Financial investors have a big impact on the strategic decisions of companies. From their perspective the production and use of hazardous chemicals implies financial risks. However these risks can be avoided by including the chemical perspective in investment analysis, and there are opportunities to grasp in investing in companies producing safer alternatives.
Companies need to be prepared for chemical regulations
The implementation of the European chemicals legislation REACH and the Toxic Substances Control Act in US are greatly effecting chemical manufacturers, as well as downstream companies and retailers. To avoid risks and underperformance, hazardous chemicals have to become a rising issue on the investment horizon.
The authorisation element of REACH states that substances cannot be used in the European Union after a sunset date unless an authorisation has been granted for a specific use. The responsibility for seeking authorisation lies solely with the producer, importer or user of a substance, and can only be given if the company proves that the risks of continued use are limited or the benefits outweigh the risks. Applications are costly, 50 000 EUR per substance and use, with no guarantee that an approval will be granted.
The use of hazardous chemicals implies financial risks
Producers and users of hazardous chemicals facing possible future restrictions, such as the ones listed on the SIN List (which are identified by ChemSec as Substances of Very High Concern according to REACH criteria) face the risk of increased costs associated with reformulating products and modifying processes, which can have significant implications for company performance. This implies vast risks for companies with long production cycles. A product that is made today, but put on the market in ten years, could require the use of a substance which by that time has been restricted through REACH.
Product recalls are rising, in United Kingdom there has been a 10 percent increase per annum since 2003. (Source: Henderson, SRI briefing report Feb 2009, “Chemical safety in consumer products industries”).
At the same time, there are opportunities for winners to seize, in the form of both preparedness and innovation. When substances are restricted, a need will arise for alternative chemicals. The producers and users of these alternatives can gain market shares and probably out-perform the sector.