Industry
Manufacturing
Future-Ready Manufacturing: Partnering in your journey to a sustainable manufacturing enterprise
Highlights
- The chemical industry draws attention from investors, regulators, and consumers calling for action to reduce climate and environmental impacts, with tightening regulations and transparent disclosures encouraging companies to go beyond compliance.
- To improve compliance, the chemical industry is advancing its abatement levers around carbon, energy, water, and waste along with circularity, as key enablers of long-term profitability and strengthen its social license.
- The sustainability transition for the chemical industry can be accelerated by leveraging AI and digital tools for sustainability induced processes, products, and service innovations.
On this page
On this pageinpage
Summary
Proactive investment in sustainability-focused IT capabilities will set future leaders apart in the chemical industry.
This paper aims to position the chemical industry’s sustainability transition through a digitally enabled lens, emphasizing the unique balance between economic enablers and planetary constraints.
The chemical industry stands at the crossroads, in an endeavour to balance economic growth with sustainability imperatives. As sustainability directives (for example, CSRD, CSDDD) and regulations (for example, EUDR, PPWR) tighten, companies must integrate circular economy principles, decarbonization strategies, and undertake digital transformation to remain competitive. Addressing carbon, energy, waste, and water impacts through advanced recycling, bio-based materials, and AI-driven optimization is essential. Additionally, the shift to sustainable supply chains, transparent disclosures, and digital product passports ensures regulatory compliance while unlocking billion-dollar opportunities. While much more can be done, chemical companies operate with long investment cycles. Fundamental process changes at scale are complex and capital intensive while large-scale modernization is time consuming and requires a phased approach to low carbon and circular transformation.
In the sustainability journey for process and chemical industries, the integration of digital tools is key in enhancing the operational performance, improving the resource efficiency, and enabling the phased adoption of sustainability–focused innovations. While the end-to-end sustainable transformation of their value chain may be complex and incremental, organizations that proactively invest in their sustainability induced digital capabilities are likely to outperform competition due to their ability to monetize the complexity of data driven sustainability response strategies that the volatile market demands.
Introduction
The chemical industry is both a pillar of modern civilization and a significant contributor to environmental challenges.
Few industries shape the modern world like chemicals — from plastics and coatings to fertilizers and fuels — and it is also one of the most resource-intensive sectors. These extremities define the chemical industry’s central role in the sustainability transition.
The chemical sector has intricate value chains, unique raw materials, and resource-heavy processes, which can have far reaching consequences on air, water and land emissions in the absence of stringent internal and external controls. Chemical companies operate in an interdependent ecosystem – drawing an analogy to a food chain – by using foundational feedstocks originating from petrochemical industries with value addition through various processes as they move through the supply chain, leading to complex products used for packaging, coatings, and high-performance engineering plastics. Under the North American Industry Classification System (NAICS) codes, these industries are classified from basic chemicals (NAICS 3251) to advanced coatings and engineering thermoplastics (NAICS 3255). As a simple example, raw materials like ethylene, propylene, benzene, and chlorine get transformed by processes like cracking, distillation, and separation to produce synthetic resins, polymers, and intermediate chemicals. The value addition creates carbon emissions, plastic waste, and hazardous materials which must be managed, tracked, recycled, and disposed of with certifications adhering to various standards with environmentally friendly methods.
External Drivers
For competitive advantage, chemical companies need to go strategically beyond regulatory compliance.
In addition to regulatory pressure, shifting customer preferences — such as demand for low-toxicity materials, ethical sourcing, and recycled content — are emerging as parallel drivers.
Due to its wide impact, the sector is under increasing scrutiny from regulators, investors, and consumers to minimize environmental impacts across the value chain. A range of emerging and existing regulations in Europe such as Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy, Corporate Sustainability Due Diligence Directive (CSDDD), EU Deforestation (EUDR) and Extended Producer Responsibility (EPR), amongst others are shaping sustainability expectations across the value chain. For being aligned to these regulatory and voluntary frameworks, companies are required to ensure transparent disclosures such as European Sustainability Reporting Standard (ESRS) Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), Task Force on Climate Related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB), amongst others, where digitalization has a significant role.
Sectoral challenges
Sustainability goals vary across the chemical sub-sectors, with each facing unique decarbonization, environmental, and circularity challenges.
These challenges vary in scope and depth — from achieving net zero targets, renewables and green hydrogen use to complying with extended circularity mandates like Extended Producer Responsibility (EPR) and plastic recycling quotas driven with regulations. This creates a business necessity to invest in central digital solutions with unified data rather than siloed data and stacks, which may impede strategic integration.
Given the diversity of the chemical industry, the sub-sectors must meet their immediate and short-term goals of reducing their Scope 1, 2, and 3 emissions across the value chain, while also being committed to growth and profitability required by stakeholders and staying aligned with evolving regulatory landscape.
As an example, while paints and coatings companies focus on reducing VOC emissions, PFAS, hazardous waste and Scope 3 emissions, the packaging sector is under pressure to improve plastics circularity, reduce landfill, ocean dumping, and chemical safety. Industrial gas firms address carbon intensity and hydrogen innovation, while biosciences and fragrance producers prioritize ethical sourcing and biodiversity conservation.
The sustainability targets for 2030 typically include life cycle assessments (LCA), increasing recycled content of products, deforestation-free supply chains, and zero-waste goals, while 2050 goals align with net-zero emissions and complete circularity. The unique challenge lies in bridging the gap between ambition and execution, where the unified sustainability digital fabric is a key imperative.
This approach needs sustainability decisioning to be integrated across the boardroom, CXOs, and frontline operators. This is where the sustainability digital transformation, powered by a GenAI engine, will play an increasingly impactful role across the chemical industry. It is imperative to invest strategically now for that.
Industry response
While the industry is actively stepping up efforts, the spectrum and complexity of sustainability challenges demand a multi-pronged and digitally supported response.
Chemical companies face various risks such as financial, market, class-action, and reputational damage. Several research papers indicate that companies failing to invest in Environmental, Social and Governance (ESG) priorities face elevated risks to their profitability and market value including potential impact on EBITDA margins.
The chemical industry responds in multiple ways to their sustainability challenges with a suite of abatement levers while factoring materiality risks:
- Decarbonization:
- Scope 1 & 2 emissions reduction through operational efficiencies, energy optimization, process redesign, waste heat recovery, use of renewable energy, PPAs & RECs, Green IT, and use of EVs or Low carbon fleets.
- Direct CO2 emissions reduction leveraging carbon capture and utilization and mitigation of fugitive gas emissions is also being leveraged by industry.
- Scope 3 emissions reduction or value chain decarbonization with supplier engagement and alternatives.
- For product decarbonization, chemical companies are leveraging life cycle assessments which become critical for their end customers and users, enabling the companies to embed the circularity principles in redesigning processes internally and externally.
- Waste reduction and circularity: Advancing circularity and low-carbon feedstocks includes adoption of bio-based materials, mechanical/chemical/molecular recycling methods, and reduction of waste through zero waste manufacturing.
- Material innovation: Removal of PFAs or ‘forever chemicals’ and development of near-term materials to directly replace environmentally impactful substances.
Regulatory reforms
Regulations are undergoing reforms to enable companies to cope with deadlines which have been reset to mid-2028.
Legislative proposals on Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and Carbon Border Adjustment Mechanism (CBAM), highly relevant for the chemical industry, are currently being streamlined, revised and the provisions are being reviewed by EU Commission for adaptation. The CSRD and CSDDD disclosure requirements will be applicable from July 2028.
While the alignment of the EU Taxonomy is a requirement under CSRD, the extent of this reporting obligation is being eased out to allow companies more time to align their reporting processes. CBAM is also being revised to reduce administrative burdens. These reforms aim to balance the regulatory efficiency with sustainability and fairness in global trade. The specific deadlines for EUDR and PPWR directives would be determined by the individual EU member as they transpose the regulation into national laws.
One of the core requirements of CSRD is that companies must structure their sustainability disclosures using the same technical screening criteria, definitions, and classification system defined in the EU Taxonomy. This will ensure that the activities can be consistently evaluated for environmental sustainability. While the technical criteria and classification rules under the EU Taxonomy remain unchanged, the timeline for the companies to structure and report their sustainability disclosures is being extended to allow more time for compliance readiness. Simultaneously, the CBAM is undergoing adjustments to reduce compliance complexity. These reforms are aimed at making it easier for companies to meet regulatory expectations without compromising the EU’s broader sustainability objectives. For directives such as EU Deforestation Regulation (EUDR) and Plastic Packaging and Waste Regulation (PPWR), the implementation timelines and enforcement are left to the discretion of the individual member states who must determine and legislate timelines at the national level. Member states are actively preparing for enforcement of both EUDR and PPWR - with the competent national authorities being designated and national implementation frameworks under development. The first reporting cycle for EUDR and PPWR regulations is Q3 and Q4 2026, respectively.
Risks and opportunities
Sustainability and circularity present both risks and billion-dollar opportunities for chemical companies.
Chemical industries face high risk propositions such as plastic pollution bans, carbon taxation, and hazardous material restrictions, posing immediate financial threats. The untapped potential of digital circularity, bio-based innovations, AI-powered materials science and chemical product passports represent newer opportunities. Companies investing in efficient energy usage, waste optimization, AI-enabled process optimization, circularity and alternative feedstocks in the next three years will be able to get a competitive edge. This may also probably command a premium from their customers which will help them with their growth while decoupling the climate and environmental impact.
The next frontier
The key is to advance digital enablement to achieve sustainability at scale.
Chemical companies require a combination of basic and advanced IT solution functionalities. It starts with basic needs of tracking Scope 1, 2, and 3 emissions, energy modeling, digital twin of process emissions, supplier sustainability, monitoring overall progress on goals, regulatory compliance and disclosures leading to managing circularity, mass balance, and chain of custody models to facilitate International Sustainability and Carbon Certification (ISCC) or ISO certifications with audits. Advanced solutions can provide interoperability between disclosures, persona-based sustainability decision-making, AI-powered regulatory intelligence, supply chain traceability with blockchain, automated environmental product declarations and creating digital passports.