Nanomaterials are an industrial revolution in a microcosm, with the
potential to yield extraordinary health, environmental, and other
global social benefits.

But they’re substantially unregulated, underassessed for their
impact on health and the environment, and they’ve been raising
cautionary flags for insurers whose core business is managing financial
risk.

Serious environmental and health concerns have already surfaced for
particular nanomaterials, including indications that one particular
form (carbon nanotubes) can cause lung damage similar to asbestos in laboratory animals.

If your company’s thinking about incorporating nanomaterials into
your products, you’ll need to exercise especially demanding due
diligence to make sure you’re not taking on liabilities that you and
your shareholders will come to regret. Nanomaterials are particles
smaller than 1,000 nanometers, roughly equivalent to 1/100,000 the
width of a human hair; those materials smaller than 100 nanometers have
been of especially great concern.

Nanomaterials have been engineered to exhibit special qualities or
functions that have applications across a broad range of products, from
solar panels to food packaging to drug delivery. But their specially
engineered characteristics represent a double-edged sword — their size
and shape may contribute to novel toxicity risks. Their small size may
allow them to penetrate bodily defense systems that shut out larger
particles and interfere with bodily processes that otherwise would be
protected.

Swiss Re, the world’s second largest reinsurer, raised questions about nanotechnology as early as 2004, in “Nanotechnology: Small Matter, Many Unknowns” (PDF). In a March 2009 commentary,
a Lloyd’s of London analyst drew parallels between the global financial
meltdown and risks from nanomaterials. The financial collapse reflected
“blithe acceptance of complex products that many didn’t understand.”
With regard to nanomaterials, he commented that “the importance of
getting to grips with and quantifying complex sources of risk has never
been more obvious.”

So many authoritative bodies have warned about the unknown and under-researched hazards of nanomaterials that it’s beginning to sound like a chorus.
If these misgivings go unheeded, that would be tragic on multiple
counts. Not only because the potential benefits from the burgeoning
forms of nanotechnologies will founder and be lost on the shoals of
public mistrust and rejection, but also because companies and their
shareholders will see corporate financial values vaporize in the face
of closed markets and possible litigation.

Government regulatory bodies are beginning to stir, but government
regulation is in its infancy. California, Canada and the European Union
have recently taken steps to get manufacturers to provide information
about nanotech products. In February 2009, Environment Canada indicated
it would be requesting information from companies about their products
and in January 2009 California’s Department of Toxic Substances Control
sent out an information request. The European Union’s newly updated cosmetics legislation will require disclosure of information about nanomaterials in cosmetics.

The U.S. EPA has also initiated a handful of regulatory actions under the Toxic Substances Control Act. EPA also launched a Nanoscale Materials Stewardship Program
(NMSP) under which industry has been invited to voluntarily submit
pertinent data. There were 29 submissions by the end of 2008, covering
123 different nanoscale materials, constituting perhaps only 10 percent
of the materials likely to be commercially available. There was a
similarly poor experience with an earlier U.K. program that received
just 13 submissions in two years. Andrew Maynard and David Rejeski of
the Project on Emerging Nanotechnologies at the Woodrow Wilson
International Center for Scholars, in a July 2009 commentary
in the scientific journal Nature, conclude from these figures that
“voluntary reporting of nanomaterials by industry has failed” and while
“mandatory measures are a step in the right direction … the field needs
more data sharing and oversight.”

Investors are concerned that existing financial disclosure regulations
do not require companies to sufficiently disclose the potential
liabilities associated with production and use of nanomaterials. In “Bridging the Credibility Gap: Eight Corporate Liability Accounting Loopholes that Regulators Must Close,” Investor Environmental Health Network (IEHN) counsel Sanford Lewis
points out that under existing disclosure requirements from the
Securities and Exchange Commission and the Financial Accounting
Standards Board, companies don’t have to disclose as much as they ought
to about the potential liabilities they’re facing. These are the very
same reporting requirements that permitted companies to legally
understate their potential liabilities from asbestos litigation until
the moment that they declared bankruptcy and wiped out shareholder
value. IEHN’s report builds on The Rose Foundation’s 2004 environmental
accounting report, “Fooling Investors, Fooling Themselves,” whose title
foreshadowed the Lloyd’s commentary cited above.
Based on these concerns, investors have encouraged companies to publish policies on their use of nanomaterials. Both Kellogg’s and Colgate-Palmolive
have done so. Avon was also asked by investors for a policy on
nanomaterials, and investors have also engaged Kraft Foods, Procter
& Gamble, McDonald’s, and Pepsi. Other noteworthy initiatives
include the Environmental Defense Fund/DuPont agreement on a framework for assessing nano risks, and the voluntary Responsible Nano Code
developed via a multi-stakeholder process in the U.K. under the
auspices of the U.K.’s Royal Society, Insight Investment, and the
Nanotechnology Industries Association. In striking contrast to
Kellogg’s and Colgate-Palmolive’s response to investor concerns, Avon’s website on product responsibility provides links to the websites of stats.org and the American Council on Science and Health, two organizations that routinely disparage emerging scientific concerns about chemical safety.

So here are some of the key questions your company might ask while doing due diligence on nanomaterials:

• Has your supplier provided robust environmental, health,
  and safety data about their product, including disclosure of whether
  they use or incorporate nanomaterials? If the product does involve
  nanomaterials, do such data take account of the unique properties of
  these nanomaterials, and have these data been developed at or verified
  by trusted independent sources or by your own company’s technical
  experts?

• How well do you know the supplier? Are they new or are they a long-term trusted participant in your supply chain?

• Have you carefully scrutinized your supplier’s materials policies and
  the reliability and consistency of their manufacturing processes?

• Have lifecycle considerations been taken into account, so as to
  address occupational exposures at the front end and end of life fate at
  the back?

• Do environmental, health, and safety assessments take into account real world and worst case applications of the materials?

Among these, the most critical threshold question is the
availability of robust environmental, health and safety data. Even
where there is a compelling functional and economic case to be made for
deploying some newly designed nano-material, the most prudent policy
course to adopt is “no data, no market.” Without such data, there’s no
meaningful way of assessing the risk:reward
(PDF) ratio of the material, and your company may be exposing itself to
potentially enormous liability. Just as the global economy cratered
because of truly toxic financial asset classes, so too could your
company if it blindly takes nanomaterials on board. In the absence of
robust environmental, health, and safety data, caveat emptor.

(Disclosure: Investors collaborating within the Investor Environmental
Health Network have engaged Kellogg’s, Colgate-Palmolive, Avon, and
other companies on nanomaterials issues. The Rose Foundation for Communities and the Environment
serves as fiscal sponsor for IEHN. The bulleted due diligence questions
above benefited from investor consultations with Kraft Foods.)


Richard A. Liroff
,
Ph.D., is founder and director of the Investor Environmental Health
Network (IEHN). IEHN is a collaboration of investment managers that
advocates for safer corporate chemicals policies to grow long-term
shareholder value and reduce financial and reputational risks to
companies. The business case for corporate safer chemicals policies, a
list of shareholder resolutions on safer chemicals policies, and a
roster of participants can be found on the IEHN website,
www.iehn.org
.