DUTY TO DISCLOSE: The Failure of Food Companies to Disclose Risks of Genetically Engineered Crops to Shareholders August 2004 1 ACKNOWLEDGEMENTS Written by Saida Benguerel of the U.S. PIRG Education Fund. © 2004, U.S. PIRG Education Fund The author would like to thank Richard Caplan of U.S. PIRG Education Fund for developing the idea that became this report and for offering valuable oversight and input; Alison Cassady of U.S. PIRG Education Fund for her editing expertise; Michelle Chan-Fishel for reviewing an earlier version and offering suggestions; and Lisa Archer from Friends of the Earth for her input. For copies of this report, please visit our website or send $30 payable to U.S. PIRG Education Fund at: U.S. PIRG Education Fund 218 D Street SE Washington, DC 20003 (202) 546-9707 www.uspirg.org U.S. PIRG is the national lobbying office of the state Public Interest Research Groups (PIRGs), a national network of state-based public interest and environmental advocacy organizations. U.S. PIRG Education Fund is the national 501(c)(3) research and policy center for the state PIRGs. 2 TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................ 4 INTRODUCTION .......................................................................................................................... 6 THE IMPRECISE SCIENCE OF GENETIC ENGINEERING..................................................... 8 HEALTH RISKS OF GENETICALLY ENGINEERED FOODS............................................... 10 ENVIRONMENTAL RISKS OF GENETICALLY ENGINEERED FOODS ............................ 12 U.S. REGULATION OF GENETICALLY ENGINEERED FOODS ......................................... 14 A COMPANY’S DUTY TO DISCLOSE .................................................................................... 15 KNOWN RISKS OF GENETICALLY ENGINEERED FOODS REQUIRE DISCLOSURE.... 18 Consumer Rejection of Genetically Engineered Foods............................................................ 18 International Renunciation of Genetically Engineered Crops .................................................. 19 Shareholder Demands ............................................................................................................... 21 Insurance and Financial Industry Concerns.............................................................................. 21 Lawsuit Liability....................................................................................................................... 21 Regulatory Compliance ............................................................................................................ 22 Growing Demand for Regulation of Biopharming ................................................................... 23 SURVEY FINDINGS: FOOD COMPANIES FAIL TO DISCLOSE RISKS ............................. 25 CONCLUSION AND RECOMMENDATIONS ......................................................................... 28 APPENDIX: PUBLICLY-TRADED COMPANIES SURVEYED ............................................. 29 END NOTES ................................................................................................................................ 36 3 EXECUTIVE SUMMARY Scientists in the United States and abroad recalled 636,000 cases of contaminated continue to raise serious concerns about the product, at an estimated cost of $10 million environmental and human health risks dollars in lost revenue. The StarLink associated with growing and consuming contamination episode ultimately will cost genetically engineered crops. As a result, the food industry billions of dollars. genetically engineered foods may pose financial risks to the food companies buying In the wake of Enron and other catastrophic and selling genetically engineered crops. financial market failures, shareholders are Even though the Securities and Exchange demanding greater transparency and Commission (“SEC”) requires companies to enforcement of SEC regulations. One area disclose to shareholders any “material” facts that is of particular concern is whether that might affect business operations, most companies are disclosing to their food companies have failed to alert their shareholders and the public all information shareholders to the liabilities associated with that will have a material impact on business genetically engineered ingredients. operations. Despite the StarLink debacle and scientific evidence raising real concerns Genetically engineered crops pose largely about the human and environmental safety unexplored threats to human health and the of genetically engineered crops, the food environment. On the food safety side, industry has done little to alert its scientists have sounded the alarm about shareholders to potential liabilities. potential allergenicity of some genetically engineered ingredients. Scientists are also In the United States, any publicly traded concerned with the possibility of heightened company registered with the Securities and toxicity levels, increasing antibiotic Exchange Commission must disclose resistance, immune suppression, elevated information that is “reasonably likely” to cancer risks, and nutritional loss. Yet the have an impact on business operations. To Food and Drug Administration still refuses determine the extent to which food to make human safety testing of genetically companies are disclosing the risks engineered foods mandatory. In addition, associated with genetically engineered environmental risks include the creation of foods, U.S. PIRG Education Fund examined “superweeds,” genetic cross contamination, the financial reporting documents of the 35 adverse effects on non-target and beneficial largest publicly traded food companies in species, increased pesticide use, and harmful the United States and found: soil contamination. Ninety-five (95) percent of the top The risks inherent in genetically engineering publicly traded processed food companies the food supply have already cost the food completely ignore the genetically industry financially. In 2000, Kraft- engineered foods issue in their annual manufactured Taco Bell taco shells were reports to shareholders. discovered to contain StarLink corn, a variety of genetically engineered corn not Only two companies—Kraft Foods and approved for human consumption. The Food Interstate Bakeries—mention genetically and Drug Administration officially recalled engineered food as a potential liability in the Taco Bell taco shells; in response, Kraft their annual reports to shareholders. 4 that their suppliers, manufacturers, raw Not one company elaborated on or gave goods producers, and farmers not use an analysis of the risks involved with genetically engineered materials. genetically engineered ingredients in their annual reports to shareholders. While Fully disclose to shareholders the use of Kraft and Interstate Bakeries’ and potential liabilities associated with declarations are a good beginning, these genetically engineered ingredients. financial documents do not discuss ways to mitigate harm, avoid future liabilities, Label all products that contain genetically and address future profitability. engineered ingredients so that consumers are fully informed of what they are purchasing. The U.S. food industry is at a crossroads. Currently, genetically engineered U.S. PIRG Education Fund recommends ingredients offer no financial or commercial that the SEC: benefits to the food industry, nor are consumers clamoring for genetically Enforce the duty of public companies to modified products. In fact, surveys and polls disclose to shareholders the potential show just the opposite. liability from using genetically engineered ingredients. U.S. PIRG Education Fund recommends that companies in the processed food Hold CEOs and CFOs responsible for industry: material omissions in companies’ annual reports, in compliance with the Sarbanes- Remove the risk of liability related to Oxley Act of 2002. genetically engineered food by demanding 5 INTRODUCTION Genetically engineered crops and foods have Bell taco shells in October 2000 after Kraft been on the market for a decade. Since their voluntarily pulled them from grocery store introduction, genetically engineered shelves. The agency declared a Class II products have generated controversy both in recall, defined as “a situation in which the the United States and abroad. Despite this, use of, or exposure to, a violative product processed food companies embraced the may cause temporary or medically technology, although none chose to label reversible adverse health effects.”6 Due to their products as containing genetically the StarLink discovery, Kraft recalled engineered ingredients. By 2003, in the 636,000 cases of contaminated Taco Bell United States alone, 42.8 million hectares of taco shells, at an estimated cost of $10 land were devoted to growing genetically million dollars in lost revenue.7 This number engineered crops.1 Ninety-five percent of does not include the ancillary costs of all genetically engineered crops are grown in recalling a product, such as loss of consumer either the United States, Canada, or confidence. All told, more than 300 separate Argentina.2 Today, 60 to 70 percent of all processed food products were recalled.8 processed foods on supermarket shelves in Kellogg’s was forced to close down a the United States contain genetically processing plant due to the contamination, engineered ingredients.3 Corn and soybeans and, in 2001, recall its Morningstar Farms