Why the stock market’s increased attention on toxic chemicals is a big thing
Analysis from Anne-Sofie Andersson, Executive Director of ChemSec, following today’s press release
From 1 April the Dow Jones Sustainability Indices (DJSI) will put more emphasis on corporate chemicals management. Why is this a big thing, you might ask yourself.
Well, in short this will give investors a much better picture of which companies that are taking action against hazardous chemicals in their products and supply chains. In addition, it’s a strong incentive for companies to increase their chemicals management efforts, since it will now be difficult to obtain a top position in the prestigious DJSI rating if you don’t know the chemical content of your products.
“It’s a strong incentive for companies to increase their chemicals management efforts, since it will now be difficult to obtain a top position in the prestigious DJSI rating if you don’t know the chemical content of your products.”
The reason for this update is because from an investor’s perspective the production and use of hazardous chemicals imply risks. Imagine if a new scientific finding is presented that singles out a chemical in widespread use as a threat to human health (which has happened many times). This often creates a public backlash for the companies that use this chemical. It’s the same with a regulatory change, if a chemical has a restriction placed on its use, or is added to ChemSec’s SIN List (identified by ChemSec as Substances of Very High Concern under REACH criteria – Europe’s chemicals legislation).
Substitution of chemicals does not happen overnight and there are increased costs associated with reformulating products and modifying processes, which can have significant implications for company performance. This implies vast risks for companies with long production cycles. A product that is made today, but put on the market in ten years’ time, could require the use of a substance which by that time has been banned or restricted.
However these risks can be avoided by including the chemical perspective in investment analysis. Therefore the new product stewardship questionnaire of the DJSI, which forms the basis for the prestigious annual rating of companies, not only applies to the chemical sector, but to a wide range of different industries where the use of hazardous chemicals are prevalent:
- Aerospace & Defense
- Auto Components
- Building Products
- Communications Equipment
- Personal Products
- Containers & Packaging
- Household Durables
- Electrical Components & Equipment
- Paper & Forest Products
- Household Products
- Industrial Conglomerates
- Machinery and Electrical Equipment
- Electronic Equipment, Instruments & Components
- Leisure Equipment & Products and Consumer Electronics
- Semiconductors & Semiconductor Equipment
- Textiles, Apparel & Luxury Goods
- Computers & Peripherals and Office Electronics
The DJSI were launched in 1999 and are the longest-running global sustainability benchmarks in the world. Not only are they a key reference point for sustainable investments and rating of sustainable companies, but the ratings themselves are very prestigious. Achieving a high rating is a top priority on many corporate agendas as this without a doubt will lead to an influx of new investment capital for the company.
This extensive new approach to chemicals is the first of its kind in the investor community and a truly progressive move by DJSI. At ChemSec we believe that this is just the beginning – chemicals will without doubt play a similar role to that of carbon dioxide in future sustainability reporting, as more and more asset managers and other rating agencies will follow the way forward laid out by DJSI.
Why not? Hazardous chemicals are very detrimental to both human health and the environment, probably to a much larger extent than most people think. The effects, however, are not something you can observe overnight. The damage done often shows up years in the future, in the form of reproductive disorders, cancer, lowering of IQ and obesity, to name just a few health issues that are linked to exposure of hazardous chemicals.
But hazardous chemicals do not currently receive much public attention, which is very unfortunate for those people that are affected. You might see news headlines here and there when something dramatic has happened that fits the mainstream media format, such as the death of 76 Samsung factory workers due to exposure to chemicals in South Korea, or the much-talked-about baby bottles that contain Bisphenol A (BPA). Arguably there are more examples that have been covered by a wide range of media outlets, but the fact that there are unsafe levels of toxins in drinking water in many US states, as well as many other pressing problems relating to chemicals, goes largely uncovered, except in special interest media which of course has a limited readership.
You don’t agree? Ask someone close to you who works in an area unrelated to chemicals if they could briefly explain the problems caused by hazardous substances, and who is using them. I think very few would have a good answer. Then ask the same person to explain the problems connected to carbon dioxide. My point is that even schoolchildren today are be able to point out the greenhouse effect, global warming and rising sea levels caused by emissions.
Just because DJSI is taking a new approach to chemicals it naturally does not mean that people will suddenly achieve a profound global understanding of the problems that hazardous chemicals entail. Nevertheless, getting investors on board the chemical train is a big step in the right direction.
ChemSec singled out investors as an important target group in terms of chemical sustainability many years ago, and since then has met with a number of rating agencies, asset managers and other stakeholders in the investors’ community to raise this issue. Our network of informed investors is growing by the day. We invite all parties that have an interest in raising the chemicals profile of their institution to contact us. We know what you should look out for and what to ask for in order to get the answers you need.
Simply put: hazardous chemicals do not make good investments.