No one knows how many of the 84,000-plus chemicals used in the U.S. are lurking in the goods we purchase, or how safe they are. Federal law hasn't required most of them to be tested or many to even be publicly identified. But the onus is quickly growing for producers and retailers of consumer products to find some answers.

Strengthening legislation in various states and around the globe-plus increasing litigation-is making it important for these companies to monitor, report and replace or reformulate toxic chemicals.

"I think companies owe it to themselves and their investors to know the chemical risks in their products and supply chains and work to eliminate them," says Richard Liroff, executive director of the Investor Environmental Health Network (IEHN) in Falls Church, Va. Its members, who collectively manage $30 billion to $35 billion in assets, encourage companies to adopt policies that reduce and eliminate toxic chemicals from their products and activities.

The toughest law is the European Union's REACH regulation, which controls the registration, evaluation and authorization of chemicals. Now being phased in, it requires companies to meet certain obligations if they use chemicals from a REACH watch list. Called "substances of very high concern" as defined in the regulation, they include things that are carcinogenic, mutagenic or toxic to reproduction.

Under a consumer "right to know" provision, companies must respond within 45 days to customer inquiries about these chemicals in products or packaging. "If you're invested in a company marketing in Europe, you need to be very concerned about REACH," says Liroff, "because REACH will over time generate a list of chemicals that cannot be marketed."

REACH-like regulations are also being prepared in emerging countries such as China and India, though they aren't as stringent, says Amandine Marques, a Paris-based environmental, social and governance (ESG) analyst with MSCI Inc.

Meanwhile, individual states in the U.S. are taking action, in the absence of updates to the Toxic Substances Control Act of 1976 (TSCA). They've passed more than 80 chemical safety laws over the past nine years, and nearly 30 states are considering toxic chemicals legislation in 2012, according to Safer States, a network of environmental health coalitions and organizations.

Companies also face negative publicity and legal risk as consumers press harder for safer ingredients in personal and household items. Case in point, says Liroff, is Sigg Switzerland USA, the U.S. distributor of Swiss-made Sigg aluminum bottles. Company sales plummeted after trace amounts of Bisphenol A (BPA), an endocrine-disrupting chemical that mimics estrogen, were found in the plastic linings of supposedly BPA-free bottles. It filed for Chapter 11 bankruptcy last year.

What about the U.S. Food and Drug Administration's March rejection of a petition calling for the ban of BPA in food packaging? "At least in terms of what moves markets, by this point the FDA is largely irrelevant," says Liroff, who notes there are major efforts to move away from BPA.

In another high-profile case, the maker of the popular Brazilian Blowout hair-straightening product line agreed in March to settle a class-action lawsuit for about $4.5 million, the New York Times reported. GIB LLC, which marketed these products as formaldehyde-free even though some emit a gas form of this known carcinogen, separately agreed to a $600,000 settlement with California's attorney general for deceptive advertising. It must now include warning labels on its products.

You may also recall U.S. toymaker RC2, which faced $17.6 million in recall costs in 2007 and settled a class-action lawsuit for $30 million in 2008 after lead paint was found in its wooden railway toys. The company was purchased last year by Japanese toymaker Tomy Co.

Marques expects consumer awareness of unsafe chemicals to expand as information is easier to access through product rankings and reviews (from GoodGuide, Campaign for Safe Cosmetics, etc.) and awareness campaigns from Greenpeace and other NGOs.
Liroff also notes that portable X-ray fluorescence (XRF) devices are making it easier to detect chemicals in some products.

Put On Your Safety Goggles
So what's the best way to navigate chemical hazards?

"Understanding how the various regulations work is key to identifying where the risks and opportunities are," says Marques, a frequent speaker on the topic. "Potential upside can be large for a company that would find a safer and economically viable alternative to [the preservatives] parabens, for instance." 

It's also important to pay attention to the SIN List (which stands for "Substitute It Now!"), developed by the International Chemical Secretariat (ChemSec) using REACH guidelines. The list now includes 378 substances that can cause cancer, alter DNA, damage reproductive systems, harm the environment or cause other problems-in essence giving companies advance notice about the chemicals likely to be most restricted by the EU, says Liroff.

MSCI ESG Research, with help from scientists and toxicologists, used the SIN List to assess how 16 major business segments might run into trouble with these chemicals. Household chemicals, plastics and rubber (in toys) and textiles and clothing are products at the highest risk, given the number of substances in them that could be regulated by REACH.

Marques expects that companies will see profit margins cut over the next three to seven years as they are increasingly forced to provide more evidence of chemical compliance and safety. But those that proactively anticipate regulatory changes should be able to absorb reformulation costs over a longer time period or be in a better position to find suppliers who can offer safer alternatives in the volumes needed, she says.

Marks & Spencer Group PLC, a major U.K.-based retailer, is among the leaders she has identified. M&S, which gets 100% of its revenues from private-label products, has removed polyvinyl chloride (PVC) and phthalates from all its children's clothing, removed PVC from all its packaging and placed restrictions on other chemicals such as BPA.

Retailers usually have a hard time monitoring the compliance of private labels because they do not own the formulas or make the products, but M&S has worked with suppliers to encourage innovations in green chemistry, says Marques.

The Clorox Co., maker of household and lifestyle products, is another leader identified by Marques. It discloses most of its ingredients and has a transparent chemical phaseout strategy that includes a complete, global ban of parabens, phthalates and phosphates. The company is also involved in various industry and governmental groups on green chemistry.

Other companies MSCI has classified as proactive innovators are Apple, Dell, Nike, Adidas AG, L'Oréal SA, Gap and Hennes & Mauritz AB (H&M). "Asset managers tend to concentrate on identifying the innovators, but we think they should also be concerned by the laggards," says Marques. MSCI has found that companies with large, complex portfolios-including Target, Carrefour SA, Procter & Gamble and Henkel AG-are likelier to take a more reactionary approach.

Marques thinks there are a couple of reasons that P&G has removed substances banned in the EU only from the products it sells there. First, household and personal products may look the same in different markets but are developed, designed and manufactured locally with formulas altered according to local consumer taste and other factors such as water hardness. Second, safer alternatives to chemicals banned in the EU may not yet be available in large volumes or at a reasonable price in other markets.

In general, Marques hopes to see better disclosure of chemical management. "Companies are disclosing more and more information in this area, yet the overall level of transparency remains poor," she says.

Liroff thinks U.S. retailers should study the chemical management initiatives being taken by such European-based retailers as M&S, H&M and Alliance Boots, a pharmacy-led health and beauty group. What happens in Europe can come here, and companies entering Europe must be able to compete against the likes of them, he says.

Smaller companies can collaborate through industry coalitions to better manage their supply chains, say Liroff and Joel Tickner, director of the Lowell Center for Sustainable Production at the University of Massachusetts Lowell. "Footwear and apparel has been doing some amazing work in collaborating supply chains," says Tickner, who notes that a half dozen brands, including Nike, are working with Greenpeace toward zero discharge of hazardous chemicals. Consumer electronics manufacturers are also doing a good job with chemical policies and management, he says.

The Green Chemistry & Commerce Council (GC3), a business-to-business forum that's a project of the Lowell Center, has received very positive response to its retailer portal. Tickner says the portal, accessible through the GC3 Web site, is a great starting source of information for retailers to learn what types of tools, support and programs exist.

Turning Up The Heat
Shareholders have also been pressing companies to improve their chemical management policies. Last October, Boston-based Trillium Asset Management LLC sent a letter to Newell Rubbermaid asking about brominated flame retardants (BFRs) in its Graco brand children's car seats. It filed a shareholder proposal in November after failing to receive a response, and then withdrew that proposal following a good dialogue with the company in December and January.

"Shareholder proposals have a way of getting noticed in the same way that shareholder letters seem to get lost," says Jonas Kron, vice president with Trillium and a member of its advocacy team.

BPA has also been a hot issue for Trillium. This year, it filed a resolution with Panera Bread Co. regarding BPA in its thermal receipt paper, which it withdrew after receiving commitments from the company. Resolutions it co-filed with Coca-Cola about BPA in aluminum can linings received a significant 22% of the shareholder vote in 2010 and 26% in 2011.

Apple agreed to phase out some toxic chemicals in its products after Trillium filed (and then withdrew) a shareholder proposal in 2007 asking the company to consider the feasibility of eliminating "persistent and bioaccumulative chemicals," BFRs and PVC plastics from all its products. More toxic chemical resolutions and their outcomes are posted on the IEHN Web site.

Consumer products companies are also moving away from controversial chemicals such as triclosan, an antibiotic agent used in soaps. Johnson & Johnson, which has faced consumer boycotts, is re-evaluating the chemicals in its children's products. "No one wants to end up being caught up in the next asbestos litigation," says Kron, who has looked at studies linking diseases to toxic chemicals.

Studying how toxic chemicals may be impacting health-care costs, lost work days and demand for government services is also important, says Kron. "These are externalities that may not come to roast one particular company," he says, "but we can't afford to have drags on our economy."