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WHAT PRICE BEAUTY? RISK POSED BY TOXICS IN COSMETICS COULD LEAVE UNWARY INVESTORS WITH A BLACK EYE
February 20, 2007
Growing Regulatory, Consumer Pressure Pose Major Challenges for Cosmetics Industry, Retailers; Bed, Bath & Beyond and CVS Face Related 2007 Proxy Votes
Things could get ugly for investors who ignore glaring health risks in the cosmetics industry, warns a new report from the Investor Environmental Health Network (IEHN), which represents 20 investment organizations with $22 billion in assets under management. A powerful convergence of forces — including shareholder resolutions, improved health risk information, European and U.S. regulatory changes and growing consumer pressure — could drive sweeping changes in the U.S. personal care and cosmetics industry, with significant implications for investors, according to IEHN.
The release of the IEHN report caps a flurry of developments in recent weeks exposing the risks associated with toxic-bearing cosmetics and the retailers who provide them to the public. Investors are now weighing two related shareholder resolutions at CVS (which holds its annual meeting on or about May 12th) and Bed, Bath & Beyond (where shareholders meet on or about June 29th). On February 8, 2007, Innovest Strategic Value Advisors, a financial research firm, released a report that the risk of “toxic lockouts” could result in a loss of market share and loss of market access for four major industries, including cosmetics. On January 25, 2007, it was announced that 500 cosmetics companies — including The Body Shop and Burt’s Bees — had signed the Compact for Safe Cosmetics, a pledge to eliminate toxic ingredients from their products nationwide.
Entitled “Beneath the Skin: Hidden Liabilities, Market Risk and Drivers of Change in the Cosmetics and Personal Care Products Industry,” the new IEHN report describes a ticking time bomb scenario of a largely self-policed industry in which regulatory action by the U.S. Food and Drug Administration (FDA) typically is triggered only by reporting from the companies themselves. “The result is a system that permits significant consumer exposure to occur before sufficiently rigorous safety testing is conducted — ultimately, a game of roulette which places consumers, manufacturers and investors at risk,” said Sanford Lewis, an attorney specializing in corporate accountability and one of the report’s authors.
The U.S. cosmetics industry, which is dominated by ten large companies, accounts for the use of nearly one in seven of the 75,000 chemicals registered for use in the United States. However, the FDA bans or restricts only nine of those substances, the report states.
Common ingredients found in U.S. personal-care products include phthalates, which have been linked to malformed or underdeveloped reproductive organs in males; formaldehyde, classified as a carcinogen; and parabens, endocrine-active preservatives that have been found in breast tumors. Many ingredients are exempt from labeling requirements because the product formulas are protected as proprietary, the report notes.
Scientists and consumers also have expressed concern that the industry’s use of nanoparticles — which involve the manipulation of microscopic particles — may allow them to penetrate into the bloodstream and the lymph system and damage tissue.
“Once they surface, health hazards may pose a serious threat to brand loyalty with significant implications for profitability and market share. It is difficult to overstate the potential magnitude of this challenge," said Lauren Compere, director of shareholder advocacy at Boston Common Asset Management, which has introduced shareholder resolutions on safer cosmetics at CVS Corporation.
The weak U.S. regulatory structure also limits product marketability in the 457-million person European market. In 2005, the European Union banned more than 1,000 chemicals for use in cosmetics, the report notes. Closer to home, both California, the world's sixth-largest economy, and Canada have tightened their regulations of personal-care products.
A total of 500 manufacturers, distributors and retailers have signed the Compact for Safe Cosmetics, a pledge to phase out hazardous materials in cosmetics and personal-care products within three years, and to meet the tough new European standards worldwide, the report notes. Unfortunately, many of the industry’s largest companies, including Avon, Estée Lauder, and Procter & Gamble, have refused to take the same common-sense step. Instead, the cosmetics industry has begun touting its Consumer Commitment Code, which appears to do little more than defend the status quo: the industry’s self-policed ingredient review process and the inadequate “remedy” of voluntary reporting to the FDA.
The code “appears to do little if anything to encourage cosmetics companies to eliminate the array of substances of concern for long-term health issues such as reproductive, cancer, and endocrine impacts that are being flagged in the scientific literature,” the IEHN report notes.
“Companies that proactively reformulate their products based upon emerging concerns about chemical safety will enhance their competitive positioning and position themselves to avoid future regulatory costs,” said Karen Shapiro, shareholder advocacy associate at Domini Social Investments LLC, which has introduced resolutions in the past at Avon Products. “They may also maintain a competitive edge in global markets.”
The authors of “Beneath the Skin” recommend that investors in cosmetics industry companies: compare and benchmark cosmetics and personal care companies on their performance on these issues; demand greater disclosure; monitor emerging scientific data; and anticipate tighter regulation and changing markets.
“A cosmetics company that explores less toxic reformulations, embraces a greater degree of pre-market testing for health impacts, and expands its positioning in the use of natural ingredients stands to gain,” the IEHN report concludes.
The Investor Environmental Health Network is a collaboration of investment managers encouraging companies to adopt "safer chemicals” policies for cosmetics and other products. Members of the network are concerned that companies will be locked out of markets and suffer financial and reputational damage, if they don’t systematically identify and eliminate hazardous chemicals in their products.
Sanford Lewis, Esq., report author, (413) 549-7333
Lauren Compere, Boston Common Asset Management, (617) 720-5557
Karen Shapiro, Domini Funds, (212) 217-1112.
Report available for download here.