Litigation is mounting, regulation is tightening, and 3M will exit the production of PFAS. Will others follow suit, and can we remove PFAS and other forever chemicals from our drinking water?
Read this article to understand:
- Why the widespread use of PFAS is a risk to health and investments
- What growing stakeholder and regulatory pressure means for chemical companies
- The investment risks and opportunities this issue creates
A study published in January 2023 found dangerously high levels of synthetic chemicals called PFAS (polyfluoroalkyl substances) in freshwater fish across US rivers and lakes. PFAS have been used for decades in everything from non-stick pans to makeup, firefighting foam, mobile phones, food packaging and fabrics. Because they don’t easily break down in nature, they have accumulated in waterways, including drinking water, and in the bodies of fish, but also animals that drink those waters. PFAS have even been found in human blood.1
The study was American, but the phenomenon is worldwide. “Forever chemicals” are linked to health problems in animals and humans, from cholesterol to cancer, reproductive abnormalities, lung disease and diabetes.2
As awareness has grown, so has the pipeline of legislation aimed at restricting the use of PFAS.3,4 Litigation, particularly in the US, has been piling up too.5 Working with environmental NGO ChemSec, we have been researching this issue for some time to hold chemical companies to account.6 Together with Norway’s Storebrand, we built the Investor Initiative on Hazardous Chemicals to encourage companies to better manage the risks of manufacturing hazardous chemicals and phase out PFAS. The initiative has grown to 50 investors with over $10 trillion in assets over the last two years.7
Avowedly because of investor pressure, combined with litigation and reputational risks and upcoming regulation, chemical company 3M recently announced it will entirely phase out PFAS from its products by the end of 2025.8 Meanwhile, the US Environmental Protection Agency (EPA) has proposed its first ever restrictions for PFAS compounds in drinking water. Municipal utilities will now be required to remove the compounds from drinking water, increasing litigation risk for PFAS manufacturers.9 Are we now at a turning point for the industry?
This article explores the drivers of and obstacles to change, and implications for investors.
PFAS will be hard to get rid of
PFAS are hard to get rid of once produced. They do not break down naturally once they reach waterways or the ground in a rubbish dump, meaning they keep accumulating in nature, but also in the animals that ingest them – including humans. And with current technology, it is difficult and expensive to filter PFAS out of the environment and destroy them.10 It is also hard to destroy existing stocks, as fire departments around the US have found following a recent requirement by the Pentagon to replace PFAS-based firefighting foams with other suppressants.11
The sheer number of molecules makes it nearly impossible to keep track of what is being used where
It will also be complicated to remove PFAS from supply chains. Firstly, PFAS represent a family of over 4,700 different chemicals, according to recent OECD research, and more than 12,000 according to the US Environmental Protection Agency (EPA).12,13 Although previous incarnations of PFAS products have been banned, chemical companies began making others, which are beginning to show similarly negative effects as their predecessors. The sheer number of molecules also makes it nearly impossible to keep track of what is being used where.14
PFAS are used in a huge array of products, all requiring R&D to identify or make efficient but safe substitutes. These substitutes may also be more expensive to incorporate into products, although consumer companies are increasingly pledging to abandon PFAS, such as H&M, Kingfisher and Levi Strauss.15
Meanwhile, regulation varies across countries and regions. Some require disclosure on the production of hazardous chemicals, others don’t, and the list of concerned molecules differs from one jurisdiction to the next.
Eugenie Mathieu, Earth pillar lead at Aviva Investors, says whilst disclosure of the names of hazardous chemicals manufactured is required annually in the EU and every four years in the US, it is not compulsory in most other countries. As a result, investors do not know which companies are producing which chemicals in which countries, while some chemical companies may have been tempted to move production to jurisdictions with less stringent requirements.
Growing pressure from all sides
Although awareness is growing in Europe, the focus on PFAS has predominantly been a US issue so far thanks to the film Dark Waters and high-profile lawsuits, but also because the bulk of production has historically been in America.
Many of the well-known products that contain PFAS are made by US companies
“I view this largely as a US issue because so many of the well-known products that contain PFAS are made by US companies,” says Max Burns, portfolio manager and head of equity research at Aviva Investors. “It is where most of it has been manufactured in some shape or form at some juncture in the last 50 years. That liability never goes away.”
The Biden administration has taken steps on PFAS and restored strength, credibility and power to the EPA, which had been weakened under the previous administration.16 The EPA drastically tightened its guidelines for safe levels of PFAS in drinking water, from 70 to 0.004 parts per trillion. More recently, it proposed legal restrictions on six PFAS chemicals, the first time in 26 years that the EPA has set new legal limits for a contaminant in drinking water at a federal level.17 The new rule – which will be finalised after a 60-day period of public comment - will require communities to test for two of the "forever chemicals", PFOA and PFOS, and treat for them if they are found at levels higher than four parts per trillion.18 This has significant cost implications for municipal utilities.
Meanwhile, the number of lawsuits keeps climbing, with more than 6,400 filed since 2005. The number has exploded in the last two years as awareness of PFAS has grown in the US. Lawsuits focusing on firefighting foam are so numerous they have been consolidated into a multi-district litigation (MDL). Chemical company DuPont de Nemours was long the main target, but others are now being sued with the same frequency.19
“The US is the bellwether for these legal problems. The MDL could be a seminal moment because if the judge finds in favour of the claimants, that will show there is a link between PFAS and people’s illnesses,” says Joshua French, ESG sector analyst for global industrials and chemicals at Aviva Investors. “That link has not been proven beyond doubt yet, which is an obstacle chemical companies sometimes use against investors.”
European regulation on the way
US litigation has raised awareness in Europe. In the UK, while PFAS use remains legal for now, the Health and Safety Executive is due to publish an assessment on the associated health risks. That could be the first step towards regulation of the chemicals.20
In the EU, in January 2023, PFAS were banned in food while a group of five countries submitted a proposal to the European Chemicals Agency (ECHA) to restrict the use of around 10,000 PFAS.21,22 In addition, the four final criteria of the EU’s environmental taxonomy propose that producing safer chemicals should be considered “deep green”. ChemSec believes this could become a powerful weapon in the fight against hazardous chemicals.23
In 2020, ChemSec launched its first ChemScore report, ranking the world’s top 35 chemical producers on their efforts to reduce their chemical footprint. The ranking is updated annually and ChemSec encourages companies on its list to engage with it and improve disclosure of hazardous chemical use and production as a first step to reducing production of forever chemicals.24
We have been asking the companies to improve transparency over the names and volumes of chemicals produced globally
We were an early supporter of the rankings and have been asking the companies to improve transparency over the names and volumes of chemicals produced globally.
“We engaged solo the first year and came up against a brick wall,” says Mathieu. “I discussed it with a contact at Storebrand who said she would love to join, and why didn't we get other investors on board? It is an easy one to build support for because it is one of the environmental issues with the greatest potential impacts on share prices due to regulation, liability lawsuits and consumer pressure.
“Going from one investor in 2020 talking to these companies about ChemScore to 50 in 2023 has shown companies they can't bury their heads in the sand anymore,” she adds.
Reaching a turning point?
As a result of these pressures, while there was not much progress between the first and second ChemScore reports, the 2022 edition showed improvement by four companies, despite others backsliding. That includes DuPont, which has hidden its entire chemical production in the US behind the label of “confidential business information”, rendering it inaccessible.25
Mathieu has also seen better engagement with ChemSec from firms that had previously been unresponsive. This is welcome as the investor initiative aims for the outcome to be collaboration between investors, ChemSec and chemical companies.
“There is now much more collaboration, with firms discussing the results and making sure they are right,” she says. “In December, the announcement of 3M’s commitment to phase out PFAS was ground-breaking. We expect momentum to build with other companies.”
Although current estimates of the liability for 3M are in the range of $30 billion, Bloomberg Law notes three new PFAS-related lawsuits including 3M have been filed every day in the US since the beginning of 2020. Given the sheer pace of new lawsuits including 3M as a defendant, it would not be surprising to see consensus expectations for PFAS liabilities to greatly increase over time.26
It would not be surprising to see consensus expectations for PFAS liabilities to greatly increase over time
“We identified PFAS as a key risk for 3M quite early,” says Burns. “We called it out because the liability attached to legacy PFAS and forever chemical production by 3M isn't quantifiable.”
On top of the ultimate hit of litigation to the company’s balance sheet, lawsuits have impacted 3M’s share price over the last five years. Between March 2018 and February 15, 2023, it fell from over $240 to under $115.27
Given those impacts, and the 3M business lines that are positive for society, the company’s commitment to phase out PFAS by 2025 makes sense commercially. Other chemical producers should follow a similar path.
French says the issue informs stock selection, not just in chemical companies, but in downstream companies as well, because of the litigation, reputational and financial risks.
“The way we've approached this over the past years is avoidance, based on an assessment of risk,” says Burns. “We analyse information we can gather of a company’s historic and current exposure to PFAS and take a view as to whether the risks are significant enough to warrant exclusion.”
Giving the example of solutions companies in Aviva Investors’ climate transition strategies, Burns explains that, among the major American players in heating, ventilation and air-conditioning (HVAC), Trane is the only name without firefighting foam PFAS exposure, in contrast to Johnson Controls and Carrier, driving our preference for the former.
Potential PFAS liability gives us great pause and an incentive to do more fundamental bottom-up research
“Looking at companies that had similar businesses, firefighting foam PFAS exposure was one of the criteria used to select Trane,” he says. “It's more far-reaching than you might think and usually comes about when a company buys another with legacy liability attached. It doesn't go away, and litigants view the acquiring companies as having deep pockets. On the equity side, when we discover potential PFAS liability, it gives us great pause and an incentive to do more fundamental bottom-up research.”
Consumer brands are also exposed. Evidence has emerged of the presence of PFAs in cosmetics such as mascara and foundation, increasing legal and reputational risk due to the growth of “clean beauty” preferences. In 2022, we engaged with Coty and L’Oréal to better understand their exposure to PFAS.28
However, there are now opportunities linked to removing PFAS, one which relates to water, particularly given the new legal limits proposed by the EPA in March 2023. Companies that can enhance existing water-treatment facilities to enable them to test for these chemicals offer investment opportunities.
“We own companies like Xylem, a large water-treatment company, so there are opportunities on the adaptation side,” says French. “Unfortunately, these are solutions allowing us to adapt to a bad situation, but that shows how big the issue is.”
There are now opportunities linked to removing PFAS
Engineering and construction companies that build and enhance water-treatment facilities on a bigger scale could also benefit. As an illustration, part of Jacobs Engineering’s business is to enhance such facilities, and it has recently cited receiving increased enquiries around PFAS treatment.
While many solutions companies are small cap and not currently investable for every portfolio, they may warrant attention as they grow. For example, NXP Filtration has developed nanofiltration technology to reject PFAS compounds and supply clean drinking water. This also reduces energy and chemical use.
As awareness grows and tougher regulations come in, Burns believes there will be medium-term opportunities in remediation, for example through companies like NXP Filtration, but also water-focused engineering and construction companies.
Finding alternatives, such as companies that can advertise being PFAS-free, is an area worth exploring. “It's an opportunity as the public becomes more aware of the risks,” says Burns.