Moving from a passive to an active strategy in managing for chemicals in products makes good business sense
Companies increasingly need to know more about the chemicals in their products and supply chains, thanks to such drivers as regulatory requirements, market demands, media attention, advocacy from nongovernmental organizations (NGOs), product recalls and market opportunities. Otherwise, they are blind to the hidden liabilities of chemicals of concern to human health and the environment in their products. This can be a significant barrier to generating value as transparency becomes increasingly essential to informed decisions, supplier reliability and clear communication to customers.
Companies and purchasers downstream from chemical manufacturing—which use chemicals by virtue of the products they buy—mainly use the “passive strategy,” for chemical management, complying with such government regulations as upper limits to certain substances in products. They do not look pre-emptively for chemical risks; rather, they save short-term costs by not investing in systems, staff or third parties for chemicals management beyond meeting regulatory requirements.
Such a strategy, however, has serious flaws. It leaves companies vulnerable to hidden liabilities and unprepared for swiftly changing market demands and regulations. It also makes them vulnerable to crises that incur significant costs—to sales, to brand reputation and to stock value—by failing to invest in due-diligence chemicals management.
Alternatively, the “active strategy” seeks to stay ahead of regulatory and market demands. Companies integrate chemicals management into product design, material selection and supplier engagement: chemicals become another element to be considered in products along with costs, performance and other sustainability attributes. Such companies make upfront investments ahead of regulatory and market demands and invest in systems for knowing chemicals in products and supply chains. This creates long-term value for them and their shareholders by enhancing brand reputation, increasing sales, creating innovative products, increasing supply chain reliability and avoiding the high costs of chemical crises (such as reformulating products under pressure).
If hidden liabilities in chemicals become revealed to regulators or customers, the costs can be high in terms of fines, lost market share and value, and tarnished brand reputation. Consider, for example, the fines levied by American regulators on retailers for failing to appropriately manage products that become hazardous waste when they break or are returned: over three years, Walmart, Target, Walgreen Co., CVS Pharmacy and Costco Warehouse were fined a total of $138 million
Retailers need to know the chemicals of concern in their products and which ones trigger hazardous waste regulations, while establishing chemical management systems in their stores. The costs of product recalls—where an unknown chemical of concern in products causes brands to incur significant costs for non-compliance, legal counsel, supply chain communication, product takeback, and/or product reformulation—can stretch into hundreds of millions of dollars.
In 2011, Sony’s recall of its PlayStation cost the company $150 million in lost sales and product reformulation. And in 2007, Mattel’s recall of more than 9 million toys cost $110 million and pushed its stock price down 18 percent. Meanwhile, RC2 Corporation’s recall of toy trains cost $48 million in expenses and legal fees, and halved its stock price. Compared with such costs, the benefits of the passive strategy—delayed investments— are quite modest. And with regulation of chemicals increasing globally, market forces are moving faster and more aggressively to demand chemical ingredient transparency and safer substitutes. The market costs of failing to address consumer demands for safer chemicals in products can be high.
In 2009, Johnson & Johnson lost significant sales in China when American NGOs found formaldehyde and 1,4-Dioxan in some of its baby products (including shampoo). The company knew the chemicals were in their products, but opted not to remove them. However, consumers—when informed of the chemicals’ presence—chose to avoid the brand. Tens of thousands of Chinese stopped buying its products, thousands of stores dropped them and its market share for baby products declined by almost 10 percent. Four years later, the company responded to market demands and reformulated its baby Mark S. Rossi Get Active C Moving from a passive to an active strategy in managing for chemicals in products makes good business sense Mark S. Rossi Interim Executive Director, Clean Production Action 36 products to eliminate the two substances. Similarly, retailers and consumers reacted swiftly when water bottle manufacturer, Sigg, failed to disclose Bisphenol A (BPA) in products. Sigg USA had to file for bankruptcy in 2011 with $13 million in liabilities. All these examples illustrate the corporate risks of chemicals of concern in products. Such risks are often hidden from the companies themselves, only coming to light through government enforcements or NGO campaigns. The passive strategy clearly creates vulnerabilities for companies, including tarnished brand reputation, lost shareholder value and the high monetary costs of responding to revelations under crisis conditions.
By contrast, proactive businesses do not wait for government regulations, product recalls and market demands to emerge before finding out about the chemicals in their products and supply chains, and reducing the use of hazardous ones. Instead, they integrate knowledge of them into their management systems and create value for their organizations. Seagate Technology PLC (manufacturer of data storage devices), Coastwide Laboratories (manufacturer of cleaning products and division of Staples, Inc.) and Shaw Industries (manufacturer of flooring products, including carpets) provide three examples of companies implementing such an active strategy.
Passive approaches to chemicals management leaves companies vulnerable to hidden liabilities and unprepared for swiftly changing market demands and regulations.
Seagate realized many benefits from knowing chemicals in products, including:
- Reduced costs: every time a new chemical of concern emerges due to regulations or market forces, Seagate staff search for it in their chemicals management database, thus enabling a quick response to new substance restrictions with current resources. As more and more chemicals of concern emerge, its data collection costs remain relatively stable instead of varying widely up and down.
- Increased supplier reliability: an unintended benefit is a much more thorough understanding of suppliers and the quality of their products. By knowing in detail the chemistry of its suppliers’ products, Seagate can quickly identify when changes are being made to the materials in its components.
Coastwide Laboratories realized significant benefits when it invested in a new product line based on safer chemicals. Its Sustainable Earth brand became the primary driver behind the company’s rapid growth during the early 2000s: net operating income averaged double to triple the industry norm, sales rose 8 per cent, market share grew to about 16 percent of the regional market and new customers increased by 35 percent.
Meanwhile, Shaw Industries’ investment in safer chemicals for carpet backings quickly captured market attention. For example, it replaced polyvinyl chloride (PVC) plastic and its phthalate plasticizer with safer alternatives, and reduced the weight of carpet backing by 40 percent. Production capacity tripled by 2000 and, within two years, sales of its new EcoWorx products exceeded those of PVC-backed carpets.
The demand for increased chemical transparency up and down the supply chain grows daily. Awareness of hazardous chemicals in products and supply chains is driving companies to disclose their chemical ingredients and select inherently safer substances. Such companies are leaving behind crisis-driven change and creating long-term value for themselves, their shareholders, the public and the planet