‘New asbestos’ warning to chemical sector from investors with $10 trillion in assets

Read this story in today’s Financial Times.

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The Investor Initiative on Hazardous Chemicals (IIHC), which represents over $10 trillion in assets under management or advice, wrote to the CEOs of the world’s 50 largest stock-listed chemical companies saying: “Manufacturers and users of PFAS chemicals are exposed to deep liability and insurance risks, reminiscent of those historically linked to asbestos, which could materially adversely harm the long-term value of companies involved in their manufacture and sale.” Production and use should be phased out, it said. Parts of the letter were published by IIHC coordinator, the International Chemical Secretariat (ChemSec).

IIHC collectively represents over $10 trillion in assets under management or advice and includes Storebrand Asset Management, Allianz Investment Management, BNP Paribas Asset Management and Resona Asset Management. Members stepped up their interventions this year, holding meetings with 16 chemical firms on production reforms, a level of pressure from institutional investors the sector has not seen before.

For decades, asbestos was known as the magic mineral, despite early health concerns that eventually led to lawsuits and numerous bankruptcies that continue to this day. PFAS hazards were also recognised early, but production today is at an all-time high. US companies face a flood of lawsuits, with defendants expanding beyond producers to PFAS users in the auto, food, textiles, cosmetics and paper sectors. The first bankruptcy occurred this year and more are expected, experts told Bloomberg. In Europe, 3M reached a €500m settlement last year, but fresh lawsuits have begun in the Netherlands and Belgium. Both US states and the European Union are drafting PFAS bans.

A fresh analysis published today by California-based casualty emerging risk analytics company Praedicat estimates that US PFAS bodily injury estimates for the ChemScore ranked companies covering all production to date range from $10B on an expected loss basis to $41B at 5% probability. These numbers climb to $66B when looking at events less likely than 1% probability. Additional costs to remove PFAS from drinking water across the United States range from $64.5B to $248B. Full clean-up costs could exceed $400B, an amount that may also be borne by customers of the ChemScore companies.

Victoria Lidén, co-chair of the IIHC and Senior Sustainability Analyst at Storebrand Asset Management, says: “Mismanagement of hazardous chemicals ranks as one of the largest and most immediate of all environmental risks for investors when it comes to its potential to impact the bottom line of corporates. Not only do PFAS – or forever chemicals – negatively impact human health and ecosystems; we have also seen the effect that group litigation, such as the $10.3bn settlement by 3M this year, can have in eroding shareholder value. In the short term, this impact could be more material than even climate change, so it’s imperative that firms take meaningful action to phase out the use of these substances.”

Sabrina Sanz, Senior ESG Analyst Chemicals at Amundi Asset Management, says: “We see parallels emerging between the PFAS and asbestos issue, especially with respect to the substantial liability and insurance risks associated with asbestos in the past. It is vital today to develop a better understanding of chemical companies’ exposure to problematic chemicals and, in turn, a better understanding of the financial risks involved. ChemScore provides critical insights into a company’s product portfolio, its transition to safer alternatives and its operational transparency. This knowledge enables investors to make more informed decisions, better shield their portfolios from environmental risks and eventually safeguard shareholder value.”

ChemScore ranks the sustainability of the 50 chemical producers. Published today by ChemSec, it shows that five PFAS producers (3M, AGC, Chemours, Daikin and Honeywell), are frequently near the bottom of the table. Two others, Solvay and Arkema, score relatively well, achieving 6th and 12th place respectively, thanks to more sustainable processes and better transparency, among other things.

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ChemScore lead author, Sonja Haider, says: “PFAS are the new asbestos; that is clear to us and increasingly to investors. The parallels are stark: scientists blow the whistle, and firms continue producing for decades until, eventually, the law catches up with them and it’s game over. We don’t think the full extent of the threat is factored into share prices yet. Analysts see the mounting legal claims but have little idea of just how widespread and critical the problem is. The fact some firms continue to defend PFAS is as cynical as it is short-sighted.”

Beyond PFAS, ChemScore reveals that the firms are making little progress in transitioning away from hazardous chemical production towards safer alternatives, are persistently secretive about their operations and are making only slow progress in boosting the sustainability of their operations. The average score is 14.3 out of a possible 48 points, up slightly from last year’s average of 13.3. European firms scored best at 18.1 on average, trailed by Asia (13.1) and North America (12.4).

Beyond PFAS, Praedicat predicts claims filed in the US against ChemScore-ranked companies for bodily injury claims arising from 245 chemicals in their model, produced to date. These could yield total liability costs ranging from an expected $45 billion to a 5% likelihood of $99B or greater loss, it said. Extreme scenarios, less likely than 1% probability, could cost at least $164 billion and could even exceed $300 billion. Since liability is faced by both the chemical producers and their customers, total chemical-related liabilities would be 2-3 times higher than the previously stated figures, with the customers of ChemScore companies bearing at least half of the burden.

Scientists warn that chemical pollution has crossed a safe limit for humanity and threatens the biological and physical processes that underpin all life on Earth. The crisis is so severe that global leaders are setting up a UN scientific bodyto advise governments on managing chemicals and waste and preventing pollution, similar to the Intergovernmental Panel on Climate Change. PFAS are very long-lasting, pass through soil into drinking water and build up in food chains. Human exposure is now “widespread”, as are pollution hotspots. PFAS have been linked to testicular cancer, attention deficit disorder, reproductive problems and a weakened immune system, among other illnesses.