What are emerging contaminants and why they pose a risk to investors
Despite a growing focus on ESG and sustainability issues, in particular, investors may have a blind spot when it comes to one category of pollutants: emerging contaminants.
There’s no doubt that the environment is on the priority list for US businesses. Sustainability was the unequivocal message of Larry Fink’s 2022 Larry Fink’s 2022 letter to CEOs.
Shareholder activism has ESG firmly in its sights. The Biden-Harris administration has made environmental issues a priority — and, probably equally important, companies are waking up to the fact that ESG is good for business.
For investors, ESG issues are a prime concern. Companies ranked highly for ESG outperform their less environmentally-focused competitors, with stock prices that tend to be less volatile and are less likely to fail.
But failing to recognize the risk posed by emerging contaminants — sometimes called emerging pollutants — is a risk to ESG investors.
What Are Emerging Contaminants?
Emerging contaminants is a term used to describe chemicals that are not yet regulated in the US, but cause, or are suspected of causing, harm when dispersed into the environment.
They may be harmful to human and wildlife health or cause wider environmental damage.
Examples of Emerging Contaminants
Emerging contaminants can include pharmaceuticals, pesticides, industrial chemicals and personal care products.
What are examples of emerging contaminants? Emerging contaminants of concern, also termed contaminants of emerging concern, include dinitrotoluene (DNT), nanomaterials (NM) and perchlorate.
These contaminants of emerging concern are being detected at low levels in groundwater, surface water, waste water and drinking water in the US, as well as in some food sources. The EPA is concerned about the impact that emerging contaminants in water may have on aquatic life. There is also concern about the potential impact on humans when these compounds pass through drinking water treatment plants.
Why Do Emerging Contaminants Pose a Risk to ESG Investors?
Investors increasingly look at ESG performance when evaluating investments. Private equity and venture capital investors, as well as other institutional investors, are under growing pressure to apply an ESG lens to any decisions they make.
As a result, many companies are paying growing attention to ESG issues; to sustainability, to their tackling of social inequalities, and to their governance. Clear ESG frameworks exist to measure and monitor ESG goals with defined regulations and metrics.
But the range of environmental challenges is large, and there’s a danger some will get overlooked. Emerging contaminants can be something of a blind spot, even among organizations with otherwise robust ESG compliance.
Unregulated, there is no legislative imperative to monitor them. The lack of regulation makes these contaminants of emerging concern less visible to companies whose energy is consumed by meeting greenhouse gases and carbon emissions obligations.
Consequently, companies are left open to risks from their approach, or lack of, to emerging contaminants. It’s probably safe to assume that, as with other pollutants, there will be future legislation around these emerging contaminants in the environment.
Companies operating in ignorance of the contaminants they’re using will face a rude awakening if these come to greater public attention or are the subject of regulation in the future.
The ESG Investing Challenge: Identifying Upcoming Risks
There is no regulation and no public record of companies that are guilty of using and dispersing emerging contaminants; because of this, it can be difficult to identify impending investment risks.
Even when the board is rigorous in its oversight of corporate ESG performance, the impact of emerging contaminants gets underestimated or is not on the company’s radar. One thing is for sure, the shareholder activists monitoring corporate performance on ESG will be a step ahead when it comes to the issues they consider.
If you are making an investment, how do you ensure that you are investing in a company whose approach to emerging contaminants is as future-proofed as can be?
- Ensure organizations you are considering as an investment have robust ESG strategies supported by structured frameworks. Ask what they do to keep pace with emerging ESG risks and developments. How do they stay abreast of ever-changing legislation and best practice? How do they equip their senior management with the knowledge they need to take the lead on ESG issues? You want to invest in organizations that demonstrate a proactive and methodical ESG strategy.
- Check ESG risk scores and ratings to measure a potential investment’s performance. With public disclosure of ESG performance becoming the norm, it’s possible to get an idea of an organization’s commitment to environmental concerns. While this may not yet include emerging contaminants, it will be a good bellwether of the company’s stance on ESG.
And if you are a company open to investment, how can you bolster your ESG performance to include lesser-known risks like emerging contaminants?
- Put in place a comprehensive and structured ESG strategy that extends beyond the obvious to cover all the potential ESG risks your organization faces. Implement a systematic approach to data collection, benchmarking and reporting. Many organizations are turning to automation to strengthen their ESG compliance, using audit-ready ESG platforms that scale easily to newly-identified risks. Find out more about how Diligent ESG can help to deliver the rigor your ESG strategy needs.
- Stay informed and up to date on emerging ESG risks. ESG is a non-negotiable aspect of any organization’s strategy today. Are your business leaders equipped with up-to-date knowledge and insight? At a time when corporate leadership must tackle environmental issues, the Climate Leadership Certificate Program from Diligent, an interactive eLearning program, arms them with the information they need to oversee climate risk and create sustainable growth strategies for your company.
Emerging contaminants may be the latest environmental challenge for corporate leaders already grappling with the difficulties of meeting their ESG obligations — and the newest area of concern for potential investors. But by taking a proactive and robust approach, corporates and investors alike can ensure that the risk of emerging contaminants does not derail their ESG strategies.
