raw materials, like natural gas.
For Henkel, on the other hand, customer use of its products is what accounts for the lion’s share of Scope 3 emissions. In particular, use of cleaning or hot-glue products resulted in 22.2 million tons of Scope 3 emissions in 2023. A large share of the remainder of its Scope 3 emissions are attributable to the fossil-fuel-based materials that go into Henkel products. A portion of those emissions originate at BASF, one of its suppliers.
Reducing Scope 3 Emissions Through Teamwork
Because the measures necessary to reduce Scope 3 emissions are not within the sphere of action for individual organizations, progress on this front requires that companies jointly develop and adopt cooperative strategies with value chain partners. In addition, they need to anticipate and influence the behavior of the ultimate users of products and services in their value chain.
To increase transparency for its direct customers, BASF has pioneered a methodology to determine the product carbon footprint (PCF) of each of its more than 45,000 products that uses real production data instead of general estimates from commercially available models. The PCF accounts for cradle-to-gate emissions — that is, all product-related greenhouse gas emissions that occur up until a BASF product leaves the factory. BASF is collaborating with its suppliers and customers as well as with industry consortia to promote broader adoption of this methodology.
Its next step involves a plan to cooperate with suppliers to identify levers for further reductions of Scope 3 upstream emissions, including the use of bio-based raw materials. In addition, BASF is working on new solutions for the circular economy that should significantly aid its efforts to reduce emissions over the longer term.
Henkel’s plan to reduce upstream emissions is to use more recycled packaging materials and ingredients based on renewable raw materials, and it is cooperating with its suppliers, including BASF, to achieve this. At the customer and consumer levels, it aims to reduce Scope 3 emissions by developing new products that require less energy in use, such as adhesives that can be used at lower temperatures than traditional hot-melt adhesives. Henkel also aims to promote behavioral changes among consumers, such as by introducing products that are adapted to work well with lower-energy “eco” settings on washing machines and dishwashers. It also anticipates that as households’ and industries’ access to supplies of renewable energy increase, all of their emissions, including those related to the use of Henkel products, will decline.
Taking a Step Toward Sustainability
The BASF-Henkel collaboration offers some lessons for organizations with similar Scope 3 aspirations.
- Think big and have courage. While many organizations set themselves ambitious greenhouse gas reduction targets, they often do not implement new practices at scale. Small pilot projects are useful to test the technological feasibility of changes in production, but without meaningful, substantial measures in place, companies will not be able to reach their emission reduction targets. To achieve significant reductions fast, economies of scale are crucial. Instead of changing only the raw materials base for only a few products or smaller product lines, companies should target large-volume brands. Larger projects may not require much more effort than smaller ones and will have a significantly bigger impact.
- Find a strong partner. It’s also crucial to team up with partners within the value chain that are committed and have a common vision, technological capabilities, and the resources to deliver. That’s easily said, but orchestrating effective cooperation requires long-term commitment, experience, and competencies on both sides. Companies’ cultures should be sufficiently compatible to allow for joint planning and execution and, in particular, dealing with unforeseen difficulties. It’s more likely that everyone involved will be willing to go the extra mile when all management levels and functions believe that it’s critically important to achieve a material reduction of greenhouse gas emissions. Combining the two large companies’ experiences and different positions in the value chain, as well as several of their corporate functions, brought a lot of energy and excitement to the task for BASF and Henkel.
- Senior management must be closely involved. The sponsorship of senior management and the constant interaction between management and the project team foster fast and tangible results, especially when unforeseen difficulties arise. Only senior managers have the authority to quickly resolve issues such as the cost-sharing problem faced by Henkel and BASF. When senior managers act quickly, decisively, and fairly, they keep projects from getting bogged down, maintain morale and momentum, and motivate managers at operational levels to be similarly decisive.
- Encourage agility. Many variables — raw material supply and cost, consumer preferences, and consumer readiness to pay for more sustainable products — can vary across markets and over time. That means projects to reduce emissions in the value chain require flexibility and the ability to adapt quickly. For example, the cost for fossil-fuel-based products may change, making biomass-balanced materials economically more or less attractive, and both partners need to be prepared to adapt swiftly to such situations. If consumers prefer sustainable products but are not ready to pay more for them, companies need the flexibility to try out creative ideas for keeping profit margins and growth rates at healthy levels while staying the course for a more sustainable product portfolio.
- The BASF-Henkel collaboration can be seen as a lighthouse project in the chemical industry. It demonstrates that with a clear commitment, openness, combined competencies, sufficient resources, and joint efforts by both partners, a significant transformation is possible, far beyond the small pilot projects that the industry had previously undertaken. Both companies are extending their collaborative strategies for reducing greenhouse gas emissions to other partners in their value chains.
The collaborative strategy we’ve described can also be applied along the value chains of other CO₂-intensive manufacturing sectors. For example, automotive manufacturers are working with steel and aluminum suppliers to reduce Scope 3 emissions through low-carbon metals. Net-zero targets in the building and construction sector demand greater quantities of sustainably produced steel and cement. All of the major manufacturing sectors, be it machine tools, electronics, or consumer packaged goods, need to develop industry-specific material balance approaches as well as novel forms of upstream-downstream net-zero collaborations. BASF and Henkel’s experience shows that with strong partnerships, it’s possible to make real progress toward emissions reduction goals.
Credits: TCA, LLC.