The Non-Stick Nightmare (Part II): What can we learn from the 'forever chemicals' disaster?
Why was the chemicals industry so badly regulated and how can we clean up the mess?
Asymmetric risks
Dating to the 17th century, the hippocratic oath is deeply embedded in the culture of healthcare. Anyone familiar with the process of pharmaceutical industry drug development (which is probably most people following COVID) will have seen this ‘first do no harm’ mantra in action. Multiple trial phases must be past, including ‘preclinical’ trials in the lab and potentially testing on animals, small phase I safety studies on humans, phase II studies on several hundred humans and then large-scale phase III trials on thousands of people. This is to prove the efficacy of a compound, but also to check that it is safe and that any side effects and risks are identified. These studies are ‘double blind’ trials meaning that half of the people are on placebos in order to eliminate various forms of bias.
It should be obvious why we have all these processes in place. The downside risk of an ineffective and dangerous drug is asymmetric. Can you imagine ingesting a drug that has not been proven to work or .. perhaps worse, hasn’t been rigourously tested for safety and side effects? Furthermore, can you imagine pumping it into rivers and lakes, dumping it in landfill, spraying it on crops or applying it to the surface of your frying pan?
That would be madness, wouldn’t it…..!?!
Familiar bedfellows, the oil and gas industry has similar incentives to the chemical industry when it comes to fighting against PFAS regulations.
Source: US Environmental Protection Agency, Enforcement and Compliance History Online, William Blair
Asymmetric incentives
I know what you’re thinking…. no matter how much of a ‘wonder product’ a chemical appears to be, surely its safety should be established before millions of tonnes are released into the environment or applied to billions of consumer products?
Unfortunately not.
Not preventing (via proper regulatory oversight) the use of these poisons in consumer products, has allowed them to be turned into billions of dollars of annual revenue that the industry is desperate to protect. Furthermore, the decades of pollution and adverse health effects has simultaneously turned into a multi-billion dollar liability. These are two very large incentives for management and shareholders to block regulation and cover up the science. Time for my favourite Charlie Munger quote….
I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power.
Charlie Munger
Teflon by name …..
Despite the many similarities between the pharmaceutical industry and chemicals industry (with many companies having divisions that do both), the product research, development and regulatory process is very different. Whilst the pharmaceutical industry has had it’s governance challenges, drug dvelopment operates within very tight guardrails aimed at protecting consumers. In contrast, the chemical industry has deflected responsibility and regulation for decades.
The chemical industry had developed its own form of regulatory Teflon. An extremely weak form of reactive, laissez faire self reporting has become the standard. Whilst Federal legislation on PFAS levels in drinking water has recently been passed by the Biden Adminstration, this is too little too late. Much more needs to be done. A combination of lobbying, regulatory capture and aggressive PR has led to a weak and fragmented ineffective system:
When the US Congress passed a food-additives bill in 1958, chemicals already in use were presumed to be safe and grandfathered in.
Under the final version of the Toxic Substances Control Act of 1976 (still the main federal legislation today), existing chemicals were again grandfathered in.
Under the Toxic Substances Control Act, manufacturers only have to inform the EPA when they introduced new chemicals. They are not required to test or provide data about the health impact of chemicals before they access the U.S. market.
Only a handful of the 80,000-plus chemicals on the market have ever been tested for safety (fancy being a guinea pig in a vast haphazard chemistry experiment anyone?).
There is no legal requirement anywhere to list PFAS as present in (or on) consumer products.
The Toxic Substances Control Act makes it extremely difficult for the EPA to ban chemicals. Voluntary phase-outs are more common.
There are more than 4,700 different types of PFAS, but only a handful have been studied in depth (again, an assumption of safety until proven fatal).
The strictest PFAS regulation is only applied to those that have been proven to be harmful, meaning that (potentially more harmful) new variants can enter the environment unfettered.
Whilst no longer manufactured in the US and EU, there is no current ban on the importation of PFAS to the US or Europe from foreign countries.
Chemical companies are increasingly replacing long-chain compounds (PFOA and PFOS) for new shorter-chain PFAS chemicals (e.g., PFHxA, PFHpA, PFBS, PFOSA, PFBA, GenX)—many of which have been minimally (if at all) regulated but share similar traits to legacy PFAS compounds, including a resistance to degradation in the natural environment.
EU regulation ‘REACH’ places responsibility on industry to manage the risks from chemicals and to provide safety information on the substances (because that has been proven to work with the current incentive structures…..).
Persistent Organic Pollutants (POPs) regulation in the EU are a list of ‘toxic, man-made, hazardous chemicals that have dangerous effects on the environment and our health.’ Despite being known as dangerous since at least the 1990’s, the PFHxS, PFOA and PFOS are the only three subgroups of PFASs currently listed under the Stockholm Convention as industrial POPs.
Forever chemicals are everywhere. Collecting data, measuring the pollution levels and establishing the environmental and human risks is a gargantuan task. Clean them up, even greater.
Source: US Environmental Protection Agency, Enforcement and Compliance History Online, William Blair
Innovation gone awry
I consider myself a technologist. A pro-growth and pro-progress guy. Both are usually driven by the increased productivity that new technology can provide. But as previously mentioned many times, new technology must be appropriately regulated based on the direct and indirect risks that it poses. We must think in second and third order terms about the potential asymmetry of risk as well as the asymmetry of reward. Are non-stick pans, worth the risk of widespread environmental damage and human suffering?
Our failure to thoughtfully and dynamically regulate new technology risks embedding powerful negative incentives into the system (i.e. huge revenue streams and liabilities). This inevitably means that producers are very unlikely to serve the common good if safety issues are subsequently identified. Whilst I caution against dystopian Blade Runner type prophecies, a failure to regulate new technology effectively at inception always means that we risk a repeat of the ‘forever chemicals’ catastrophe.
Conclusion: Can we fix it?
Removing PFAS from the environment is a complex task. Conventional water treatment processes are ineffective, and technologies that can remove PFAS, such as granular activated carbon and high-pressure membranes, are expensive. Furthermore, dealing with PFAS waste once it has been collected is also significant challenge. Nevertheless, several companies are working to address this issue. Montrose Environmental provides a range of services, including PFAS testing and remediation, while Tetra Tech offers comprehensive PFAS management solutions, from site investigation to remediation design and implementation. Both are publicly listed companies who (sadly) view PFAS remediation as a huge and growing market.
Alternatives to PFAS are also available and being developed. Nikwax is a great example of a long-term PFAS free innovator in the outdoor clothing market. PAKA apparel are a new outdoor brand that has been PFAS free since inception.
We can learn a lot from this sorry saga. With increased understanding of forever chemicals risks and slowly improving regulation, it seems that perhaps, we are slowly waking up from this non-stick nightmare. I am also sure that with the political will, we can establish processes that prevent catastrophes like this from happening again. We already have them in other industries for goodness sake!
My views are my own and do not represent that of any company or other individual. This is not investment advice and should anyone to choose to use it as such, their capital will be at risk. The author may own shares in companies mentioned in the blog (but I don’t sell short). Share prices can fall as well as rise and readers should seek financial advice before investing in any investment themes or stocks mentioned in this blog. In short, I try my best to be right, but I’m often wrong.