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February 10, 2005
Benchmarking Corporate Governance on Product Toxicity and Safer Alternatives
    by William Baue

The benchmark, released by the Rose Foundation today, addresses the scientific uncertainty of product toxicity through risk assessment and opportunity identification instead of inaction.


Business operates in the field of uncertainty (will a new product fail or succeed? will share price rise or fall?), where corporate choices in the present are punished or rewarded in the future. Today, the Rose Foundation for Communities and the Environment issued a report on the presence of toxic chemicals in products, an area marked by scientific uncertainty over the effects of human exposure to such products. The report includes corporate governance benchmarking guidelines aimed at steering decisions concerning product toxicity away from risks and toward opportunities.

Report author Rich Liroff, a senior fellow in the toxics program at the World Wildlife Fund (WWF), modeled the benchmark on a 14-point "Climate Change Governance Checklist" issued in a 2003 CERES/Investor Responsibility Research Center (IRRC) report. Climate change resembles human response to toxicity in that scientific uncertainty does not stop regulation and litigation from proceeding, precluding the luxury of inaction for businesses that wish to avoid risk and remain competitive.

"The framework modifies IRRC/CERES benchmark provisions of good corporate environmental governance, deletes benchmark provisions specific to greenhouse gasses, and substitutes benchmarks that measure corporate commitment to using less toxic chemicals or non-chemical methods," Dr. Liroff writes in the report. The benchmark framework calls for corporate commitment to safer alternatives policy, investor and public accountability, data development, and internal capacity building and "greening" the supply chain. "The benchmark is an initial set of 'best practices' that investors should demand of their portfolio companies."

The socially responsible investment (SRI) community plays a prominent role in the report, which includes an annex summarizing shareowner action over the past several years around the issue of product detoxification as well as addressing shareowner activism in the report body. Shareowners advance the same rationale as the report: product toxicity increases the risk of regulation, litigation, and reputation loss that can erode shareowner value, so product detoxification represents prudent risk minimization.

For example, a 2003 resolution at General Electric (ticker: GE) calling for a report on site-specific annual expenditures in the 1990s related to polychlorinated biphenyls (PCBs) and hazardous substance laws and regulations received 25.6 percent of votes. Several other companies, including Avon (AVP), Baxter International (BXL), Cardinal Health (CAH) JC Penney (JCP), and Kimberly-Clark (KMB) have complied with the terms of product toxicity-related resolutions, prompting their withdrawal.

Near the end, the report profiles successful chemical substitutions by companies in the electronics, consumer goods, and retail sectors.

"In a fully operationalized benchmarking framework, SC Johnson and Son [SCJ] likely would score quite high," writes Dr. Liroff. SC Johnson "launched its trade-marked Greenlist process in 2001 [ . . . which] builds on SC Johnson's reputation for being an early adopter of measures to reduce environmental impact, even in the face of scientific uncertainty."

"For example, in 1975, SC Johnson removed ozone-depleting chemicals from its aerosol cans, three years prior to a government mandate to do so," he continues.

Such foresight would benefit companies currently operating in Europe, where Registration, Evaluation, and Authorization of Chemicals (REACH) regulations proposed in 2003 await imminent enactment by the European Parliament.

"REACH is based on the idea of 'no data-no market'--companies must make public much more data than are available now on the hazards of their products, or face the risk that they will not be able to continue selling them," writes Dr. Liroff. Companies "that have attempted to purge the most toxic chemicals from their product lines may be better positioned to be winners under the REACH process than those companies that have not."

REACH also stands to benefit business-to-business transparency, which currently represents a bigger liability for "chemical choosers" (or manufacturers using chemicals in their products), who are held more accountable than chemical producers.

"The new REACH initiative in Europe should help improve the availability of information to the business purchasers of chemicals," Dr. Liroff told SocialFunds.com. "What also seems clear to me is that environmentally preferable purchasing is gaining momentum, driven in part by European regulations currently in place or anticipated."

The report concludes with recommendations, some directed to the SRI community.

"Investment organizations employing environmental screens may wish to add a product detoxification screen to their armamentarium," writes Dr. Liroff. "Organizations devising socially responsible investment indices may wish to add product detoxification as a criterion when evaluating corporate performance and making judgments about 'best in class.'"

"Investors concerned about enhancing corporate profits and reducing future liabilities may want to press corporate management to launch chemical substitution efforts and to increase disclosure about progress," he continues. "The converging pressures outlined in this brief present sizeable risk, but they also represent substantial opportunity."

 

 
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