Unknown to most people, PFAS — a set of chemicals that span several thousand substances ̵ serve almost as a kind of hidden magic in almost every aspect of our lives. Well, if you believe in magic, at least.
PFAS are everywhere in our lives, found in common consumer products, as well as lesser-known ones. A major reason for this ubiquity is that PFAS have many incredibly attractive properties, due to their resistance to water, oil and heat. The range of use is enormous, including everything from non-stick pans for cooking, clothes, packaging, personal care products, to industrial products, to even pharmaceutical products ingested by people or injected into them.
Harmful effects
However, the magic is too good to be true: it turns out that PFAs also have severe downsides, turning out to produce negative health effects like increased risk of cancer, weakened immune system, liver damage, hormonal disruptions and lower birth weights in children.
The environmental risks are high, since the chemicals are very persistent and do not degrade easily in nature, leading to long-term contamination of water, soil and air. Since PFAS can accumulate in both animals and humans over time, the full extent of damage is still unknown.
ESG Integration in Practice
In December 2022, Storebrand’s portfolio managers received a research note from Victoria Lidén of the Risk and Ownership team. It contained a thorough assessment of PFAS, upcoming regulation from the EU and an overview of portfolio companies which may be impacted by a PFAS ban due to exposure to the chemicals in production.
A ranking system by ChemScore [1] showed that two companies in team Solutions portfolios, Umicore and Sika, had exposure to this issue. In collaboration with the Risk and Ownership team, team Solutions portfolio managers for the respective holdings initiated a dialogue to learn more about the companies’ knowledge on the topic and preparedness for upcoming Regulation.
The Risk and Ownership team-initiated engagement on the topic during 2021, with portfolio companies where Storebrand had investments. The objective of these engagements were: to improve transparency, land a time-bound phase-out plan of forever chemicals such as PFAS from portfolio companies’ production, and to improve the firm’s ranking on ChemScore.
Engagement results
We reached out to Sika, a Swiss specialty chemicals producer, which is part of our Global Solutions strategy. The aim of the dialogue was to gain a better understanding of the company’s potential exposure to the EU proposal to ban persistent chemicals, as well as how they plan to address any potential challenges and opportunities arising from it.
In our dialogue, Sika informed us that they would carry out a PFAS investigation and share more information about this once it was finished. In August 2023, the initial investigation was finished and Sika confirmed that they are not a PFAS producer, and that the amount of PFAS used in product formulations is very small, accounting for well below 0.4 per cent of group sales. Sika also assured us that they are now contacting their suppliers and conducting investigations on how a phase-out of these substances can be accomplished in the most efficient way.
As part of the Investor Initiative on Hazardous Chemicals, we have also been leading the engagement with the materials recycling company Umicore since 2021 — the company is also part of our Global Solutions strategy. The dialogue has focused on Umicore’s hazardous substance management, with the intention of improving the company’s disclosure on these substances. Umicore said that it had undertaken a gap analysis of the substances it uses and had discussed providing more transparency internally. The company said that there were no PFAS in its end products, although there were PFAS in some of the equipment it buys, and in some of its processes. The company has been open to dialogue with us. Our most recent call with the company was held in early September this year and the engagement will continue through IIHC.
Identifying opportunities
Furthermore, the awareness of the portfolio managers on the business opportunities that arise with the need to treat water contaminated by PFAS has made a difference. Several solution companies in our portfolios reported rapid growth in PFAS water treatment for the past quarter, so the financial implications are real.
Firms within the water segment, such as Arcadis and Xylem, have stated in their quarterly reporting that their expertise in PFAS water treatment has become an increasingly important revenue stream. Arcadis recently announced that the Water segment, which accounts for 15 percent of group revenues, experiences significant demand for PFAS treatment to restore contaminated water. Xylem announced recently that “PFAS treatment is a growing area of concern for water utilities, businesses and communities, particularly as governments pass stricter regulations”[2].
Regulatory Tailwind
In Sweden, the authorities have now set strict new regulations on the PFAS content of drinking water, effective from 2026, which sharply reduce the allowable limits of PFAS from the current level 90 nanograms/litre to just 4 nanograms/litre.
At the start of 2023, two new EU regulations were introduced aimed at reducing human exposure to dangerous levels of PFAS in food and drinking water [3]. In February, the EU also introduced additional restrictions on PFAS chemicals. If approved, these measures would lead to a ban on the production, use, and sale of approximately 10,000 types of PFAS within the EU.
The EU has initiated the Drinking Water Directive, which limits safe thresholds for PFAS in drinking water [3]. Member states must ensure compliance by 2026, setting new standards for water utilities.
In the USA, the federal government launched drinking water standards for PFAS in April 2024, targeting safe drinking water for 100 million inhabitants [4]. With the new agenda for clean water, business opportunities arise. [2]
With the new agenda for clean water, business opportunities arise. There is a strong need for enlightened water management worldwide. Investment needs seem to follow the stringent regulations, in hard capital allocation and in demand for cleanup services. This is especially good news because “forever” is such a long-term horizon that contaminated chemicals will know no borders.
References
[1] Administered by ChemSec, ranking the world’s 50 largest chemical producers on their work to reduce their hazardous chemical footprint (link)
[2] Xylem (2024), Understanding PFAS treatment technologies (link)
[3] European Environment Agency, Treatment of drinking water to remove PFAS (link)
[4] United States Environmental Protection Agency (April 10th, 2024), Biden-Harris Administration Finalizes First-Ever National Drinking Water Standard to Protect 100M People from PFAS Pollution (link)