A sustainable economic future relies on sustainable investment practices. Delivering that future means investors must address not only ESG impacts and risks facing individual companies but also global systemic risks like climate change and nature loss.
As systemic risks threaten whole portfolios and the stability and health of the financial system as a whole, this category of risk is typically most effectively addressed through the implementation of consistent and effective government policies, regulations, rules and standards. Investors also have a pivotal role to play in supporting the development of those measures.
While the Paris Agreement and the Kunming-Montreal Global Biodiversity Framework provide critical overarching policy architecture to address climate change and nature loss, sector-specific responses are also needed to tackle the very different ways in which each sector contributes to these systemic risks. A particularly critical sector is chemicals, which is why we strongly welcome the finalisation of the Global Framework for Chemicals.
The role and impacts of chemicals in modern life
Synthetic chemicals are integral to modern life; nearly 95% of all manufactured products use these chemicals as inputs. We cannot solve the climate crisis without them. Yet few sectors are as firmly implicated in driving the triple global planetary crises of climate change, biodiversity loss and pollution, nor in damaging human health.
The chemical sector is the third-largest source of industrial greenhouse gas (GHG) emissions globally and chemical pollution is a key driver of biodiversity loss; it has been demonstrated to negatively impact insects, pollinators, fish and bird populations, among others. In addition, exposure to hazardous chemicals throughout their lifecycles threatens workers’ health and that of the wider population, and disproportionately impacts vulnerable and at-risk groups. The urgency to transition to safe and sustainable chemicals is clear.
The risks and costs of inaction
As understanding mounts of the extensive impacts of this sector, the risks and potential costs facing companies and investors also mount. The societal costs of environmental chemical exposures are estimated to exceed 10% of global GDP, a staggering $7.5trn, highlighting the economic ramifications of inaction. To put that in perspective, the sector’s total revenues that year were $4.4trn. More recently, ChemSec, a Swedish NGO, estimated that in 2022 while the revenues from PFAS – just one class of hazardous chemical – were €26bn, the total annual societal costs relating to healthcare, environmental remediation and water purification is €16trn.
Regulatory and litigation landscape
Regulators worldwide are responding. The EU Green Deal, the Chemical Strategy for Sustainability, and other regulatory initiatives in Japan, the US and the UK underscore a global shift towards more stringent regulations. Sell-side research estimates that the market capitalisation of companies impacted by PFAS regulation alone is $30trn. This widespread move towards tougher regulation should be a strong signal to chemical companies that they need to invest now to find alternatives to chemicals slated to be regulated, to ensure they avoid the costs, penalties and fines associated with future regulation.
Tightening regulations could also put revenues at risk, potentially ‘stranding’ whole classes of chemicals. Litigation related to ‘forever chemicals’ further heightens concerns, with potential costs estimated to potentially eclipse even the landmark Big Tobacco settlement. Major brands, motivated by evidence of extensive harm, are aligning with the call for a ban on hazardous chemicals, signalling a shift in demand towards safer alternatives. In light of these mounting market signals, institutional investors must surely up their focus and proactively engage with the sector to ensure the transition to safer alternatives.
Global framework on chemicals: A roadmap for multi-stakeholder action
Following years of negotiation, the Global Framework on Chemicals was finalised in December this year. This framework provides a sector-specific roadmap for the essential transition to safe and sustainable chemistry, outlining a series of objectives and targets, and calls on investors and other actors across the financial sector to bring their influence to bear to help to implement it.
Tools for investors
Investors do not lack for initiatives to help them take action. CA100+ and ShareAction’s Decarbonisation programme address many major global chemical producers and the Institutional Investor Group on Climate Change (IIGCC) has published investor expectations for chemical companies’ transition to net-zero which investors can use to engage with the petrochemical players.
The Investor Initiative on Hazardous Chemicals (IIHC) supports engagement to drive greater disclosure around the production of PFAS and other persistent chemicals. The recently launched NatureAction100 will tackle the biodiversity impacts of big players in the sector and the Chemical Footprint Project urges major brands to adopt policies and practices to phase out the use of damaging chemicals. Investors seeking to facilitate early-stage investment in safe and sustainable alternatives can support initiatives like ISC3 and Transition Finance for Sustainable Chemicals and Materials.
We urge other investors to join us in realising the goals of the Global Framework on Chemicals and in placing greater emphasis on tackling the extensive environmental and social impacts generated by the production, use and disposal of chemicals. Transformation of this sector to safe and sustainable products is critical to a healthy and sustainable future.
