After years of talks, the Global Framework on Chemicals was finalised late in 2023. It provides a sector-specific roadmap for the essential transition to safe and sustainable chemistry. Rachel Crossley, Head of Stewardship Europe, explains how investors and other actors across the financial sector can bring their influence to bear and help implement the framework.
We firmly believe a sustainable economic future relies on sustainable investment practices. Delivering that future means investors must play their part in addressing not only environmental, social and governance (ESG) impacts and risks facing individual companies, but also global systemic risks such as climate change and nature loss.
Such risks threaten whole portfolios as well as the stability and health of the entire financial system. Accordingly, these risks are typically addressed most effectively by implementing consistent and effective government policies, regulations, rules and standards. We believe investors can play a pivotal role in supporting the development of those measures.
While the Paris Agreement and the Kunming-Montreal Global Biodiversity Framework provide a vital overarching policy architecture to address climate change and nature loss, sector-specific responses are also needed to tackle the different ways in which each sector contributes to these 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. Consequently, we cannot solve the climate crisis without them. Yet few sectors have been 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.
- Chemical pollution is an important driver of biodiversity loss: it has been shown to negatively impact insects, pollinators, fish and bird populations, among others.
- In addition, exposure to hazardous chemicals throughout their lives threatens workers’ health and that of the wider population. It 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 grows of the extensive impact of this sector, the risks and potential costs facing companies and investors mount. The societal costs of environmental chemical exposures are estimated to exceed 10% of global GDP, a staggering USD 7.5 trillion.
This highlights the economic ramifications of inaction. To put that into perspective, the sector’s total revenues were USD 5.72 trillion in 2022. Recently, ChemSec, a Swedish NGO, estimated that in 2022, the revenues from PFAS – just one class of hazardous chemical – were USD 26 billion, but the total annual societal costs relating to healthcare, environmental remediation and water purification was USD 16 trillion.
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 USD 30 trillion.
This widespread move towards tougher regulation should send a clear 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 put revenues at risk, potentially ‘stranding’ whole classes of chemicals. Litigation related to ‘forever chemicals’ further heightens concerns, with costs estimated to potentially eclipse even the landmark Big Tobacco settlement.
Major brands, motivated by evidence of extensive harm, are aligning with a call for a ban on hazardous chemicals, signalling a shift in demand towards safer alternatives. Considering these growing market signals, institutional investors must surely up their focus and proactively engage with the sector to ensure the transition to safer alternatives.
Tools for investors
Investors do not lack initiatives to help them take action.
CA100+ and ShareAction’s Decarbonisation programme address many major chemical producers and the Institutional Investor Group on Climate Change (IIGCC) has published investor expectations for the transition by chemical companies to net-zero emissions. Investors can use these to engage with petrochemical players.
The Investor Initiative on Hazardous Chemicals (IIHC) supports engagement to drive greater disclosure around the production of PFAS and other chemicals.
NatureAction100 will tackle the biodiversity impact 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 impact of the production, use and disposal of chemicals. We believe transformation of this sector to safe and sustainable products is critical to a healthy and sustainable future.
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