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DowDuPont Spinoffs: How Do They Add Up for Aperio's Values-Aligned Investors?

Values-Aligned Investing
April 8, 2019

Last year, the corporate merger of Monsanto into Bayer AG (BAYN) presented values-aligned investors at Aperio with an important portfolio question: Should they retain their shares in the combined company if they objected to Monsanto’s business practices, including its introduction of genetically modified organisms (GMOs) into the agricultural food supply? Now this question is surfacing again at another widely held (and sometimes-maligned) company—DowDuPont (DWDP). Because this corporate action involves spinoffs rather than a merger, the portfolio question this time is effectively being posed in reverse.

DowDuPont will be breaking into three companies over the course of this year. For Aperio clients concerned with environment and health issues, will the risks facing this chemicals behemoth now disappear or simply move into different places? Here are some facts you may wish to know:

  • For starters, DowDuPont came together in August 2017 with the historic megamerger of two chemicals giants, Dow Chemical Company and E.I. du Pont de Nemours & Company (DuPont). The combined company was valued at $130 billion at the time of the merger and had $80 billion in annual sales, making it a staple of most index-based portfolios. Both firms sometimes showed up on lists of companies making objectionable products that posed alleged human health and environmental hazards.
  • By the end of 2019, DowDuPont will break into three separate companies: Dow Inc., a materials science company; DuPont, a specialty products company; and Corteva Agriscience, an agriscience company. By virtue of size, each will be a global leader in its field.
    • Corteva Agriscience will stand as the world’s only major agriscience company completely dedicated to agriculture, specializing in crop protection and seeds. (Think pesticides and GMOs.)
    • Dow Inc. will be a global leader in making propylene, silicones, and industrial materials, with half of its revenue coming from plastics and consumer packaging. (Think plastic grocery bags and containers, consumer care, and industrial coatings.)
    • DuPont is being billed as the “fast-growth” portion of this spinoff, with a focus on transportation, electronics, and nutrition. (Think electric vehicles, lightweight materials, and probiotics.)
  • Of the three newly minted companies, Corteva and Dow may raise the most obvious red flags for investors concerned about chemical and genetic alterations of the world’s food supply and the proliferation of plastic waste around the globe. DuPont, by comparison, may be in “greener” businesses, but it is not without its own set of sustainability concerns.
  • While Aperio’s ESG (environmental, social, and governance) team does not conduct fundamental company research or offer stock-picking advice, we have come up with some ESG strengths and concerns of each spun-off company that may be of interest to values-aligned clients:

Corteva Agriscience

Strengths: Like it or not, we believe Corteva is in a “growth” business (no pun intended). The global market for genetically modified seed is expected to top $43 billion by 2022, with a projected compound annual growth rate of nearly 10%, according to the industry research site ReportLinker. Longer term, there will be another 1.5 billion mouths to feed in the global population, meaning that more food will need to be produced per acre of available cropland.

Concerns: Genetically modified seed and pesticides are anathema for the healthy food crowd, especially in Europe. This movement could spread to other parts of the globe as demand surges for more organic foods and locally sourced, less industrialized supplies. Corteva will enter public trading, we believe, with very few products aimed at this burgeoning organic foods market.

Dow Inc.

Strengths: Dow maintains that plastics will be essential to meeting some of the United Nations’ Sustainable Development Goals (SDGs). Plastics have the benefit of being light weight relative to strength, giving them a smaller environmental footprint on a volume basis than competing container products like metal and glass. With a rising middle class consuming more packaged goods, about 275 million tons of plastics will be used annually in packaging by 2040, according to a recent forecast by the consultancy Accenture.

Concerns: Because plastics do not break down fast or easily, they persist in the environment for decades or even centuries. Waste management on land and cleanup of plastics in the ocean have become a pressing global concern. The European Union decreed in 2018 that all plastic packaging must be recycled by 2030. The American Chemistry Council, an industry group, has set a goal of recycling all US packaging by 2040. Dow has no plans to become a recycling company, however. According to Accenture, half of the forecasted growth for plastics may come from recycled resins rather than virgin materials that Dow has invested billions of dollars to produce. While Dow makes some chemicals that help recycled resins to be used more widely, and is among the companies working on ways to break down plastics into basic chemicals that could then be reused as feedstocks for virgin plastics, cost remains an obstacle to widespread adoption of these new production techniques.

DuPont

Strengths: DuPont’s specialty products include “green” applications in photovoltaics, lightweight materials, and a coming fleet of electric vehicles. The company plans to spend nearly $1 billion a year on research and development, doubling its investment in nutrition and health opportunities. (DuPont already supplies one-third of the world’s probiotics market.) In addition, the new company will be headed by current DowDuPont CEO Ed Breen, who successfully engineered a 10-year, five-way split of Tyco, a company that weathered a major governance scandal 15 years ago.

Concerns: DuPont has long been associated with toxic chemicals that taint its green image and have saddled it with huge legal liabilities. It is a potentially responsible party in more than 100 Superfund sites, and it releases millions of pounds of toxic emissions into the environment each year. Its Chambers Works complex in Carney Point, New Jersey—operating since 1892, but now mostly abandoned—is a toxic wasteland. A $54 million cleanup plan submitted by DuPont and its spun-off Chemours (CC) unit in December 2017 is only 5% of what township residents claim will be necessary to remediate the site over coming decades. The New Jersey Department of Environmental Protection is now suing DuPont, Chemours, and 3M (MMM) to clean up decades of industrial contamination at the site. The companies have just been asked to turn over documents regarding the deposit of toxic chemicals commonly known as PFAS.

As with any portfolio execution of values-based criteria, there is no one right answer for all Aperio clients. Personal beliefs, investment goals, tax consequences, benchmark tracking error, and corporate engagement strategies all may factor into the choice that is most appropriate for you. But if the breakup of DowDuPont is of concern with respect to your socially responsible investing choices, you may wish to discuss the potential issues with a financial professional, whether that is your own advisor or Aperio.


Send questions or comments to blog@aperiogroup.com.

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