Evaluating the risk of synthetic chemical pollutants

Financial markets spend much of their time focused on risk and return metrics. The generally accepted relationship is that one needs to take on more investment risk to realise a higher return. If the investor is unwilling to take on risk, they should expect to receive the risk-free rate – e.g. a risk-free bond. But this assumes efficient pricing. Planet Tracker believes that the risks of synthetic chemicals are not being correctly priced by financial markets. Some may view there to be some (fat) tail risk – i.e. the likelihood of extreme events causing major losses which are typically rare and unpredictable – but the probability of some major harm and the associated financial repercussions, appears to be rising. A reassessment of the risk premium applied to producers and users of these substances looks wise. Below, we discuss why.

The flood of synthetic chemicals

It is hard to comprehend the scale of synthetic chemicals being released . These chemicals, also known as novel entities, are “ new substances, new forms of existing substances, and modified life forms that have the potential for unwanted geophysical and/or biological effects .” They include chemicals, plastics, other types of engineered materials or organisms not previously known to the Earth system, and naturally occurring elements (such as heavy metals) that are mobilized by anthropogenic activities. ⁱ

The Chemical Abstracts Service (CAS) maintains a database of chemical names, CAS numbers, and structures for more than 204 million chemicals disclosed in literature since the early 1800s. ⁱⁱ Since 2016 a new substance has been registered in the CAS database every 1.4 minutes . ⁱⁱⁱ

Over 350,000 chemicals and mixtures of chemicals have been registered for production and use. This figure comes from an analysis of 22 chemical inventories that mainly cover North America and Europe. Over 50,000 chemicals, 14% of the total, remain unknown as companies claim their composition as confidential. Worryingly these figures exclude all South America, Africa, and large parts of Asia. ^iv For context, over 26,600 substances were registered in the EU REACH database of which, 10,000 are yet to be assessed , and companies are only required to report releases of around 60 chemicals or groups of chemicals to the EU Pollutant Release and Transfer Register (E-PRTR). ^{v vi vii}

In the US, the Toxic Substances Control Act (TSCA) Chemical Substance Inventory contains approximately 86,000 chemicals, and companies are required to report releases of nearly 800 chemicals across 33 chemical categories to the Toxics Release Inventory (TRI). ^{viii ix} On a company level, Saudi Basic Industries Corp (SABIC) alone releases 150 new products every year . ^x

For a more detailed analysis, please see ‘Novel Entities – A Financial Timebomb’

The rise and rise of scientific research

Not only are there human engineered chemicals being produced and released into the environment at a remarkable rate, but scientific studies which evaluate their impact on the environment and humans are also rising dramatically . As the number of studies increases, this gives further opportunities for systematic reviews and meta-analyses, providing additional tools for evaluating the existing data in primary research.

For example, the Minderoo Foundation, in collaboration with JBI at the University of Adelaide, undertook an umbrella review, systematically examining vast amounts of research data from thousands of scientific studies on exposure to plastic chemicals and the impacts on human health. The review specifically examined some of the most used plastic chemicals that we know humans are exposed to – BPA (bisphenol A), phthalates (plasticisers), PCBs (polychlorinated biphenyls) and PBDEs (Polybrominated Diphenyl Ethers), both of which are flame retardants, and PFAS (per- and polyfluoroalkyl substances). It found that there was consistent and irrefutable evidence that plastic chemicals in every class examined harm human health across the entire human life cycle . ^xi

To gather an indication of the amount of research taking place on synthetic chemicals in Figure 1 we show the research studies undertaken, by year, for additives used in plastics. ^xii

Figure 1: Published research articles by chemical class, for plastic additives only. (Source: Minderoo Foundation).

The wider pool of evidence

E vidence of chemical pollution is also available to investors from other reports . Last week, the European Environment Agency published ‘Europe’s state of water 2024: the need for improved water resilience’. ^xiii Of the three challenges identified – protecting and restoring aquatic ecosystems; achieving the zero-pollution ambition; and adapting to water scarcity, drought and flood risks – the analysis of pollution makes for some concerning reading .

The report notes that “ the overall quality of Europe’s waters is not improving ”. Under the Water Framework Directive (WFD) for European rivers, lakes, transitional, coastal and groundwaters, the deadline to meet good status was 2015. It was not met and there has been little improvement since 2010 . By 2021, only 37% of Europe’s surface water bodies achieved a good or high ecological status. Only 29% achieved a good chemical status .

The EEA states that the lack of significant progress in chemical status in surface waters can partly be explained by long-lived pollutants that are particularly challenging to remediate , such as mercury and brominated flame retardants. Interestingly, if the analysis had been undertaken without considering long-lived substances, “ good chemical status is achieved in 80% of surface waters, with 14% in unknown status ”.

And there is a word of warning about the future which the finance community should note. “ As monitoring becomes more comprehensive and analytical and screening methods are improved, new harmful substances will continue to be found in water and we will increasingly become aware of their harmful effects. Well-known examples include the ‘forever chemicals’ per- and polyfluoroalkyl substances (PFAS), which are harmful to human health and are widespread where they have been investigated, but for which we currently lack a good understanding of their overall presence in water at the European level .”

Conclusion

Both producers and users of synthetic chemicals need to be aware of the risks associated with synthetic chemicals. The release of new chemicals continues unrestrained with the scientific community and regulators struggling to understand all their full impacts. However, scientists too are ramping up their analyses and many of the results are concerning. The Minderoo-Monaco Commission on Plastics and Human Health found that for plastic related chemicals “ The thousands of chemicals in plastics-monomers, additives, processing agents, and non-intentionally added substances include amongst their number known human carcinogens, endocrine disruptors, neurotoxicants, and persistent organic pollutants. These chemicals are responsible for many of plastics’ known harms to human and planetary health .” ^xiv

Planet Tracker recommends a revisiting of risk models for companies associated with these novel entities. There are examples of companies which are presently incurring the financial pain associated with such materials – see ‘Is Bayer a litigation leading indicator?’ – which could be used as a benchmark.

While undertaking this risk assessment, investors and lenders are faced with three major challenges. Firstly, the time factor is a difficult to judge. Will litigation accelerate and if so, when? This is further complicated by the fact that these synthetic chemical pollutants are not here today, gone tomorrow. Secondly, it is evident that many of these pollutants are so widespread in products that they need to determine whether this is a specific (company/idiosyncratic) risk or a systematic (systemic/market) one. Thirdly, how significant is the litigation exposure? To date, there are examples of multi-billion claims. Over to the experts.

For investors focused on petrochemical companies’ fossil fuel dependence and hazardous chemicals exposure in plastics please see the Petrochemical Investor Statement.

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