CONTENTS EdEvidence Newsletter

January 2008

"Beyond Compliance" — The Essential Starting Point for Strategically Managing Business Risks From Toxic Chemicals In Products

Federal environmental and product safety regulation increasingly appears to be a hollow façade. Therefore it is essential that corporate managers and investors look beyond compliance with federal law to strategically manage business risks from toxic chemicals in the products they make and sell.

The robust media coverage of product recalls in recent months has highlighted the sad state of federal law and regulation. They're truly like the Potemkin villages of old-a false front suggesting that the federal government is effectively protecting public health and the environment. But in reality, existing laws, regulations, staffing, and budgets are grossly deficient and have been for many years. Recent congressional pronouncements about limited staff and budgets at the Consumer Product Safety Commission bring to mind the famous scene in the movie Casablanca, where Captain Renault closes down the gambling in Rick's café. Renault declares "I'm shocked, shocked to find that gambling is going on in here", and is then handed his winnings by the croupier.

States are stepping forward to fill the void. California's clearly the leader, inspired by regulatory developments in Europe over the last several years. There are now twenty-seven nations in the European Union; California's adopted so many of Europe's chemical regulations that it's been jokingly suggested that California should consider becoming the 28th. Following the EU, California has adopted new laws on brominated flame retardants, toxic chemicals in electronics goods, cosmetics safety, and phthalates in toys. A senior marketing VP for a major retailer commented on this pattern at a meeting with shareholders who had filed a resolution on product safety: "We look over there in Europe because what happens in Europe comes over to the States. We look at California and the East Coast because that's what's going to shape the marketplace for us."

California's not alone. Similar initiatives have been launched in Washington, New York, Maine, and Massachusetts, among others. In mid-December 2007, Maine Governor John Baldacci announced he will incorporate into his 2008 legislative package some of the recommendations of a task force on reducing toxic chemicals in consumer products. He can select from recommendations including publication of a list of chemicals of high and moderate concern, requiring disclosure by companies of these chemicals in their products, and restricting chemicals in consumer products when safer alternatives are available and affordable.

The recommendations from the Maine task force adopt concepts from a newly established EU regimen for chemicals management called REACH. For companies managing supply chains, the most noteworthy and potentially worrisome near-term component of REACH is the publication in mid-2009 of chemicals whose characteristics make them substances of very high concern for potential substitution. Regardless of how quickly EU regulators act on the list, there'll be a tremendous incentive for socially responsible retailers to get ahead of the curve and to ask their suppliers to eliminate these chemicals from supply chains.

B2B (business to business) initiatives complement those from the states. Wal-Mart's sustainability policies, including its precautionary preferred substances (chemicals) policy, have drawn considerable attention. The health care sector, responsible for 16% of US Gross Domestic Product, is a hotbed of safer chemical initiatives, observing the precept of "first, do no harm." Consorta is a group purchasing organization (GPO) representing 60% of all the Catholic health care systems in the US. Consorta's just launched Evergreen magazine, captioned "The magazine for healthcare environmentally preferred purchasing." The journal will go to at least 50,000 healthcare managers and its regular chemical feature will focus on such substances as mercury, flame retardants, phthalates and pesticides.

So what do all these developments mean for corporate managers and for the investors assessing their companies? First, a company with solely a federal compliance mindset has its head in the sand and will be ill-prepared for toxic lockouts of products from various marketplaces. Second, a company needs to systematically gather information from its suppliers on the toxic chemicals in its supply chain. This can be quite difficult where supply chains are quite extended and local regulations and political cultures are not supportive of disclosure. Third, those companies launching sustainability initiatives must have strong chemical foresight mechanisms developed where appropriate-akin to the foresight mechanisms insurance companies have evolved to flag emerging risks. Fourth, such companies should establish suitable goals and metrics for toxicity reduction to ensure success in potentially turbulent chemicals markets ahead. Fifth and last, beginning the safer chemicals journey, especially for companies with no prior experience or internal expertise, can be an intimidating process. Companies should aggressively explore opportunities to partner with companies within and outside their businesses, and with those NGOs that have developed strong technical competencies, to speed their journey.

For their part, investors should heed the lessons from 2007's recalls of various consumer products: the companies they invest in need solid policies and practices in place for tracking chemicals in products or face toxic lockouts from the marketplace, reputational damage, sizeable reductions in shareholder value, and possibly lawsuits.