Chemical Disclosures: The Next Frontier of ESG Disclosures

Impact and ESG investors share the belief that material information is not limited to what is on a corporate balance sheet, but that material risks to performance include nonfinancial elements relating to environmental, social and governance factors. It seems logical that the topic of chemical safety would be included within this conversation, and comprehensively managed, but in reality, our awareness and management of chemical safety issues is astonishingly limited.

To provide some context, we are exposed to hundreds of chemicals on a daily basis. From the chairs we sit on, to the pots we cook in, to the packaging our organic produce comes in, to the contents of our cosmetics and beyond. It is difficult to comprehend the level of chemical exposure we each face on a daily basis. Given this ubiquitous contact, one would imagine that chemicals are rigorously tested for safety by the government before being approved for use. However, in the US regulatory environment, chemicals enjoy the same benefit as do defendants within the US Justice System – “innocent until proven guilty.” Chemicals in consumer products are primarily regulated through the Toxic Substances Control Act, under the EPA. However, since the 1970s only five chemicals have been banned outright of the 85,000 that were registered for use under the law¹.

While regulation was updated last year under the Frank R. Lautenberg Chemical Safety for the 21^st Century Act, oversight remains unbound by timelines and carries a weak standard of safety – therefore failing to truly address the underlying issue, which is that chemicals used across consumer products, manufacturing, cosmetics, food and every other sector you can imagine are actually considered safe until proven otherwise. Proving otherwise requires a demonstration of causality between health outcomes and chemical use, no small undertaking for diseases such as cancer or attention deficit disorder that can take years to manifest, in addition to being extremely difficult to trace back to isolated chemical exposures. In fact, it is estimated that consumer products contain over 2,300 chemicals with suspected toxicity, as defined by the California Code of Regulations². Under the current regulatory environment, it would take over a century for the EPA to review these chemicals given its present pace of review.

The reason these chemicals are can be considered dangerous and difficult to link to disease is that their presence in the body acts as a stealthy predator – entering the body without setting off alarm systems – as they replicate and potentially disrupt normal bodily functions including hormones and endocrines that send critical signals to our body. Focusing on one specific area of chemical risk, these “endocrine disruptors³” can have massive negative consequences, as they have been linked to serious health issues including cancer, autism, developmental problems, ADD, infertility, intelligence loss and so on. The cost of chemical related illness is said to be massive – estimated to be $340 billion annually in health care costs.⁴

It seems clear that acknowledgment of this enormous risk lies just over the horizon as consumers start to question everyday chemicals and their potential dangers, especially in light of the FDA recently banning the sale of many antibacterial soaps because their risks outweigh their benefits.⁵ Trends indicate that many consumers will ultimately demand that future regulation properly incorporate human and environmental health risks, signaling an opportunity for growth and investor focus. Examining the associated risks quickly demonstrates how corporate failure to account for the use of toxic chemicals has been shown to be a material risk that investors would be well-served to heed within their ESG analysis. As a textbook example, when it was discovered that Lumber Liquidators’ flooring materials emitted hazardous levels of formaldehyde (a known carcinogen), the stock dropped by nearly half its value, causing a massive PR crisis as well as lingering consumer concerns about the safety of the brand’s products⁶.

Looking at the landscape of ESG investors, there is a growing acknowledgement that non-financial risk factors such as GHG emissions, workforce issues and governance structure are indeed material to financial performance. However, the topic of chemical disclosures has been slow to enter the conversation. This is beginning to change thanks in part to the Chemical Footprint Project (CFP), an initiative that aims to help companies manage chemicals of high concern (COHC) within their supply chain. This is accomplished through a survey and resulting score that assists with internal evaluation and ranking, and provides external parties with a means to evaluate company management of chemical risk – a benchmark for comparison in a very murky and non-transparent space.

Last month, I was honored to participate in BizNGO / Clean Production Action’s (the creator of the Chemical Footprint Project) annual conference. This event is a forum for sustainability practitioners who deal directly with chemical management and disclosure to share and discuss best practices. Participating companies include global sustainability leaders such as Levi Strauss & Co., Interface, Johnson & Johnson, HP and newer brands such as the non-toxic cosmetics brand Beautycounter and Coyuchi, an organic bedding company. At the event, I gave a presentation outlining why chemical disclosure matters to investors, providing these knowledgeable practitioners with a bird’s eye view of the ESG evaluation process to which the CFP’s efforts contribute. The event left me encouraged to see the private sector meaningfully mobilized to share best practices regarding disclosure and management of the chemical supply chain in order to avoid chemicals of high concerns and identify safer alternatives for use across supply chains. This is especially encouraging given that these companies are showing leadership well ahead of changes in regulation or even clear demands from consumers given the complexities of the issue at hand.

The benefits that these companies could reap may be immense, as outlined by the Chemical Footprint Project’s handbook, in terms of both mitigating risk and benefiting from new opportunities. As previously mentioned, the CFP intends to create a comparable benchmark by which investors can evaluate and compare companies’ management of chemical risks, which are summarized below:

1. Regulatory Risk – this includes meeting current regulations, i.e. avoiding product recalls as well as future regulations by anticipating change to proactively managing restricted substances, participating in policy discussions and creating corporate policies to enforce issue oversight.
2. Reputation Risk: the potential costs of being exposed publicly with hazardous chemicals in products or supply chains.
3. Redesign Risk: the financial and reputational costs related to the continued use of hazardous chemicals in products and manufacturing process, as well as of having to redesign a product or supply chain to remove a hazardous chemical once regulations change or markets shift.

There are also quantifiable benefits to brands that show leadership on chemical management including growing consumer and investor trust, enhancing brand reputation, ability to respond to increasingly stringent retailer and purchaser requirements (i.e. Walmart and Target are setting guidelines for chemical disclosure for all brands that they stock), and improved due diligence among potential investors.

Sonen remains a dedicated signatory of the CFP, and regularly engages with companies in its portfolio to encourage participation in the survey. We also encourage other investors to become an investor signatory and engage on the topic as well. It is our firm belief that chemical disclosure is a critical element to comprehensive ESG evaluation. Furthermore, such disclosure may serve as a proxy for management quality: companies who undertake the CFP survey or otherwise disclose such information have put into place a rigorous chemical management system, which implies that they have also mapped out material non-financial risks and made progress in addressing them. The topic remains a newcomer in the broader ESG dialogue, but we are committed to lending our voice and AUM to the critical topic of human and environmental health through chemicals management.

Resources to learn more and/or get involved:

1. Environmental Working Group: http://www.ewg.org/ and http://www.ewg.org/enviroblog/2015/03/industry-chemical-bill-worse-current-law
2. Investing in Safer Alternatives to Toxic Chemicals: https://rachelsnetwork.org/safermade/
3. Investors’ Environmental Health Network: http://www.iehn.org/home.php
4. Chemical Footprint Project: http://www.chemicalfootprint.org/
5. Natural Resources Defense Council: https://www.nrdc.org/issues/toxic-chemicals

To See Danielle’s Presentation at the BizNGO Conference click here.

SOURCES:

1. Trager, Rebecca. Explainer: Toxic Substances Control Act. ChemistryWorld. https://www.chemistryworld.com/news/explainer-toxic-substances-control-act/1010187.article June 10, 2016.
2. Department of Toxic Substances Control: Informational List of Candidate Chemicals and Chemical Groups. Link: https://calsafer.dtsc.ca.gov/chemical/search.aspx
3. The Lancet: Diabetes and Endocrinology, “Exposure to endocrine-disrupting chemicals in the USA: a population-based disease burden and cost analysis” (October 17,2016) Link: http://www.thelancet.com/pdfs/journals/landia/PIIS2213-8587(16)30275-3.pdf
4. Yearly Exposure to Chemicals Dangerous to Hormone Function Burdens Americans with Hundreds of Billions in Disease Costs. NYU Langone Medical Center (October 18, 2016).
5. Tavernise, Sabrina. “F.D.A. Bans Sale of Many Antibacterial Soaps, Saying Risks Outweigh Benefits (September 2, 2016). New York Times. Link: http://www.nytimes.com/2016/09/03/science/fda-bans-sale-of-many-antibacterial-soaps-saying-risks-outweigh-benefits.html
6. Lumber Liquidators Linked to Health and Safety Violations. 60 Minutes. CBS (March 1, 2015).

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