PFAS - Erneut wird ein chemischer Stoff zum Kapitalmarktrisiko

Asbestos, glyphosate…PFAS?

Once again, a chemical substance has become a capital market risk

What are PFAS and why are they dangerous?

The fact that chemical products are not necessarily beneficial in every respect and may be harmful to human health and the environment is well known, and not just since the controversy around glyphosate. Another prominent example from the past is asbestos – the ‘miracle mineral’ of the 20th century that was used in up to 3,000 types of product. The material’s favourable properties, particularly for insulation, were unfortunately overshadowed by devastating secondary health damage and staggering remedial costs following the ban of asbestos in the early 2000s. Although the risks and side effects associated with asbestos had long been known, it took most industrialised nations several decades to impose an outright ban on the material. The parallels with the current debate about PFAS are quite striking. Are people and companies at risk of harm and loss on a similar scale to that caused by asbestos in the past century?

PFAS are widely used…

PFAS is short for ‘per- and polyfluoroalkyl substances’, a collective term for a group of around 4,700 synthetically manufactured chemical substances. PFAS have been produced since the middle of the 20th century and serve as an input material for the production of a plethora of everyday items. Their dirt-, grease- and water-repellent properties make (or made) them an interesting proposition for a wide variety of applications:

  • in the textile, outdoor and leather industries,

  • in single-use packaging (e.g. coffee cups, pizza and hamburger packaging),

  • in non-stick cookware such as pots and pans,

  • for general surface treatments (e.g. car and ski wax)
  • and as an input material for fire-extinguishing foam.

…but, unfortunately, also very dangerous

The benefits of their flexible and diverse applications, initially seen as a blessing, have now been overshadowed by the impact of their damaging side effects. In addition to their desired uses, it turns out that PFAS also have a number of properties and secondary effects that make them dangerous for humans and the natural world:

  • They are very durable and do not biodegrade, which earned PFAS the nickname ‘forever chemicals’.
  • They are highly mobile and spread across a region especially through air and water (e.g. ground water, but also rivers).

  • When absorbed by an organism, PFAS behave in a bioaccumulative manner, i.e. they build up and are not broken down or excreted.

  • In humans, this accumulation can have a variety of adverse health consequences as illustrated in figure 11. It can result in issues such as a weakened immune system, complications during pregnancy and various forms of Cancer.

Potential effects of PFAS on human health

Potenzielle gesundheitliche Effekte von PFAS
European Environment Agency: Emerging chemicalrisksin Europe –„PFAS“ (Dezember 2019); Sources: US National Toxicology Program (2016); C8 Health Project Reports (2012); WHO IARC (2017); Barry et al. (2013); Fenton et al. (2009); and White et al. (2011).

PFAS affects humans and nature

But how do PFAS end up in the natural environment and how to they become a threat to human health? One way in which these substances spread is through direct contact with the aforementioned consumer goods. But they are also released into the environment through industrial production and processing, either as a result of direct contamination or due to inadequate waste disposal. Even landfill sites, recycling facilities and water treatment plants are ultimately unable to (completely) break down or destroy most PFAS. The risk of these chemical substances penetrating the soil and ground water is a particular concern in this context. There is evidence that PFAS enter the natural food chain of animals and humans in this way. Traces of PFAS have been found in commercially utilised plants, fruit, vegetables, eggs and fish. As a result of the continuous ingestion of contaminated food, PFAS accumulates in the human body over time and can lead to the aforementioned harmful health effects. Figure 2 illustrates the different contamination channels described here.

Wie gelangen PFAS in die Umwelt und Nahrungskette?
Source: European Environment Agency: Emerging chemicalrisksin Europe –„PFAS“ (December 2019)

Stricter regulation planned to curb the use of PFAS

This ‘vicious circle’ of widespread use in many different types of product, the longevity of these chemical substances and the risk to the environment and human health has already prompted stricter regulation. Under the European Regulation for the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), which has been in force since mid-2007, certain types of PFAS are classified as SVHC (substances of very high concern), because they are deemed to be particularly harmful to humans and nature. REACH has paved the way for stricter rules concerning the manufacture and use of specific chemicals or even bans on certain substances. Very recently, the production of PFOA (a particularly harmful sub-type of PFAS) was banned by the European Union with effect from July 2020. In addition, the German Environment Agency (UBA) is collaborating with a number of other European countries to develop a proposal for EU-wide restrictions for all PFAS substances2. The reasoning behind this project is that assessing and potentially banning all 4,700 PFAS compounds individually would consume a lot of time and resources and thus be inefficient, and that a blanket ban for all PFAS compounds should therefore be imposed. The proposed limitations under the REACH regulation would thus result in extensive restrictions for all PFAS. But in light of the highly harmful nature of PFAS, the public authorities and governments submitting the proposal believe a quasi-ban would be a prudent precaution. Based on the alarming data available, the EU Council of Ministers also called for an action plan in June 2019 to eliminate all non-substitutable PFAS substances. Alternatives to PFAS already exist for use in outdoor textiles and also for non-stick coatings of pots and pans.

Alternatives are also being sought for use in disposable crockery and cutlery and coated packaging, prompted not only by the debate about today’s ‘throw-away society’. Packaging made from alternative materials has been broadly accepted for quite a while now. Currently, PFAS coating is still required in certain specific types of work clothing such as firefighters’ uniforms.

The risks posed by PFAS have also become known and (largely) accepted at a global level. The production and use of highly persistent organic pollutants (POP) that are generally classified as particularly harmful can also be restricted by including these substances in the Stockholm Convention on POP. A final POP regulation will then set out conclusive restrictions for individual chemicals or whole groups of substances at international level, in the same way as already implemented specifically for PFOS (2009) and PFOA (2019).

A study from Germany shows that restrictions like these can be successful in the long term. According to the findings of this study, the concentration of the most harmful types of PFAS (PFOS and PFOA) in the blood plasma of selected test subjects has reduced significantly since the 1980s, although traces of both substances can still be found. Nevertheless, early restrictions imposed on these two types of chemical have had a positive effect on human health over time and have served to protect consumers. The findings of this study could support the attempt to impose a comprehensive ban on the entire PFAS family of chemicals.

Bans, lawsuits and fines pose risks

Steadily increasing restrictions on the production and use of PFAS have a negative operational impact on affected businesses. Companies such as 3M from the US, one of the largest global producers of PFAS, could lose an entire business segment if a blanket ban on PFAS is imposed. But lawsuits actually pose an even greater risk – not only for PFAS producers, but also for companies that process PFAS as an intermediate product. There have already been court rulings ordering companies to pay fines and compensation in recent years, especially in the US. Claimants have been focusing on three main arguments/demands in court:

  •  As early as 2004, the US company DuPont agreed to pay US$ 235 million to settle a lawsuit. This money is intended to cover the costs of long-term medical monitoring that 70,000 residents in a PFAS-contaminated area will require..

  • Personal injury claims are being filed and, in some cases, the courts have already found in favour of claimants. In 2017, DuPont was forced to pay further compensation, this time almost US$ 700 million, to residents in the vicinity of a PFAS plant in West Virginia.

  • Remediation costs are another common cause for legal action. These cases usually focus on the removal of contaminated soil and the treatment of polluted ground water. The persistence of PFAS makes the remediation work a lengthy and expensive undertaking. In 2018, 3M was forced to pay US$ 850 million as a result of a single lawsuit concerning contaminated drinking water in Minnesota.

At this juncture, it is quite clear that further court rulings and the associated compensation payments could prove very costly. According to an analysis conducted by UBS in December 2019, up to 55 million people live in or near areas with a high risk of PFAS contamination in the US alone. The harm that PFAS cause in humans and nature can only be proven over the long term. This means that further claims and potential compensation payments could arise and pose a risk for affected companies even in the distant future.

The US, of course, is not the only place with dangerous residual sources of PFAS. A study looking at Europe has found that the long-term financial burden faced by the 31 member states of the European Environment Agency (EEA) over the coming years could amount to up to €16.9 billion (best estimate) – although the difference between the highest and the lowest estimate is quite substantial.

In addition to the financial burden from environmental damage and fines, affected companies are also exposed to high levels of reputational risk.

Union Investment’s ESG Committee has challenged companies on the subject of PFAS during discussions with them. Individual companies have already been excluded from the investment universe for sustainable funds. The outcomes from these discussions, together with insights gained from engagement initiatives, are being made available to all portfolio managers in a transparent manner, e.g. via our inhouse database SIRIS, in order to ensure continuity in the monitoring of this evolving issue.

Internal documents and statements from former employees of affected companies suggest that affected companies had been aware of the dangerous side effects of PFAS for several decades but took no action to point out the danger or to cease the production and use of PFAS. This could become a major problem.

If the allegations can be corroborated, a new wave of costly lawsuits can be expected – proceedings in relation to claims from former firefighters who were exposed to the contaminated foam for years are already under way in the US. But that is not all: The accused companies would also suffer serious reputational damage in this scenario.

Targeted, sustainability-focused corporate analysis is required

The financial threat posed by PFAS lawsuits and fines also has important implications for investors. Companies such as 3M and DuPont (and companies affiliated with DuPont) are generally subject to higher levels of risk due to their long history of producing and using PFAS – this assessment is supported by the aforementioned initial lawsuits and court decisions. But some European companies such as Solvay, Arkema and BASF could also be facing repercussions in the capital market in future due to their past use of PFAS as an input material. The widespread use of PFAS compounds could also mean that further industries and companies outside the chemical sector will be impacted by legal disputes. For investors, it is therefore vitally important to consider these potential risks in investment decisions.

The aforementioned SVHC list and the REACH regulation can be useful sources of timely information about critical chemical products when evaluating companies and sectors, particularly the chemical sector. Together with the SIN (‘substitute it now’) list – which is freely accessible, offers information on critical substances and is published by a non-profit organisation4 – these sources can be used by investors as an ‘early warning system’. If a large number of (chemical) products offered by a company are included on both lists, this can be regarded as a ‘warning sign’ indicating a heightened level of potential risk for the affected company and its investors.

Engagement – i.e. active communication with the management – is another way of gaining an overview of the risks to which a company is exposed. An open dialogue between the company and investors offers an opportunity to discuss relevant risks transparently, which, in turn, makes it easier to assess these risks more accurately. Direct communication between Union Investment’s analysts and 3M, for example, revealed that the provisions set aside so far by 3M for future PFAS-related fines will hardly be sufficient to cover the likely costs of future PFAS disputes. The company itself does anticipate further lengthy court cases.

It is apparent that a targeted fundamental analysis of a company’s product portfolio is key to the appropriate consideration of potential risks in investment decisions, especially in the chemical sector. Close collaboration between ESG analysts and portfolio managers also helps to ensure that relevant sustainability issues are being considered and enhances the prospects of long-term success for investment decisions.


The production and processing of PFAS entails significant risks. The long-term damage to humans and the natural environment is of a scale that bears comparison with the asbestos scandal. Affected companies have already seen their activities in this area restricted by tightening regulation in recent years. But above all, fines in connection with lawsuits and costs for the remediation of environmental damage are posing a mounting financial threat to the companies that stand accused. If some of the allegations made in the lawsuits that are currently ongoing turn out to be true, another wave of claims could follow and the resulting reputational damage should not be underestimated.

Whether companies are setting aside sufficient provisions to cover the potential costs associated with these risks is questionable. This constitutes an additional risk factor that investors in the capital market should take into account when making investment decisions.

It is therefore all the more important to use a combination of sustainability-focused corporate analysis, a critical engagement process with selected companies and an active portfolio management approach in order to assess the risk profile of each individual company comprehensively. This makes it possible to identify relevant risks at an early stage and to take sensible, forward-looking investment decisions in all industries, including those where companies are generally exposed to higher legal and reputational risks due to their product portfolios.

  1. 1 Refer also to the study of the European Environment Agency (EEA): Emerging chemical risks in Europe – ‘PFAS’ (December 2019).
  2. 2 Refer also to the following study by the German Environment Agency: ‘PFAS. Gekommen, um zu bleiben.’ [‘PFAS are here to stay’ ] (Schwerpunkt magazine 1/2020).
  3. 3 See also the following study conducted by the Nordic Council of Ministers: ‘The cost of inaction’ (2019).
  4. 4 This list has been prepared by the International Chemical Secretariat (ChemSec) since 2008.

As at 16 September 2020