ESG and Emerging Contaminants – Investors Beware
The Environmental, Social and Governance (“ESG”) movement has existed for over 10 years, but has taken on exponentially greater importance in the corporate, investment and insurance worlds in the last two to three years. With the Biden-Harris administration taking power in 2021, the environment is at the forefront of United States policy as never before, with focuses on climate, environmental justice, and natural disasters. Investors assessing companies’ environmental footprints, offsets, and green practices have a myriad of ways of factoring and scoring companies for their environmental impact with a lens towards determining risk. Yet, with all the emphasis on risk assessment through ESG vehicles, many investors are overlooking an important sub-“E” within the environmental component of ESG – emerging contaminants.
What Are Emerging Contaminants?
Emerging contaminants are chemicals that are typically widely used within the United States or globally and which are dispersed into the environment through various means. Emerging contaminants almost always have concerns surrounding them related to biopersistence, harmful effects to human health, and complicated and costly environmental remediations. Another similarity among emerging contaminants is that they are largely unregulated at the federal level, but there are growing regulatory efforts underway either at the federal level or in various states, all of which are early signals of changes to come.
Some of the more prevalent and broadly discussed emerging contaminants include per- and polyfluoroalkyl substances (PFAS), ethylene oxide (EtO), microplastics, and endocrine disruptors, to name a few. To varying degrees, each of these have seen exponentially increasing media, legislative and regulatory attention year over year.
ESG and Emerging Contaminants
Private equity, venture capital, banking and other investment firms regularly examine ESG factors when considering portfolio companies or investment opportunities, and routinely require companies that are invested in to adhere to certain metrics that fall within the ESG framework. However, financial and investment companies that ignore the risks presented from chemicals or other environmental concerns that are not yet regulated, but may be within the time frame of the investment window, are opening their tens or hundreds of millions of investment dollars up to significant risk. One does not have to look much farther than the example of PFAS to see the significant financial impact PFAS has had on the chemical industry vertical. Yet, simply seeing PFAS as a chemical vertical issue ignores the significant financial impact to date that state-level enforcement actions have had on the manufacturing vertical. One reason for this could be due to the fact that enforcement settlements, penalty amounts or fines are not publicly reported, as major civil lawsuit settlements are in the news.
Certainly more emerging contaminants have and will continue to have financial impacts on companies across many different verticals, yet the equity and investment world must be cognizant of the fact that even the companies utilizing the emerging contaminants may not be fully aware of the risks that these contaminants pose to their corporate finances. The most impactful advice, both to the corporate world and the investment world, may be the simplest – hire experts who are well versed with state and federal regulatory pressures, interests, and concerns; who have the necessary skill and experience to identify emerging contaminant risks; and who have a proven track record of predicting emerging contaminant risks before they have broad-sweeping impacts on verticals or the market.