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May 17, 2006
Chemical Companies Unprepared to Reduce Toxicity for European REACH Regulations
by Bill Baue
An Ethical Investment Research Service report finds on Akzo Nobel advanced in preparation for
REACH, while an Innovest report debunks industry claims that the rules will cripple them.
SocialFunds.com --
In response to public concern over chemical toxicity, the European Commission (EC) has drafted the
Registration, Evaluation, and Authorization of Chemicals (REACH) directive, slated to
come into force in 2007. REACH will require companies making or importing chemicals in European
markets to demonstrate they are adequately controlling environmental and human health risks posed
by chemicals, and will undoubtedly lead to the blacklisting of certain chemicals, such as
carcinogens. The impact of REACH on business, particularly chemical companies, is not yet fully
understood since the regulation is not set in stone. Still, investors are eager to understand the
potential impact on companies they hold.
 Ethical Investment Research Service (EIRIS), a UK-based socially responsible investing
(SRI) research firm, recently produced a report briefing investors on
risks facing the chemical industry not only from REACH but also from other regulatory and societal
developments.
"The process of phasing dangerous chemicals out of the environment is
clearly a major challenge for the chemicals industry," said Peter Webster, executive director of
EIRIS. "Although we discovered a number of examples of good practice, the general picture was of
an industry not yet fully prepared for this challenge."
The study, entitled Beyond
REACH--Chemical safety and sustainability concerns, assesses the preparedness of seven
publicly-traded companies worldwide that produce specialty chemicals for sale in Europe and have
"high exposure" to regulatory and market risks. These companies include Akzo Nobel (ticker: AKZO), Ciba
Speciality Chemicals (CSB), Clariant (CLZNF.PK), Dainippon Ink &
Chemicals (DINKF.PK), Imperial Chemical
Industries (ICI), Lanxess (LNXSF.PK) and Solvay (SOLB.BR).
"The greater a firm's exposure to safety and sustainability risks, the greater the expectation,
by investors and society at large, that the business in question demonstrate leadership and
strategic competence in managing the risks involved," the report states.
Unfortunately,
EIRIS found precious little leadership. EIRIS rated company performance "advanced," "good,"
intermediate," "limited," or "no evidence" on 12 indicators of their chemical management in three
categories--strategy and responsibility, research and development, and reporting and dialogue.
Only Akzo Nobel rated "advanced" overall, and ICI rated "good," while the rest of the companies
fell into the "intermediate" and "limited" categories. While there was widespread action on
certain indicators, only the top performers are acting on other key indicators.
"For
example, each of the seven companies has made a commitment to apply product stewardship principles
as well as to conduct risk assessments on their products," the report states. "The majority (five
out of seven) have also taken steps to incorporate chemical safety and sustainability concerns into
their R&D work."
"However, only two of the seven Companies (Akzo Nobel and ICI) state a
commitment to phase-out and/or substitute chemicals of concern where feasible, as well as to avoid
chemicals of concern in the development of new products where possible," the report continues.
"EIRIS considers both of these commitments to be essential if a company is to minimise its exposure
to chemical safety and sustainability risks."
The EIRIS study follows up on a report it
produced for the European Social Investment Forum (Eurosif) last year on five challenges facing the chemical
industry over the next five to ten years, including not only chemical toxicity but also climate
change, resource use, and process safety.
Innovest Strategic Value Advisors, another SRI research
firm, paid particular attention to potential impacts of REACH in its annual report on the chemical
sector, which evaluated sustainability issues at seventy chemical companies worldwide. The report
disputes industry claims that REACH will result in thousands of lost jobs and have sweeping
economic impacts, countering that the impact of REACH on variable operating costs for most large
capitalization chemical companies will be minor.
"For example, industry titan BASF AG [BF] estimates that,
barring any effects on the labor market and the competitive situation, investors can expect REACH
to cost the company EUR 0.5 billion over a period of ten years," said Andrew White, managing
director of Innovest. "The effects of REACH will be felt more intensely by the mid-cap and small
cap companies--some smaller specialty firms indicate that approximately 30 to 40 percent of
intermediates used in production could be affected."
"Investors may also note that the
industry has been largely successful in watering down the regulation," he added.
Looking
beyond REACH at overall sustainability performance, the report finds that companies with above
average Innovest ratings financially outperformed those with below average Innovest ratings by more
than 60 percent over the period from December 1996 to December 2005.
©
SRI World Group, Inc. All Rights Reserved.
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