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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.

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.


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