The lion in the wild versus the lion in the cage

11-02-2015 | Engage | Matthias Narr, Sylvia van Waveren

Tightening legislation on toxic chemicals has an important impact on chemical companies. As consumer awareness on the dangers of certain substances grows, companies are evaluating the negative impacts of hazardous chemicals on their image and competitiveness. At the same time, they are exploring opportunities to develop less toxic alternatives. Investors should consider these factors in their analysis. We used the topic as an opportunity to try out a new engagement platform: a roundtable with chemicals companies.

Stricter legislation impacts companies’ profitability
Since 2007, when the European Union introduced its chemicals policy REACH (Registration, Evaluation, Authorization and Restriction of Chemicals), thousands of chemicals manufactured in or imported into the European Union have to be registered. REACH and similar upcoming regulations in the US and potentially Asia are affecting chemical manufacturers, downstream companies and retailers. As consumer awareness about hazardous chemicals grows, chemical companies are evaluating the negative impact that toxic chemicals could have on their brand image and their overall operations and competitiveness. At the same time, they are also exploring market opportunities to develop less hazardous chemicals. We believe investors should consider these factors into their company analyses. Therefore, we examined whether an engagement with selected companies in the chemical sector could be useful.

The roundtable – direct contact with companies
We invited five companies that had participated in the RobecoSAM Corporate Sustainability Assessment (CSA) to a chemical industry roundtable to exchange ideas and share experiences around the topic of toxic chemicals. In line with Robeco and RobecoSAM’s fully integrated engagement and investment approach, we aim to enhance the added value of our engagement activities by focusing on financially material issues direclty linked to company profitability and that are therefore relevant for investors.

Four engagement objectives
For our dialogue with the chemical companies, we defined four key objectives. The companies should:

  1. be aware of the substances of very high concern (SVHC) in their products and supply chains and set goals to disclose information on the production and use of these substances
  2. implement a time-line for phasing out chemicals of high concern either by exiting these businesses or developing economically competitive, safer alternatives
  3. commit to continuous improvement by setting goals and publicly report on their progress and establish a corporate chemicals policy
  4. support public policies and industry standards

The chemical industry roundtable took place in early October, shortly before the RobecoSAM Forum. Five chemical companies from the US, Germany, Switzerland and the Netherlands met with Robeco and RobecoSAM analysts and engagement specialists.

The roundtable participants discussed questions such as "How material is the issue of toxic chemicals for chemical companies and their customers?" and "How significant is the phasing out of toxic substances for the company’s profitability?"

Key conclusions: the chemical industry is quite advanced
The key conclusions from the roundtable were:

1. The need for harmonization
The number of different regulations is creating insecurity and higher costs, as each legislation creates different or additional standards and requirements. Therefore the the chemical industry’s main wish is the global harmonization of legal frameworks.

2. The difference between toxicity and risk: the lion in the cage between the lion in the wild
There is a big difference between toxicity and toxic risks, which can be illustrated as the difference between a lion in the wild and a lion in a cage: the toxicity remains the same – the lion is a dangerous animal no matter where – but the risk is very different if that same lion is held in a cage. Safety is therefore considered to bemore important than the phasing out of toxic substances.

3. Product stewardship as a key driver
Product stewardship is a key driver for the chemical industry; it is highly financially material and thus highly relevant to us as investors. The business practices applied by the chemical industry – particularly the global players in Robeco and RobecoSAM’s portfolios - are already highly advanced.

4. Global improvements in chemicals management
Contrary to our expectations, there does not seem to be a large gap between the industry leaders and the rest of the companies. Rather, the chemical industy seem to have high chemicals management standards. In addition, the laggards benefit from membership in the International Council of Chemical Associations (ICCA), which seeks to strengthen cooperation withinin the industry and with global organizations such as the UN Environmental Program or NGOs to improve and make the management of chemicals more sustainable.

5. Business opportunities
The demand for cleaner substances by end users is a major driver for the chemical industry. However, developing new substances for standardized industrial processes typically requires 10 years. Looking ahead, today’s hot topic is nanotechnology, which can rapidly lead to the use of new substances in a variety of applications in the Auto, Aerospace, Food & Beverage and Packaging industries.

Conclusion: delivering value to companiesand investors
The companies considered the roundtable to be a great success because they were able to speak openly with their peers, share experiences and hear investors’ concerns. Our dialogue with companies creates value for them as we clarify shareholders’ expectations and help to strengthen the links between sustainability initiatives and financial performance. This way, companies can increase their competitiveness and attract investors with longer-term investment horizons.

At the same time, the roundtable also created value for us as investors as it provided unique insights into the industry, how it deals with risks, and how it transforms these challenges into opportunities for innovation and development of substitute materials. The companies are aware of the SVHC chemicals in their products and supply chains, are transparent and implement a time-bound program to phase out chemicals of high concern either by exiting these businesses or developing economically competitive safer alternatives. As sustainable investors we will continue to monitor the chemical industry’s progress on product stewardship. We will continue to hold roundtables in the future, as they have helped us to define sustainability issues that are relevant to corporate profitability and investors.

matthias-narrMatthias Narr

Engagement Specialist
RobecoSAM Governance & Active Ownership

"Roundtables are valuable platforms for us to define financially material sustainability issues."

 

 



sylvia-van-waverenSylvia van Waveren

Senior Engagement Specialist
RobecoSAM Governance & Active Ownership

"Our dialogue with companies creates value as we clarify shareholders’ expectations to them, helping to strengthen the links between sustainability efforts and financial performance."

 



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matthias-narrMatthias Narr
Engagement Specialist RobecoSAM Governance & Active Ownership



sylvia-van-waverenSylvia van Waveren
Senior Engagement Specialist RobecoSAM Governance & Active Ownership



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