Reducing the damage caused by hazardous chemicals takes holding chemical companies to account through public rankings.
Eugenie Mathieu explains how an initiative to shine a spotlight on chemical companies’ opaque practices and investor engagement are playing a vital role in addressing the threat of hazardous chemicals.
Read this article to understand:
- Why hazardous chemicals are a growing risk to human health and the environment
- How investors have had limited visibility on chemical companies’ harmful activities
- Why a new ranking of the world’s largest chemical manufacturers and investor action will be critical agents of change
From cooking equipment to fire repellents; from clothing to electronics; and from furniture to food packaging – chemicals are an essential component of products that are part of our everyday lives. But while they have undeniable benefits, there is a dark side to chemicals, one that manufacturers have worked hard over many decades to keep out of the public domain.
According to Eurostat, over 70 per cent of chemicals manufactured and used in Europe are hazardous to human health and/or the environment.1
In recent years, high-profile lawsuits against the likes of DuPont and Bayer-Monsanto have highlighted how hazardous chemicals have become a growing risk for chemical manufacturers, their investors and consumers. According to analysts, the potential costs associated with litigation related to per- and polyfluoroalkyl substances (PFAS – see explainer below) could be as high as US$40 billion.2
The problem: A lack of transparency
And yet today, investors have highly restricted visibility on which companies are manufacturing which hazardous chemicals, where, and in what quantities. EU and US regulations require a minimal degree of reporting, covering only a fraction of all hazardous chemicals, but even in the US this data is only published once every four years. The rest of the world has minimal reporting requirements, leaving investors and other stakeholders almost entirely in the dark.
The environmental and social costs of hazardous chemicals are even more severe. According to the World Health Organization, two million lives and 53 million disability-adjusted life years were lost due to exposure to hazardous chemicals in 2019, compared to 1.6 million and 43 million in 2016.3 They are also key drivers of biodiversity loss.
Growing regulatory, as well as market, pressure to transition towards less hazardous chemicals is positive, as seen by the European Green Deal and the US Environmental Protection Agency’s October 2021 roadmap for tackling PFAS. But despite this, many chemical companies remain secretive, making it difficult for investors to fully understand their impact on the environment, or the legal and reputational risks they are exposed to.
This even includes companies who score highly in ESG, sustainability or ethical rankings, which, while a useful starting point for assessment, often lack the in-depth understanding to inform investors’ decision-making on this critical issue.
By way of example, Johnson Controls, a provider of smart-buildings solutions, is a constant presence on the World’s Most Ethical Companies list4 and ranked 33rd on the 100 Best Corporate Citizens List5. However, it makes firefighting spray with PFAS and has polluted local Wisconsin watercourses, making the company the subject of a number of class action lawsuits. In January 2021, residents in the small Wisconsin town of Peshtigo reached a $17.5 million settlement with Tyco after being exposed to the chemicals, while in March 2022 the Wisconsin Department of Justice filed a civil environmental enforcement lawsuit against Johnson Controls and Tyco Fire Products for alleged PFAS violations.6
Investors allocate billions of dollars to the chemical industry and have a vital role to play in pushing for change. Aviva Investors has been a critical and pioneering supporter of the work we are doing to improve transparency in the sector, and is a leader among asset managers through its active engagement with chemical companies.
Following the investor letter coordinated by Aviva Investors in December, which coincided with the release of ChemScore 2021, we saw a marked increase in the number of companies engaging with ChemSec on their disclosure. More than half of the ranked chemical companies are now communicating with ChemSec, including BASF, Solvay, 3M and Lanxess, to understand what changes are needed to improve their score.
The solution: ChemScore and investor action
In an effort to address the lack of transparency and robust data for the sector, in 2020 we worked closely with ChemSec, an independent, Swedish non-profit committed to the development of sustainable chemicals through dissemination of knowledge, collaboration and practical tools, in its development of the ChemScore ranking.
ChemScore assesses the world’s largest 50 chemical producers on their efforts to reduce their hazardous chemical footprint, ranking their performance across four categories: the toxicity of their product portfolio; research and development of non-toxic chemicals; management and transparency; and the number of controversies and scandals that the company has been involved in.
It was developed to provide investors with better information to assess which companies have strong chemical management strategies and which do not. As well as helping investors make more informed comparisons – a crucial element in making an investment case – they also provide vital insights on what areas investors should focus their engagement efforts on to push companies into addressing poor practices.
Following the first ChemScore ranking, in 2021 we engaged with five companies (Bayer, Dow, LG Chem, Solvay and Umicore) to encourage them to improve transparency in reporting on hazardous chemicals management, and to work with ChemSec to improve their scores.
Although we were pleased three of these companies started a dialogue with ChemSec, there were no significant improvements in company scores by the time of the second ranking in December 2021.7
This ranking showed that 38 of the 50 companies actively market greener, sustainable products on their website, yet none provide public information on global hazardous chemicals production. Just four have gone public with their plans to phase out existing hazardous chemicals and all still produce hazardous chemicals in high numbers.
As investors, we have a responsibility to be an agent for positive change. Together with Storebrand, Norway’s largest asset manager, we assembled a group of 23 investors with a combined $4.4 trillion of assets under management to write to the 50 chemical companies in December 2021, asking for disclosure on which hazardous chemicals are produced globally, to set targets to phase out persistent and ‘prior, informed consent’ substances, and to shift towards a circular rather than linear model of production and use.
This investor group will continue to engage with chemical companies on these issues. This year, we plan to lead the engagement with five companies. While there is a huge amount of work ahead of us to see real change, initiatives like ChemScore have a vital role to play.
Chemical manufacturers should be under no illusions as to the consequences of inaction: investors armed with better data and greater transparency will increasingly be able to make more informed choices about where to allocate capital. Leaders should be rewarded; laggards should see their cost of capital increase.
PFAS – An explainer
PFAS are a group of more than 4,700 man-made chemicals (OECD, 2018) used in a variety of consumer products and industrial applications because of their unique chemical and physical properties, including oil and water repellence, and temperature and chemical resistance. PFAS have been used in firefighting foams, non-stick metal coatings for frying pans, paper food packaging, creams and cosmetics, textiles for furniture and outdoor clothing, paints and photography, chrome plating, pesticides and pharmaceuticals. Of the relatively few well-studied PFAS, most are considered moderately to highly toxic, particularly for children’s development.
