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January 2, 2006

As managers and investors seeking sustainable long-term returns from our investments, we are working to ensure the companies we invest in are taking appropriate steps to reduce risks associated with the toxic chemicals used in their products. They should also take advantage of the strategic market opportunities that are emerging as governments, businesses, and consumers demand safer, less toxic products. We believe companies need to keep investors fully informed of these risks and rewards.

To protect and enhance their long-term value, our companies need both to respond to and, more importantly, anticipate major changes in their global markets that may dramatically influence their sales and competitive position. These changes are driven by growing scientific knowledge about the health effects of chemicals in common household and office products, public worry about burgeoning rates of cancer and other diseases, and new regulations in Europe, Asia, and various U.S. states. Changes are also flowing from companies and governments adopting “environmentally preferable purchasing practices” and are reflected in the consumer market place by expanding sales of natural beauty products, organic foods, and other environmentally preferable items made with safer chemicals and materials.

Some of the signs of change in business include:

  • Kaiser Permanente eliminating hazards to human health from chemicals relied on to provide health care. Kaiser Permanente has awarded multi-year contracts for PVC (polyvinyl chloride)-free carpets and office furnishings free of PVC and other worrisome chemicals
  • Catholic Healthcare West shifting a multi-year contract to B.Braun Medical from another major company, because Braun could deliver products free of PVC and another chemical
  • SC Johnson and Son, Inc. reducing its ecological footprint via a patented Greenlist process that has, for example, altered the chemical formula of Windex, while increasing its effectiveness, sales, and market share
  • General Electric Company’s Ecomagination program aiming to double its research investment in cleaner technologies by 2010, with a goal of doubling its profits from Ecomagination products and services at the same time. GE is advertising a new fire-retardant resin wire covering free of suspect chemicals that complies with some of the strictest environmental labeling schemes in the world.
  • Wal-Mart Stores Inc.’s aiming “to bring cleaner, more environmentally preferable products within the reach of everyday people around the world”, and “developing incentive plans and common-sense scorecards” for its merchandise buyers pursuing that goal.

Legislative and regulatory changes include:

  • The new European Union Cosmetics Directive adopted in 2003 outlaws carcinogens, mutagens, and reproductive toxicants in cosmetics and personal care products.
  • California, Maine, and other states have enacted bans on two types of brominated flame retardants.
  • The European Union’s RoHS Directive (Restriction of Hazardous Substances in Electrical and Electronic Equipment) outlaws six chemicals in new electrical and electronic equipment, among them lead, mercury, cadmium, and chromium.
  • China is adopting requirements similar to those in the EU’s RoHS Directive.
  • New York City has enacted environmentally preferable purchasing legislation that will reduce purchases of products containing PVC, mercury, toxic flame retardants, and other chemicals.

These changing business and government practices can shut markets for companies and their products but can also create new opportunities for those who first market innovative safer substitutes. Companies need to know what’s in their products, what chemicals are in the materials they buy from their suppliers, and they need to invest in “green chemistry” and encourage their suppliers to do so as well. They also need to alert investors about this changing environment, so we can properly value our investments and not be blindsided. We believe that fairly presenting companies under Sarbanes-Oxley requires more disclosure about these changing market conditions then we are currently receiving.

We’re also concerned about legal liabilities associated with chemicals in products. For example, E.I. du Pont de Nemours and Company recently settled a lawsuit for more than $100 million associated with its use of the chemical PFOA in the production of Teflon® and other products. This was followed with a DuPont settlement of an EPA civil proceeding for $16.5 million, over the issue of the company’s failure to disclose certain information related to health hazards of PFOA, and now the company is the subject of a federal criminal investigation. Investors had little forewarning of these developments. The company’s stock price dropped nearly 30 percent over the last year concurrent with many of these developments.

To encourage our portfolio companies to better address these changing conditions, several of the undersigned companies have filed shareholder resolutions at eleven companies during this proxy season. Some have already been voted on and some have already yielded promising responses. Others lie ahead and we encourage other investors to join us in protecting and enhancing the value of our investments. We think this issue should be of particular fiduciary interest to state and local government pension funds; exposures to toxic chemicals can contribute to health care costs and, where toxic chemical exposures early in life lead to developmental problems, such exposures can drive up the costs of special education programs funded by state and local governments.

Two resolutions — at Becton, Dickinson and Company and at Whole Foods Market, Inc. — ask these companies to report on the feasibility of developing safer chemicals policies and practices. The principal elements of such policies and practices have been suggested in a benchmarking framework published by Dr. Richard Liroff that is referenced in these resolutions. The resolutions ask these companies to, among other things, identify suspect chemicals in their products and to work with their suppliers to reduce use of these chemicals. We are pleased that as a result of these resolutions, Becton, Dickinson has begun querying its suppliers about brominated flame retardants. Whole Foods Market has removed some baby bottles from its shelves that contain Bisphenol-A and phthalates, and has stated a goal of helping its customers avoid “endocrine-active materials” (sometimes referred to as hormone disrupting chemicals) in products and packages where functional alternatives exist. Wal-Mart has also begun to move in the right direction of safer chemicals policies and practices.

Three additional resolutions focus on cosmetics safety. The resolution at Johnson & Johnson was withdrawn when the company agreed to make more public disclosures about its cosmetics safety policies and to meet with the Breast Cancer Fund and other members of the Campaign for Safe Cosmetics. The resolution at Avon Products Inc., the latest in a series of resolutions on safer cosmetics there, asks the company to publish a report articulating Avon’s policy on using safer substitutes for known or suspect toxic chemicals. The resolution at CVS Corporation asks the company to examine the feasibility of reformulating its CVS-branded products to be free of chemicals linked to cancer, mutations or birth defects, to inventory product ingredients for a broader range of chemicals of concern, to proactively seek alternatives and report on its progress, and to encourage manufacturers or distributors of cosmetics products sold in CVS to do the same.

The resolution at The ServiceMaster Company, the parent company of TruGreen ChemLawn, asks the company to report on the feasibility of discontinuing the use of synthetic pesticides and substituting natural and non-toxic lawn care services. The company recently acquired a large lawn care service in Canada, where regulations limiting the use of synthetic pesticides in lawn care have been proliferating.

A resolution filed at DuPont asks the company to report on a prospective phaseout of PFOA. A related resolution at ConAgra Foods, Inc. asks the company to report on policy options for reducing or eliminating the use of PFOA-related chemicals in product packaging. The resolution at The Dow Chemical Company asks the company to report on the extent to which Dow products may cause or exacerbate asthma, and describing policy initiatives and Dow policies and activities, to phase out or restrict materials linked with such effects.

Two resolutions at the primary chemical producers Dow and DuPont do not focus on consumer products per se, but on safer chemicals practices instead. Catastrophic accidents at both companies’ facilities could potentially pose a risk to millions of people and thus hurt companies’ bottom line and shareholder value. The resolutions ask the companies to report on the implications of adopting policies to increase the inherent security of company facilities through such steps as reducing the use and storage of extremely hazardous substances, reengineering processes, and locating facilities outside high-population areas.

We are working together in this initiative as the Investor Environmental Health Network. Inspired by the effectiveness of the Investor Network on Climate Risk and The Carbon Disclosure Project in encouraging companies to recognize the impact of global climate change on long-term corporate value, we believe that companies need to step up to the plate and candidly address the environmental health questions raised by their products. In the future, we anticipate engaging a larger number of companies about the chemicals in their products. We look forward to constructive conversations and, where necessary, we will file additional resolutions. We would like to believe that smart corporate strategists will see the hand-writing on the wall, and position their companies both to avoid future liabilities and to take advantage of the numerous value enhancement opportunities ahead.


Adrian Dominican Sisters

As You Sow Foundation Boston Common Asset Management, LLC

Calvert Investments

Citizens Advisers, Inc.

Domini Social Investments, LLC

Green Century Capital Management, Inc.

Harrington Investments, Inc.

Inhance Investment Management, Inc.

Maryknoll Sisters

Mercy Investment Program

Newground Social Investment

Pax World Funds

Sierra Club Mutual Funds

Sisters of Mercy, Regional Community of Detroit

Trillium Asset Management Corporation

Trinity Health

Investor Contacts

Avon (safe cosmetics policy). Karen Shapiro, Domini Social Investments (212) 217-1112

Becton, Dickinson (brominated flame retardants). Karen Shapiro, Domini Social Investments (212) 217-1112

ConAgra Foods, Inc. (PFOA). Andrew Shalit, Green Century Capital Management, (617) 426-2503

CVS (safe cosmetics policy). Lauren Compere, Boston Common Asset Management (617) 720-5557

Dow (pesticides/asthma). Shelley Alpern, Trillium Asset Management (617) 423-6655

Dow (chemical security). Andrew Shalit, Green Century Capital Management (617) 426-2503

DuPont (chemical security). Andrew Shalit, Green Century Capital Management (617) 426-2503

DuPont (PFOA). Sanford Lewis, DuPont Shareholders for Fair Value (413) 549-7333

Johnson & Johnson (safe cosmetics policy). Vesela Veleva, Citizens Funds (603) 436-1513

ServiceMaster (nontoxic lawn care). Andrew Shalit, Green Century Capital Management (617) 426-2503

Whole Foods Market (Bisphenol A and other toxic chemicals). Andrew Shalit, Green Century Capital Management 617 426-2503 or Sanford Lewis (individual filer) (413) 549-7333