Petrochemicals Litigation will Cost Investors Billions
Planet Tracker report warns of legal and financial ramifications from sector’s continued environmental and social harms.
Companies’ ongoing usage of petrochemicals exposes investors to a plethora of environmental, social and legal risks which will have significant financial consequences, according to research by think tank Planet Tracker.
“Petrochemicals represent real financial risk if not managed properly,” Chris Baldock, Head of Data at Planet Tracker, told ESG Investor. “They are pervasive – meaning that investors can’t easily diversify away from them – and destructive. These risks must be addressed.”
The report noted that investors could face US$20 billion in corporate liabilities resulting from plastic-related pollution – including chemical additives in plastics – in the US alone.
“Many investors are becoming aware of the problems with plastic pollution, but few know about how today’s plastic products are filled with thousands of different additives, many of which are toxic,” said Patrik Witkowsky, Senior Sustainable Finance Advisor at non-profit ChemSec.
“Even a lot of food packaging contains hormone-disrupting chemicals. This not only makes all efforts at ‘circularity’ very problematic, but it may lead to many lawsuits in the coming decade.”
Litigation is already on the rise. Science and innovation multinational 3M is set to pay US$10 billion in fines following claims that the company polluted water with ‘forever chemicals’, more formally known as perfluoroalkyl and polyfluoroalkyl substances or PFAS.
Tip of the iceberg
The chemicals industry is very pervasive, with connections to several different industries.
Last year, the think tank published a report noting that more than 7,400 financial institutions were contributing to the negative impact of petrochemicals on human health by funding dyes, detergents, synthetic rubber and other products.
Part of the problem for investors is that it is challenging to keep track of all chemicals in circulation, according to Baldock.
A key challenge for investors and regulators is the pace of innovation. The report said that a new chemical substance is registered every 1.4 minutes, with many of the potential impacts of these new substances unknown. In Europe and North America, over 350,000 chemicals have been registered for production and use. Over 50,000 (14%) of these remain unknown as companies claim their composition to be confidential.
“By the time an investor reaches the end of this paper, there will already be a number of new chemicals out there,” said Baldock. “This will also be the case every time they engage with a [portfolio] company.”
Further, 80% of chemicals registered under the EU’s REACH regulation have been in use for at least ten years despite still not having undergone a safety assessment, Planet Tracker said, noting that companies are only required to report releases of around 60 chemicals to the EU Pollutant Release and Transfer Register (E-PRTR).
With the chemicals industry currently accounting for around 10% of global energy demand – with 58% of this consumed as feedstock – investors with climate-focused commitments should feel motivated to ensure portfolio companies are transitioning to more sustainable usage, the Planet Tracker report noted.
It outlined a series of recommendations for corporate action on chemicals in plastics, including transparent disclosure and target-setting to transition to environmentally sound and sustainable plastic, committing to identifying and eliminating the use of hazardous chemicals and additives in polymers, and publishing plans to transition to the use of more sustainable feedstocks.
“Producers should also commit to only develop new products without hazardous chemicals,” added Witkowsky.
Taking action
A growing cohort of investors are calling for companies to shift away from petrochemicals.
In May, Planet Tracker launched its petrochemical investor statement, within which 73 signatories – which collectively manage US$6.8 trillion in assets – called for petrochemicals companies to transparently disclose and define strategies and targets to reduce the impacts of plastics, and to identify and address hazardous polymers and chemicals of concern in their products.
In July, the group called on the petrochemicals industry to stop blocking progress on reducing plastic pollution.
In addition, the Investor Initiative on Hazardous Chemicals involves over 60 institutional investors and with more than US$12 trillion in assets collectively. The initiative is working to reduce the adverse impact of hazardous chemicals, and the financial risks linked to them.
ChemSec has published a report which outlines the business rationale for moving toward sustainable usage of chemicals.
At the policy level, the Global Framework on Chemicals was adopted in Bonn last year to help countries and stakeholders address the waste and impacts of chemicals across five strategies and 28 targets. These include developing legal frameworks, ensuring data availability, prioritising issues of concern, developing safer alternatives, and mobilising finance.
In addition, Target 7 of the Global Biodiversity Framework calls for countries to reduce the overall risk from pesticides and highly hazardous chemicals by at least 50%, while preventing, reducing and eliminating plastic pollution.
UN Sustainable Development Goal 12.4 calls for the responsible management of chemicals and waste.
Separately, the UN is in the process of developing an international legally binding instrument on plastic pollution via the Global Plastics Treaty. The fifth round of negotiations are due to take place in South Korea in November.
While increased regulation is likely to reduce the future risk to people and planet from hazardous chemicals, potential costs arising from their current use remain a threat to investors, according to Baldock.
“Investors shouldn’t need regulation to act on petrochemicals, due to the scope of litigation risk around this,” he said.
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