We derive many benefits from chemicals in our everyday lives – food lasts longer, clothes can withstand the elements, and electronic devices do not catch fire. However, many of the same chemicals that enable us to live easier can accumulate in our bodies over time and threaten our health.
Beyond the dangers to individuals, chemicals are increasingly threatening at a planetary level. The industry is now the world’s third-largest source of carbon dioxide emissions, as well as a leading cause of biodiversity destruction.
The most concerning chemicals are PFAS, the per- and poly-fluoroalkyl substances, which break down extremely slowly. PFAS are often called ‘forever chemicals’ – because they hardly decay in nature and stay around for thousands of years once produced. PFAS exposure has been linked to various health problems – such as decreased fertility and neurological problems, as well as an increase in Alzheimer’s, Parkinson’s disease, and breast cancer. As a result, the European Chemicals Agency is poised to implement a restriction – or an outright ban – on thousands of PFAS should its scientific evaluation find the chemicals hazardous to humans or the environment.
Investors are aware of the dangers of hazardous chemicals, the need to transition to safer alternatives, and the potential liabilities of companies with a history of involvement in the production or use of PFAS.
Earlier this year, Nordea Asset Management joined 49 other investors – representing a combined $11trn of assets under management or advice – in the creation of the Investor Initiative on Hazardous Chemicals (IIHC).
The IIHC, which is supported by environmental NGO ChemSec, looks to engage with major chemical companies about the management of hazardous chemicals and advance transparency. The ultimate goal is to stop the production of ‘forever chemicals’.
A focus on double materiality
Double materiality is important. This concept covers the ESG risks likely to impact the financial performance of an investment – in this case, the legal liabilities a company may be exposed to – as well as the broader impact of the investment on society and the environment, due to the fact harmful chemicals can contaminate habitats forever. While the two considerations are often closely linked, they should not be conflated.
With hazardous chemicals – such as PFAS – negatively impacting both living beings and nature, corporates involved in the production and usage of these substances face a plethora of financial and reputational risks. Companies in this space are facing an increasing number of claims for damages, and should these suits proceed, the impact on share prices may be material.
Consumer awareness of hazardous chemicals is also intensifying, accelerating demands for heightened transparency and the eventual replacement of the compounds within everyday products.
In light of the elevated risks, investors must dig deeper into the range of chemicals manufactured by individual companies within the industry, as well as the quantities involved. Should the EU ban the entire family of PFAS, investors must understand how much of a company’s portfolio will be impacted, and if it has the R&D capability to develop or integrate less harmful alternatives.
Making a meaningful impact
While the IIHC is only in its infancy, the investor collective has engaged with 16 of the top 50 chemical companies ranked by Chemsec. Nordea Asset Management has taken the lead in three of these dialogues, while also participating in industry-wide discussions – including with representatives from the European Commission.
In addition to activities within the IIHC framework, we continue to undertake standalone chemicals-related engagement with industrial and consumer manufacturers held in our investment portfolios. A first success has been the commitment by 3M to ‘work to discontinue use of PFAS across [the company’s] product portfolio by the end of 2025’. Nordea Asset Management is the IIHC lead investor for 3M.
The corporate response to engagement has been mixed thus far. On the positive side, several producers are well prepared for potential regulatory change and have plans to phase out the most hazardous chemicals. Some companies have already begun the substitution to less harmful alternatives. However, a number of producers and users of PFAS continue to oppose the proposed regulatory framework.
This is why it is vital to engage with corporates to determine if there is a willingness to change. We are committed to ongoing individual and collective engagement to encourage both producers and users towards increased transparency, alongside pledges to phase out hazardous materials and credible development plans for safer alternatives.
Inaction is simply not an option, as companies on the wrong side of regulatory reform are exposed to significant financial risk over the medium to long term.