Chemical substances are part of our daily lives. They are found everywhere from the cleaning detergents we use to the clothes we wear and our personal electronics. The companies that produce these chemicals, some of which can be hazardous and have a negative impact on human health and the environment, are exposed to several risks and are highly regulated. In Europe, the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) regulation focuses on ensuring the safe use of chemicals, as well as the phasing-out of the most harmful chemical substances. As the third and final REACH registration deadline approaches, we take this opportunity to look at the impact of chemical regulations on the sector and investors.
What is the REACH Regulation?
In June 2007, the REACH regulation came into force to ensure the protection of human health and the environment from risks related to the use of chemicals. The regulation also aims to enhance competition and innovation between European chemical companies. For example, by restricting the use of certain substances it forces companies to find substitutes with similar properties but better toxicological profiles.
Although REACH is a European Union-level regulation, companies outside of the region may also be affected. REACH includes reporting requirements on chemicals imported into the EU at quantities greater than one ton per year. The regulation also positions the EU as a leader in the control of chemical substances. To remain competitive in the global economy, governments in other parts of the world have taken steps to align their national regulations with REACH. For example, in 2013 South Korea adopted its own K-REACH regulation, which includes many of REACH’s concepts.
The REACH Regulation: Potential Risks and Opportunities
Under the REACH regulation, chemical manufacturers and importers are responsible for managing and identifying the risks associated with the substances they bring to the market. Companies are also asked to report on how products can be used in a safer manner. Companies that fail to comply with the REACH regulation can face significant fines. For instance, the Belgian law allows for fines of up to EUR 7,000,000 (USD 8,588,700) for REACH violations. Moreover, in case the authorities find that companies are not managing adequately the risks associated with the hazardous substances they produce or import, they can restrict the manufacturing or the use of these substances. This can result in operational disruptions for companies, as finding suitable substitutes for these substances is a potentially lengthy and costly process, possibly requiring product reformulations and changes to production processes.
Our analysis shows that 65% of chemical companies within Sustainalytics’ universe offer products with important human health or environmental concerns.
Percentage of Chemical Companies producing Hazardous Products
Source:Sustainalytics Research. The Hazardous Products indicator provides an assessment of whether the company offers products with important environmental or human health concerns. The assessment is based on the SIN (Substitute it Now!) Producers List, created by the NGO ChemSec. The Sin Producers List is a database that identifies Substances of Very High Concern, based on the criteria established by the REACH regulation. These are substances that are likely to be banned or restricted in Europe in the near future.
Additionally, Sustainalytics’ incidents research shows that 18 of the major chemical producers are involved in incidents related to the environmental and social impacts of the products they produce. Companies that produce agricultural chemicals (Monsanto Co., DowDuPont, Bayer, BASF) are particularly exposed, due to the nature of the products they sell. Agricultural chemicals include products such as insecticides, or herbicides, which have more hazardous characteristics than most other chemicals, since they are designed to be lethal to living organisms (insects or pests).
Environmental & Social Impact of Product-related Controversies within the Chemical Industry
Source: Sustainalytics Research. Controversies are assessed on a 0 to 5 scale, where “0” indicates no controversy and “5” indicates extremely severe controversy. Controversies shown above are captured under Environmental Impact of Products and Social Impact of Products
Besides regulatory risks, companies also face the risk of public scrutiny if a product is linked to severe environmental or health impacts. An example is the case of the substance GenX, produced by Chemours, which was found in the drinking water of several US states in 2018 (please see our Check the Flow story in the 10 for 2018 Report).
Regulations such as REACH can also represent an opportunity for companies to gain a competitive advantage. It offers companies an incentive to invest in the research and development of sustainable chemical substitutes and stay ahead of regulatory requirements. In practice, this means companies producing innovative alternatives to substances which are restricted by law could see an increased demand for these alternatives in the future.
Best practice examples include Solvay which, as of December 2017, has conducted analyses for 28 safer alternatives. In nine cases, an effective replacement was found for the substance of very high concern (SVHC) in question. By 2020, the company aims to complete risk assessments and analysis of any available safe alternatives for products that it is producing, and that contain SVHCs.
Investors should consider engaging chemical companies on how evolving regulations could affect certain chemical substances within a company’s portfolio, and potentially revenues. Investors should also consider how companies are managing this risk. This includes analyzing how companies are addressing possible changes in regulations, and what steps have been taken to improve transparency around the chemicals in their product portfolio.