Chemical Liability and 'Toxic Lockouts'

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by: Joel Makower

For all the attention being paid to climate change and energy issues, it's easy to forget that the corporate world faces other environmental challenges. Not the least of those is toxicity: the spiraling use of chemicals and their impact on human and environmental health.

This is, of course, nothing new. The health impacts of chemicals was the topic of Rachel Carson's groundbreaking book, Silent Spring, published in 1962, which documented the detrimental effects of pesticides on the environment and accused the chemical industry of spreading disinformation; it was credited with giving birth to the modern environmental movement. In the 1970s, the "Love Canal" scandal, in which a group of Upstate New York homeowners were sickened by waste chemicals that had seeped into the local water supply, ratcheted up the public's distrust of the chemical industry. Then came the Bhopal tragedy in 1987.

By the end of the 1980s, the industry's own polls found that only 14 percent of Americans viewed chemical companies favorably. Only the tobacco industry was less trusted by the public.

The chemical industry may have rebounded somewhat, but the issues and concerns haven't dissipated. And the concerns extend well beyond the chemical industry to its customers: thousands of companies that use toxic chemicals in their products and processes. Increasingly, these companies are at risk, too — from activists, regulators, and litigators, of course, but also from investors, which have become interested in how growing concerns about toxic chemicals will create winners and losers in various sectors.

Indeed, electronics, cosmetics, and pesticide manufacturers are among the many companies that could face loss of market share and access to major markets due to "toxic lockouts," according to a new study by the investment research firm Innovest. According to the study (Download – PDF) says some companies already have seen their fortunes shift.

A weakening of the conventional pesticide market may impact sales for several companies in the chemicals sector. Markets are shifting from synthetic to bio-pesticides, driven by biotech advancements that reduce the need for extensive spraying. Citigroup cites a $2 billion reduction in pesticide demand since 1995, a reduction mainly attributed to bioscience. The bio-pesticide industry is projected to increase by 20% per year in the US. Conversely, the synthetic pesticide market is expected to decrease by 3.14%, with bio-pesticides replacing 4.25% of that. Companies potentially affected may include: Potash, Agrium, Chemtura, Syngenta. Additionally, we project that the agrosciences division of Dow will also face growing pressure amidst this trend.

Innovest concludes that "Loss of access to major markets could pose material risks for companies that face 'toxic lockouts,'" in which their products are banned from some markets due to their toxicity.

Examples of companies and markets facing chemical reactions:

  • Apple experienced a brief interruption last year in export for iPods and other products that didn't meet European standards for reduced toxicity.
  • In 2001, Dutch officials blocked a shipment of 1.3 million Sony PlayStation game consoles because their cables contained levels of cadmium higher than those permitted by local law. Sony estimated the blockage cost it $100 million in sales.
  • Chemicals screening policies are the latest challenge for suppliers to big retailers. Marks & Spencer has begun screening products and Wal-Mart recently said it will begin implementing Preferred Chemical Principles to establish a clear set of characteristics for product ingredients.
  • More than 90% of the hospital and healthcare market has committed to phase out phthalates from items such as blood bags.
  • The green building movement has extended to the household durables sector. Three major manufacturers — Herman Miller, Steelcase, and Interface — are implementing chemicals screening policies for their suppliers. And profiting: Steelcase and Herman Miller are selling non-PVC chairs at a price premium.

    It's not just customers. Shareholder groups have been submitting a steady stream of resolutions that would require companies to disclose or reduce product toxicity, among other things. Shareholders at Bed Bath and Beyond, Hasbro, and Sears are among companies being pressed by shareholders to publish a report on product safety during 2007.

    All of this is giving an added boost to green chemistry, chemical products and processes that reduce or eliminate the use and generation of hazardous substances. Innovest notes that "A number of companies have opted to invest in green chemistry, seeing it as a strategic profit opportunity."

    In the end, says Innovest, the rationale for becoming less toxic is strictly business:

    Laggards will increasingly feel competitive pressure as the number of companies adopting chemicals management strategies increases. Given the above factors, those companies who fail to keep up may find themselves missing out on market share and repeat business.

    This conversation on toxics between companies and stakeholders is just beginning in earnest. And shareholders and activists have learned much from their engagements with companies on climate change over the years. Among other things, they are becoming increasingly more sophisticated and experienced in showing companies the value of being proactive and getting ahead of the pack — and bringing unwanted attention to those that don't.

    Whether similar conversation on toxics leads to widespread action remains to be seen, of course. Like all conversations, success is largely a matter of chemistry.

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