In addition to the portfolio choices, we studied the relative impact of three other factors that drive chemical companies’ performance. These include diversity, equity, and inclusion (DEI) programs, M&A activity (number of deals), and environmental, social, and governance (ESG) scores. Our analysis reveals that while these three factors are all important, none individually seems to have had as significant an impact as portfolio decisions in driving shareholder value as represented by the TSR.
DEI had relatively less impact than portfolio choices in explaining the variance in financial performance of focused and diversified chemical companies. For example, in 2020, the average diversity and inclusion rating (DIR) and the average TSR for companies that pursue a focused portfolio strategy were 53.3 and 29.9%, respectively. In contrast, the average DIR score and the average TSR for companies that pursue a diversified portfolio strategy were 54.0 and 20.4%, respectively.10
Also, our analysis of the M&A activity of 217 global chemical companies from 2000 to 2020 did not show as strong correlation between M&A activity and financial performance when compared to portfolio choices in improving profitability and creating shareholder value in the long term. For instance, Solution Providers pursued an average of 21 M&A deals per year over the past two decades and generated an average annual TSR of 20.6%. In comparison, Natural Owners engaged in an average of 14 M&A deals per year, but generated an average annual TSR of 29.7%. 11
Similarly, the impact of ESG scores—that measure the sustainability and societal impact of investments on performance is not as significant as that of portfolio choices. For example, the average ESG score and the average TSR for companies that pursue a diversified portfolio strategy were 57.2 and 20.4%, respectively. In contrast, they were 49.0 and 29.9%, respectively, for companies that follow a focused portfolio strategy.12