THE POCANTICO CONFERENCE CENTER OF THE ROCKEFELLER BROTHERS FUND
ACCOUNTABILITY IN THE PESTICIDE INDUSTRY
A REPORT BASED ON A FORUM AT THE POCANTICO CONFERENCE CENTER OF THE ROCKEFELLER BROTHERS FUND JUNE 25–28, 2002
THIS REPORT WAS PREPARED BY PETER RIGGS AND MEGAN WAPLES OF THE ROCKEFELLER BROTHERS FUND
POCANTICO PAPER No 5 ROCKEFELLER BROTHERS FUND Madison Avenue New York, New York - Telephone: .. Facsimile: .. E-mail: [email protected] World Wide Web: www.rbf.org
THE POCANTICO CONFERENCE CENTER OF THE ROCKEFELLER BROTHERS FUND Lake Road Pocantico Hills, New York Telephone: .. Facsimile : .. E-mail: [email protected]
© Rockefeller Brothers Fund, Inc. All rights reserved. CONTENTS
FOREWORD 5
INTRODUCTION 7
RISKS 9 Accelerating Legal Liabilities: Trends in Product Liability Suits 9 Market Trends Toward Organics and IPM 9 Regulatory Trends Away From Pesticide Use 11 Quality of Management 13 Reputation Management 18 Risks from Long-Term Uncertainties 18
REACHING THE MARKETS 21
STRATEGIES AND OPPORTUNITIES 25 Research and Analysis 25 Advancing Social Reporting 25 Supply Chain Management— Investor and Consumer Activism 28 Increasing Funding to Alternatives 28 Advancing Legal Precedent 29 De-Certification Campaigns 29 Shareholder Activism on Obsolete Stocks 30 Worker-Oriented Strategies 30
CONCLUSION 31
FIGURES Legal Liabilities 8 New European Union Directives Could Expand Liabilities for Chemical Companies 12 PIC and POPs 14 Conditions of Pesticide Use in Developing Countries 16 Unwelcome Surprises 20 2001 Top Seven Agrochemical Companies 24
POCANTICO PAPER NO 5 3 PARTICIPANTS
Greenpeace Germany Pesticide Action Network UK Harrington Investments, Inc. Domini Social Investments Strategic Counsel Domini Social Investments Pesticide Action Network North America Rose Foundation for Communities and the Environment Rockefeller Brothers Fund EarthJustice Legal Defense Fund Foundation for Advancements in Science and Education (Observer) Rockefeller Brothers Fund FOREWORD
This paper takes a sector-specific view of a widespread bargain for improved occupational health and safety problem currently dominating the news headlines. The standards. The prevailing attitude we heard from gov- problem is corporate accountability. The lens used for ernment officials, public health workers, and NGOs analysis is the agrochemical sector. can be summed up as follows: “Despite the existence of Investor concerns about the inadequacy of cor- viable agricultural alternatives, and despite a broad porate disclosure rules in the United States have fueled understanding of the problems and risks associated across-the-board declines in stock prices. At the time of with these products, deceptive marketing and outright this writing, President Bush’s moves to tighten report- dumping of these chemicals in the farm sector contin- ing requirements and punish corporate wrongdoers ues. There seems to be no way to hold these companies haven’t calmed the markets. On the contrary, in recent accountable for their actions.” weeks we have seen one of the sharpest falloffs in major At the RBF, we watched a great deal of donor stock indices in more than 15 years. Whether this dan- and activist attention migrate to the related issue of gerous downward spiral will end soon is anyone’s guess; biotechnology, and we became concerned that the neg- but even were it to end tomorrow, it is clear that this ative effects of pesticide use was considered “yesterday’s year’s massive loss of confidence in the financial mar- news”: the general perception apparently being that the kets will permanently alter our perceptions of what “the pesticide problem” had already been solved. In fact constitutes adequate corporate responsibility. many corporations with agrochemical interests are now When staff at the Rockefeller Brothers Fund getting involved with the manufacture and marketing (RBF) began late last year planning a meeting on of transgenic crops; and indeed some transgenics are accountability in the pesticide industry, we had no idea designed to promote expanded herbicide use, so issues that accounting procedures and financial risk disclosure of agrochemical use and the deployment of new trans- requirements would become such prominent issues. genic crops are in fact inextricably linked. But in stark The RBF has been involved in agriculture issues for contrast to pesticide use, a great deal of basic work many years. And while we felt our work had con- remains to be done regarding actual and potential tributed to a positive agenda for tropical agriculture, health and environmental impacts of transgenic particularly in Asia, we were often left with the nagging crops — and, as usual, regulatory controls are lagging feeling that we were having little impact on a major far behind the science. obstacle to the development of sustainable alterna- At this point in history, the science regarding the tives—that is, the power of agrochemical interests. ecological and public health consequences of pesticide Everywhere we worked, we heard similar stories. misuse is unequivocal. We know these products cause Pesticide use was expanding despite awareness of the serious and lasting harm. While additional controls are dangers; the influence of agrochemical companies on needed, a number of important regulatory and judicial national development plans continued unabated; pesti- handles already exist that should enable us to curb the cides banned in industrial countries were being aggres- worst pesticide abuses, at least in theory. However, the sively marketed in the Global South; and that the full range of what those handles are, and how they whole industry-promoted notion of “safe use” of pesti- might be used to accomplish this, have not yet been cides in the tropics was a cruel joke perpetrated on fully described or attempted to date. Similarly, farmers and agricultural laborers who lack the power to although many of the problems associated with pesti-
POCANTICO PAPER NO 5 5 cides are generally understood by the public, we believe whom we might wish to reach regarding this informa- that specific information about the long-term down- tion on financial risk; and suggests strategies and oppor- side risks of investments in pesticides are not being ade- tunities for engaging those parties. Reflecting the varied quately communicated to market analysts. We further expertise of participants, and their different institution- believe that efforts to help to provide this information al affiliations, the paper tries to address rather different in ways useful to financial service professionals repre- audiences: financial service professionals, “corporate sent a profoundly constructive contribution both to campaigners,” and those who work in agriculture and ensuring greater corporate accountability, as well as public health on pesticide impacts. We hope that the safeguarding public and environmental health. creative deployment of the strategies discussed here will It was with these tasks in mind that in June of be useful in several ways: by creating an impact on cor- 2002 the RBF brought a small group of concerned sci- porate responsibility and financial market perceptions of entists, lawyers, socially responsible investment profes- investment risks in the pesticide industry; and as a gen- sionals, and sustainable agriculture advocates to our eral blueprint for using financial disclosure and Pocantico Conference Center. It turned out that we improved transparency to increase corporate accounta- were convening the meeting at a time when corporate bility in any economic sector. accountability was front-page news. With this breadth of intended audience in The report that follows distills the brainstorming mind, we hope that the paper provokes comment and and suggestions of those who participated in the debate and perhaps a modicum of well-informed out- Pocantico meeting on “Accountability in the Pesticide rage. We hope it is spread around and that its ideas are Industry.” On behalf of the Rockefeller Brothers Fund, applied to other sectors. Responsibility for any mistakes we would like to sincerely thank the participants, as well found in the text rest with the primary authors. A full as several outside reviewers whose schedules prevented listing of citations and endnotes for this paper can be them from attending in person. To an unusual degree, found on the Rockefeller Brothers Fund website this Pocantico paper should be seen as a collective effort. (www.rbf.org). Since we are all learning how to do this Because of the range of expertise arrayed around the sort of interdisciplinary work better, we would greatly Pocantico table, everyone’s contribution was vital—and appreciate your candid feedback. all of us faced very steep learning curves. We came away with a much better appreciation of the range of strate- gies, and of the expertise needed to make our arguments in a compelling way. As such, the paper lays out the risks 20 July 2002 of investments in pesticides; mentions those parties
6 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY INTRODUCTION
This paper assumes basic familiarity on the reader’s part expand their markets, prolong the patent-protected life with the debate on the ecological and public health and overall use of their products, and shape IPM pro- impacts of pesticide use. It asserts that the current vol- grams to ensure a future role for their chemicals. In ume of pesticides used globally is unnecessary to main- addition, there is legitimate disagreement over the tain global food production—that, in fact, our current speed at which major changes to our food production over-reliance on chemical shortcuts is degrading the systems can be made, and the degree of economic dis- productive agricultural resource base, making future ruption that will occur as a result. An accelerated move increases in yields much more difficult. Substituting less away from pesticide dependency is likely to dramatical- toxic chemicals, accelerating production and deploy- ly decrease the attractiveness of the agrochemical sector ment of safer botanical pesticides, and most important- for investors. ly, vigorously promoting farmer-centered, ecologically- Another widely-held view that informs this based approaches to pest management, are considered paper is the likelihood that corporations will face larg- here as primary goals for the future of agriculture. er liabilities than they do now as a result of harms These are hardly radical assertions. Over the imposed on people and nature around the world. This past several decades, research in the fields of ecology has already occurred with tobacco and with asbestos and public health has shown the problems associated claims, and, in the latter case, liabilities have exceeded with pesticide use, and regulatory systems designed to profitability for many companies, resulting in a slew of control their use at both national and international lev- bankruptcies. Increasing disclosure and quantifying els have evolved in response to this body of research. In potential liabilities can help to discourage excessive addition, research and activism at the local level has investment in risky practices. convincingly demonstrated that viable alternatives to The point of departure for the meeting was thus chemical-dependent agriculture are both possible and the perceived disconnect between: profitable. The dramatic success of farmer-led integrat- • The broad consensus on the need for a move ed pest management (IPM) programs in curbing exces- away from pesticide reliance; sive pesticide use shows that ample scope for reductions • The increasing possibility that pesticide compa- exist even within the commodity-focused, “industrial nies will incur major financial liabilities; and agriculture” paradigm. For all intents and purposes, • The continued unquestioning support of the there is a broad professional consensus on the impor- agrochemical industry by financial markets. tance of reducing chemical reliance in agriculture. The group that convened at Pocantico consid- We believe this disconnect is due to a misunderstand- ered the interplay of research, advocacy, and market ing and underestimation of the risks, liabilities, and change factors that influence the rate of change in agri- long-term viability of this industry. Our task, therefore, cultural practices worldwide. Implementing the is to better document and communicate these risks and changes necessary for reducing pesticide reliance will liabilities to investors, analysts, and consumers so that inevitably challenge the vested interests of the existing they will able to better assess the market value of agro- industrial sector, including pesticide production, for- chemical firms. mulation, and marketing. The rational behavior of firms in this industry inevitably includes attempts to
POCANTICO PAPER NO 5 7 LEGAL LIABILITIES
Agrochemical companies have generally been able to of cases from U.S. courts using the FNC doctrine, the avoid liability for certain types of health and environ- Organization of American States has drafted a con- mental damage caused by pesticides. Three legal vention to address the issue. Nicaragua adopted a law strategies have been particularly important to corpora- requiring defendant companies to post huge bonds as tions in defending against liability: forum non conve- part of any Nicaraguan court proceeding, in the event niens, FIFRA preemption, and defenses to products that they use FNC to dismiss a case against them in liability law. Recent developments point toward a the United States. In the European Union, the Brussels weakening or even dismantling of these defenses, Convention on Jurisdiction and Enforcement of which would remove major procedural obstacles to Judgments in Civil and Commercial Matters establishes personal injury tort claims. the principle that defendants can be in the courts of the EU member states where they are domiciled, and Forum Non Conveniens FNC does not apply. A wave of legal actions, attempt- ing to hold northern companies legally accountable in The legal doctrine of forum non conveniens (FNC) has their home country courts for health and environ- been used to bar the suits brought by injured foreign mental damages abroad will likely gain significant citizens from being heard in the pesticide company’s momentum in coming years. If so, pesticide manufac- home country (U.S. and U.K.). The doctrine allows turers could face a wave of legal actions from injured the court, in its discretion, to declare that the U.S. workers around the world. court, for example, is an “inconvenient” forum for the defendant, because the injury was caused in another country and the bulk of the evidence and plaintiffs are FIFRA Preemption in another country. FIFRA (Federal Insecticide, Fungicide and Although the Global South consumes just a minority of Rodenticide Act) is the primary pesticide law in the the world’s pesticides, the vast majority of pesticide poi- U.S. Among many other aspects of pesticide manu- sonings occur there. At the same time, there are many facture, formulation, marketing, sale, storage, use and obstacles to a poor farmer or worker filing suit in his or disposal, FIFRA governs the way a pesticide must be her country, including weak legal systems, inability to labeled and packaged, the permitted uses and use hire lawyers on a contingency fee basis, no pre-trial dis- restrictions that each label must list, etc. Until the last covery or class actions, low caps on damage awards few years, federal and state courts have held that mandated by statute, and corruption. Lack of recourse FIFRA preempts most state tort actions alleging harm to the formal systems of justice at home by individuals caused by pesticide products. In other words, once the or groups in the South has shielded from legal damages EPA registered a pesticide as an “economic poison” transnational corporations whose products or manufac- and approved its label, persons who were injured by turing processes injure people or contaminate the envi- that product were barred from claiming that they ronment. Theoretically, FNC requires a U.S. judge to weren’t properly warned of the toxic hazard. find that the foreign country court system provides an Recently however several courts have ruled that adequate alternative forum before the case can be dis- FIFRA does not preempt claims alleging failure to missed and sent back to where the injury occurred. But warn of the toxic hazards of pesticides, because state based on forum non conveniens, a New York federal common law actions are not “requirements” within court judge sent victims of the Bhopal disaster back to the meaning of FIFRA’s express preemption provision. India, where there was less opportunity for injured The U.S. Supreme Court is likely to review one of plaintiffs to receive a fair hearing. these cases on appeal soon. The California Court of More recently, however, a wave of legal actions against Appeals and the Indiana Supreme Court have contin- U.S. and British companies selling toxic products or ued a trend among lower state courts, holding that processes overseas has pierced this shield. In several design defect and breach of implied warranty claims U.S. court cases, the courts have quietly begun to are not preempted by FIFRA because such claims are refuse to apply FNC. In the U.K., FNC was over- neither based upon nor need to be proved by reference turned, allowing workers at a South African plant to to pesticide labels. sue a British chemical company. Due to the dismissal (continued on page 10)
8 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY RISKS
The group at Pocantico spent considerable time Rodenticide Act (FIFRA), first passed in 1947. FIFRA becoming familiar with the types of risks and liabilities sets requirements for the testing, registration, use classi- that the industry faces. The sense of the group was that fication, and labeling of pesticides Finally, pesticide these risks could effectively be grouped into six cate- companies have successfully argued that damage was gories: legal liabilities, market trends, regulatory trends, caused by misuse of their product, and thus the liability quality of management, reputational risks, and long- falls to the user or agent responsible, and not to the pro- term uncertainties. A subsequent section of this report ducer. (See box on Legal Liabilities on pages 8 and 10). describes how these risks can be communicated to Several recent cases have undermined the tradi- actors in the finance community. tional defenses used by the industry against product liability claims. As more cases are pursued, pesticide companies may face increasing liability for their prod- ACCELERATING LEGAL ucts. Legal activists have also been working to hold the LIABILITIES: TRENDS IN PRODUCT pesticide industry, especially transnational corporations LIABILITY SUITS operating in a global economy, accountable in other ways, therefore increasing the trend of upholding the Pesticides are inherently risky products. Pesticide pro- doctrine of "the polluter pays." ducers are always at risk of product liability claims due to poisonings, deaths, and other damages. Product-lia- MARKET TRENDS bility suits against the pesticide industry as a whole, although relatively limited in their size and scope to TOWARDS ORGANICS AND IPM date, have the potential to become a major threat. In Market trends are a key concern for potential investors. addition to the legal challenges involved in such suits, If a technology or a group of products is becoming there are broader questions about access to the justice obsolete or losing consumer favor, a company whose system in a globalized economy. Much of the harm business strategy depends on that technology or prod- caused by pesticides takes place in developing coun- uct “market-leader” will usually not fare well over the tries, among workers who may have little access to for- medium-to long-term. Trends in agricultural product malized systems of justice. Establishing jurisdiction for markets are obviously relevant to pesticide markets in civil actions is fraught with difficulties, and is often particular. Farmers are the immediate consumers of compounded by justice systems that are weak, corrupt, pesticides, but their production choices are driven by or vulnerable to political pressures. the preferences of those who purchase the food and Historically, pesticide companies have found fibers that they grow. Several trends developing in these protection from product liability claims in one of three markets indicate a growing public unease with pesti- ways. The first is the doctrine of forum non conveniens, cides (and with genetically engineered crops), and a which provides that the venue for a given case can be clear preference for foods grown in a less damaging, moved in the interests or for the convenience to parties more sustainable way. These trends are visible at the and witnesses. The second is known as “FIFRA pre- level of the individual consumers’ increasing preference emption.” Pesticides are regulated at the federal level in for organic foods, and at the supplier level among food the U.S. under the Federal Insecticide, Fungicide and processors and retailers. For example:
POCANTICO PAPER NO 5 9 LEGAL LIABILITIES (continued from page 8)
Overcoming Products Liability Defenses References In Guzman v. Amvac, the Washington State Supreme Neilson, Michael R. Pesticides: FIFRA Preemption. Court ruled in 2000 that: (a) while pesticide benefits Chemical Regulation Reporter, Vol. 25, No 1 pp. may outweigh risks, this is not always the case, so each 728–737, April 23, 2001. pesticide must be judged on its own risk and merits, Guzman v. Amvac Ruling: Implications for the and that (b) a safe alternative product, versus an Agrichemical Industry. Agrichemical and Environmen- “alternative design” of the same product, may be tal News. November 2000, Issue No. 175. [http:// admissible as evidence against an alleged unsafe prod- www.aenews.wsu.edu/Nov00AENews/Nov00AE uct. In this case —brought by field workers injured by News.htm#anchor971146] exposure to phosdrin, an extremely acutely toxic pes- ticide —the company’s FIFRA preemption claim was Nijar, Gurdial Singh. Developing a Liability and defeated. Amvac argued that: (i) pesticides are dan- Redress Regime under the Cartagena Protocol on gerous products exempt from product liability, and Biosafety: For Damage Resulting from the Trans-bound- (ii) design defect claims require a showing of an alter- ary Movements of Genetically Modified Organisms. native design of the product rather than alternatives Third World Network, 2001. [http://www.twnside. per se. In a precedent-setting ruling, the court reject- org.sg/title/blplpdf] ed both arguments. The company later settled out-of- court with the farm workers for a confidential sum, thought to be substantial.
•In 2001, the Co-op Group—one of the U.K.’s harmful pesticide residues— is impressive. top five food retailers and Britain’s largest grow- According to the Food and Agriculture er—announced that it was “banning over 20 Organization (FAO), “sales values [of organic pesticides used for food production worldwide foods] have increased in most markets at an amid rising consumer concerns about the annual growth rate of 20 to 30 percent” over the impact on human health and the environment last decade; this trend has accelerated since the of chemical residues.” The ban applies not only FAO report was published. “The organic fruit to all fresh produce, but also to canned, frozen and vegetable market offers significant potential and processed foods. Six products still permitted for countries to increase their export earnings for use in the U.K. are among the pesticides for and diversify their agricultural base,” states a which the Co-op Group will show zero toler- November 2001 press release from FAO at the ance. The Co-op Group also seeks to impose launch of a new report, “World Markets for “restrictions on the use of over 30 other chemi- Organic Fruit and Vegetables.” Consumer polls cals where the Co-op will ask growers to use in the U.S., U.K., Japan, and the EU show more benign alternatives.” It has also embarked increasing concern about pesticides and the on a stringent testing program for pesticide embracing of organic produce as a safer alterna- residues to ensure implementation by their tive. growers and suppliers around the world. • The use and acceptance by consumers of both •Food processors and retailers are coming under “ecolabels” and “fair trade” designations is increasing pressure to incorporate Integrated expanding. Retailers can increasingly market the Pest Management (IPM) standards into their particular qualities associated with these special- production protocols and standards. Large ty labels in the expectation that the claims can be processors such as Campbell’s and Unilever are verified and that consumers understand what the implementing such measures. label represents. The Fair Trade labeling organi- • The market for organically grown produce is zation recently issued a guideline stating that no growing rapidly. Although currently represent- dangerous pesticides (including approximately ing just a small share of overall food sales, the 100 pesticides classified by the World Health relative growth rate of organic foods—largely Organization as Class 1a [extremely hazardous] due to consumer concerns about food safety and or 1b [highly hazardous]) can be used in the pro- duction of an item seeking the Fair Trade label.
10 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY Based on these examples, there is ample reason to implementing FQPA, which is bitterly opposed believe that the market for pesticides will shrink with by the industry and conventional agricultural decreased public acceptance of the risks and costs of interests. Still, the law already has forced EPA to ban all home and garden uses of two widely used pesticide use. insecticides and eliminate or reduce some 2,000 food residue limits to date. EPA has also been required to develop new assessment methods REGULATORY TRENDS reflecting that because many dangerous pesti- AWAY FROM PESTICIDE USE cides act on the body in the same calculate expo- sures as unrelated individual events). Based on consent decree-driven deadlines and explosive Regulatory trends play a critical role in determining a new information being generated about pesti- company’s future value. Since regulations can greatly cide impacts, health and environmental activists alter the costs of doing business and the marketability FQPA implementation to pick up speed in com- of certain products, any uncertainty in the regulatory ing years, leading to many more cancellations environment should be of concern to investors. With and restrictions on pesticide use. the trend toward increasingly stringent regulation of •National reviews of agriculture and crop protec- pesticide use in both the developed and developing tion policies over the past decade have sought to world, the picture for those investing in agrochemicals ensure the safety of drinking water supplies, is not encouraging. Europe, in particular, is leading the enhance the sustainability of agricultural pro- duction, and respond to consumer concerns way. European Union (EU) regulations are increasingly about pesticides in their food and environment. establishing liabilities for pollution caused by pesti- The Netherlands provides a dramatic recent cides, affecting both pesticide sales and creating legal example: its “Ten Year Policy on Plant liability costs for the industry (see box on page 12). In Protection” aims for a 95 percent reduction in addition to the dramatic changes in Europe, the fol- the environmental burden caused by the use of lowing trends should be borne in mind: chemical pesticides, and asks farms to seek inte- grated pest management certification by 2010. • Both the EU and the U.S. are reviewing lists of •In addition to national policies, there are trends registered pesticides with an eye toward reduc- toward more stringent pesticide regulation at ing use of these products. In the EU it is antici- the “sub-federal” level. For example, in addition pated that this review will substantially reduce to having tougher state pesticide laws as allowed the number of pesticides re-registered for use under FIFRA, California has passed a number beyond 2003. And as residue tolerance levels are of other laws affecting pesticides. A case in point revised downward, markets for pesticides phased is California’s Proposition 65, a voter initiative out in the EU come under pressure in countries passed to address citizen concerns about expo- exporting to the EU. Review of product regis- sure to toxic substances, including pesticides, tration rosters may lead manufacturers to with- that cause cancer or have reproductive toxicity. draw applications, if they believe there is little The law, which prohibits businesses from dis- chance that the product in question can be charging such chemicals into sources of drinking reregistered based on the new criteria. water and requires that warnings be given to exposed individuals, effectively sets a higher reg- •In the U.S., the 1996 Food Quality Protection ulatory standard for pesticide use and notifica- Act EPA has completed FQPA here In the U.S., tion than those of the Federal government. the Food Quality Protection Act (FQPA) passed California has frequently been the vanguard of in 1996 requires EPA to establish new safety progressive health, safety, and environmental standards that more adequately protect children regulation in the United States; laws first devel- from pesticide exposure, and then reassess per- oped and “tested" in California are often advo- mitted pesticide uses and food residues accord- cated for and eventually adopted in other states ing to these standards within 10 years. The law and/or encoded into federal law. mandates that EPA focus on pesticides consid- ered most hazardous to children, a sensible strat- •More and more public spaces, or places fre- egy widely endorsed by advocates (and dubbed quented by “vulnerable populations” (e.g. chil- “worst first” by Consumers Union). Lawsuits dren, pregnant women, the elderly), are being and settlements have been and continue to be designated as “pesticide free.” This trend is most required to ensure even lackluster progress in noticeable in schools. The Los Angeles Unified
POCANTICO PAPER NO 5 11 NEW EUROPEAN UNION DIRECTIVES COULD EXPAND LIABILITIES FOR CHEMICAL COMPANIES
New European Commission (EC) Directives in human health when the source of the threat to human Europe will make it easier to hold agrochemical com- health is land contamination.” The Environmental panies liable for pesticide contamination of water and Liability Directive also embraces the “polluter pays” primary agricultural products, as well as for potential principle, as well as joint and several liability. Under damages from Genetically Modified Organisms this new directive, those who use and regulate pesti- (GMOs). cides are now liable for the damage the chemicals THE EU WATER FRAMEWORK DIRECTIVE cause—creating a much stronger incentive to curtail establishes very high standards for surface and ground use. The Directive also states that “provisions are water quality, declaring that all water bodies must be made to allow qualified entities, alongside those per- of “good ecological status” within 15 years. It also sons who have a sufficient interest, to request the gives local Water Boards responsibility for maintain- competent authority to take appropriate action.” In ing water quality, and makes them liable for the costs plain language, this provision allows citizens and of sub-standard water quality. Cost recovery is based NGOs to instigate reviews of company and govern- on the “polluter pays” principle. The Water Directive, ment actions. by establishing clear lines of responsibility for water AN EU DIRECTIVE RELATING TO PLANT quality, prevents Water Boards, municipalities, and PROTECTION PRODUCTS, published in June farmers organizations from engaging in the time-hon- 2002, calls for the phase out of 320 hazardous pesti- ored practice of passing responsibility for water quali- cide active ingredients by July 2003. (Limited excep- ty from one entity to another. Henceforth, it is tions will apply until 2007.) Some of these products assumed that Water Boards will aggressively come will likely be added to the list of chemicals regulated after polluters for the recovery of costs associated with by the Prior Informed Consent (PIC) treaty, which water quality enhancement and environmental can lead to an international phase-out of their use. restoration efforts. The EU Water Directive makes it The EC has proposed extending the EU’s existing possible to pass unlimited liability costs for contami- Product Liability Directive to include primary agri- nation of groundwater and surface waters directly to cultural products (85/374/EEC). The Product pesticide users, and potentially to producers. Liability Directive requires the producer/importer to THE EU DIRECTIVE ON ENVIRONMENTAL pay compensation if there is a link between the prod- LIABILITY covers damages made “to biodiversity uct defect and the resulting damage without the protected at community and national levels, waters injured party having to prove negligence on the part covered by the Water Framework Directive, and of the producer/importer.
School District has banned the use of pesticides and their success and cost-effectiveness become on school grounds, and such bans are pending in more obvious, markets for pesticides in the devel- ten other states. At least 33 states have adopted oping world will shrink. This is of particular regulations addressing protection of children by importance because the developing world is now focusing on pesticide use in, around, or near the only major growth market for pesticides. schools. •Improvements in developing countries’ ability •In the developing world, government-mandated to regulate occupational safety and health will IPM programs designed to reduce pesticide use also affect agrochemical markets, especially for have become more widespread. National IPM the most toxic pesticides. Under pressure from programs also help protect the health of farmers FAO and thousands of sustainable agriculture and farm workers, reduce the financial costs advocates in North and South, availability of incurred by farmers; increasingly, such programs many now-common pesticides to any buyer will also assist farmers to gain new access or maintain decrease as more and more are regulated as existing links to export markets. Under these “restricted-use” products. This regulatory programs, farmers receive training in methods enhancement is a frequent first response to con- that significantly reduce the need for pesticide cerns regarding the health of those applying use. As these programs grow more widespread highly toxic pesticides, and when enforced, can
12 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY significantly limit the number of people with of imprudent behaviors that give rise to fiduciary con- easy access to these chemicals. cerns, since these behavior patterns pose real risks of financial injury to investors as well as posing serious These regulatory trends demonstrate a consistent and risks of harm to public health and the environment. increasing concern about the costs and impacts of pes- Although there have been a number of instances where ticides. Over time, these regulations will both reduce non-governmental organizations (NGOs) have brought the markets for pesticides and attach higher costs and information about corporate behaviors to the attention liabilities to their use. of financial analysts, resulting in revised performance predictions for a given firm, there has been little sys- tematic effort to do so on an industry-wide basis. QUALITY OF MANAGEMENT The following examples demonstrate how the behavior of particular firms with respect to pesticide use Most serious investors and investment analysts devote may be indicative of a more general failure of manage- significant effort to assessing the quality of a company's ment. Indeed it can be argued that most of the issues management, since that quality affects the ongoing addressed in this section on “Risks” could be considered financial welfare and competitiveness of the company under the heading, “Quality of Management.” throughout its operations. A widespread loss of confi- dence in corporate management is likely to contribute to a precipitous decline in share value. COMPLIANCE WITH Qualitative factors are inherently more difficult INTERNATIONAL CODES to assess than the quarterly profits and losses that go AND CONVENTIONS into a simple, short term, bottom line analysis. Because the pesticide industry deals in products that Nonetheless, even taking into account the subjective are, by design, harmful to life, sales and use of these nature of qualitative evaluation, it was the sense of the products are governed by both national and interna- group that certain patterns of corporate conduct on the tional standards. The extent to which companies part of agrochemical companies may serve as reliable observe or neglect these standards is a powerful indica- indicators of a higher quality of overall corporate man- tor of management quality. Although they vary in agement. These potential indicators include: adhering form, focus, and type of compliance required, many to international codes and conventions and taking a such standards will include guidelines for reducing leadership role in to the implementation of voluntary reliance on pesticides and minimizing the risks from codes; adopting uniform company wide performance pesticides to users, public health, and the environment. standards rather than defaulting to lower environmen- Others deal more generally with rules governing pub- tal and occupational health standards permitted by lic-private sector partnerships, or are broad statements local regulations; demonstrating life-cycle concern for regarding corporate ethics, including issues such as products; and achieving an above average level of trans- transparency, conflict of interest, due diligence, and parency with respect to company operations. preventing corruption. While most of these standards Conversely, the kinds of pesticide abuses of con- are voluntary, some are legally binding, including two cern to public interest activists may indicate a division- recent conventions with provisions requiring imple- wide, or even company-wide failure of management. mentation by governments who have ratified them; Because institutional investors (such as pension funds, these are discussed in the box on PIC and POPs on mutual funds, foundations, and endowments) must be page 14. guided by their trustees' duty to prudently manage the Non-binding, “normative” standards can pro- assets under their control, these investors must serious- vide pesticide companies with a frame of reference for ly consider any demonstrable pattern of imprudent considering best practice, corporate responsibility, behavior by those who manage the companies in which product stewardship, and good environmental manage- they invest. It was the sense of the group that, in many ment. These standards can also help investors evaluate instances, the patterns of irresponsible conduct by the management strength and performance of individ- agrochemical corporations represent precisely the kind ual companies, and provide a standard for comparing a
POCANTICO PAPER NO 5 13 PIC AND POPS
Two agreements negotiated in recent years should help import that chemical, this would be a violation of the reduce the global burden of hazardous pesticides (and other treaty, and as such would be "illegal." It is not clear what chemicals). Treaties on Prior Informed Consent (PIC) and sanctions the treaty will impose under international law for Persistent Organic Pollutants (POPs) will enter into force violations. Legislation introduced to Congress for U.S. rat- when ratified by 50 signatories. Seventy-three states and ification and implementation of these treaties makes no regional economic organizations have signed the PIC mention of specific legal penalties for treaty violations. agreement (the Rotterdam Convention ); to date, as of July Nonetheless, this aspect of these agreements does heighten 2002, 23 had ratified it. The POPs treaty (the Stockholm the necessity for companies (and exporting countries) to Convention ) has 151 signatories, with 16 ratifications (as monitor compliance. of August 2002). Both treaties are intended to be interna- The particular aim of the Stockholm Convention is the tional legally binding instruments. elimination of toxic chemicals that are known to persist in The concept of “prior informed consent” is straightforward: the environment and to accumulate in air, soil, water, and importing countries —particularly those in the developing the food chain. Seven of the nine pesticides currently iden- world — should have complete information about haz- tified as POPs are also included among the twenty-six pes- ardous chemicals, including details of any bans or severe ticides on the PIC list. Many new chemicals, including restrictions of such chemicals, prior to importing them. additional pesticides, are expected to be added to the con- Shipment of such chemicals should proceed only after the vention’s official POPs list following the adoption of criteria importing country has acknowledged its awareness of such and procedures for expansion beyond the original 12 com- information and expressed a desire to receive shipments. pounds. However, the process for establishing these will not The Rotterdam Convention establishes a system through begin until the treaty comes into force and is likely to be a which governments can exchange information about chem- contentious one given the many interests involved. icals they have found to be dangerous. If governments on Many governments have agreed to comply voluntarily with two or more continents ban or severely restrict a chemical, PIC treaty procedures prior to its formal entry into force, a committee of experts in chemicals management elected by and a PIC Secretariat jointly shared by FAO and UNEP is the Parties to the convention reviews the relevant data and already up and running. determines whether the chemical is a candidate for PIC. Of the two treaties, PIC has the potential to encompass a The convention calls for equitable geographical distribution greater number of pesticides, and is likely to have a signifi- within the committee; a limited number of NGO represen- cant impact on the international pesticide trade. Inclusion tatives (both industry and public interest) are allowed to of a pesticide on the PIC list has at times been inaccurate- attend committee meetings as observers. ly described as a “worldwide ban” on this chemical, but If the pesticide (or other chemical) meets the criteria out- PIC does not automatically trigger a process of global elim- lined in the PIC convention, a document is prepared sum- ination. Nonetheless, because it encourages and facilitates marizing the relevant scientific, regulatory, and public review of existing national pesticide registration decisions, health information, including IPM strategies or alterna- and improves communication regarding risks, implemen- tives to the chemical. This document is circulated to a tation of the PIC procedure is likely to have a significant Designated National Authority in each participating coun- impact on global pesticide trade. try—usually a senior official from the national environ- The explicit aim of the Stockholm Convention is to bring ment agency—who determines whether to allow contin- bioaccumulative toxics out of circulation, ending their pro- ued imports of the chemical. duction and trade. Signatories agree to phase out produc- A developing country may also request that a pesticide be tion and use of all chemicals included on the POPs list. included on the PIC list if it is found to cause health or (Public interest NGOs argued for the treaty language sup- environmental problems under conditions of use. Details porting this goal to be even stronger than it is.) However, relating to the type of information required to support such parties may request exemptions; for example, China has a request, and the standards used in decision-making, are requested permission to continue to use and also manufac- still under discussion. Manufacturers have expressed ongo- ture heptachlor. ing concerns about the standards and information used to As previously mentioned, this agreement is also legally determine that a chemical belongs on the PIC list, a process binding—though what that means in practice remains to over which they would seem to have less influence than be seen. It should be also noted that neither the Stockholm national regulatory processes. Convention nor the Rotterdam Convention impose any If a company exported a PIC chemical to a country that enforceable standard of behavior on countries that have not has notified the PIC Secretariat that it does not want to signed them.
14 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY specific company’s performance and standing to other Bank projects revealed broad conflict of interest firms in the industry. Such standards can indicate how and non-compliance with Bank safeguard poli- companies are performing relative to international cies. Similar concerns have been raised about partnerships with pesticide companies under the standards and norms—especially those espoused in the UN Global Compact. company’s own literature. Industry has offered its own set of standards for • Companies have frequently not lived up to their ® commitments to “cradle-to-grave product stew- best practices. The Responsible Care program was ardship” as described in Responsible Care® and developed in 1988 by the American Chemistry Council other industry literature. As described later in (ACC) “to respond to public concerns about the man- this paper, there are serious problems with obso- ufacture and use of chemicals.” According to ACC lit- lete pesticide stocks in most countries. To date, erature, “Responsible Care ® is advancing in 46 coun- pesticide manufacturers and distributors have tries, representing over 85 percent of the world's chem- strongly opposed efforts by FAO, World Wildlife Fund, Pesticide Action Network and ical production.” The program is essentially an envi- others to increase industry’s historically insignif- ronmental management system for chemical manufac- icant financial contributions to the disposal of turers, and in fact, the ACC is working on a single audit obsolete pesticides in developing countries. ® process that will award both Responsible Care and • The FAO conducted comprehensive reviews of ISO14001 certificates. The ACC website describes the the implementation of the International Code program as moving from a “process-based” to a “per- of Conduct on the Distribution and Use of formance-based” focus. In their promotional literature Pesticides in 1987 and 1993. These reports and advertising for the program, the ACC has attempt- show significant shortcomings related to trading practices, advertisement, collaboration to recall ed to use the Responsible Care ® program as evidence hazardous products, and label information, that the industry is capable of policing itself and does among other areas. Their findings are consistent not require further governmental regulation. Some with those documented by numerous NGOs companies in their annual reports and SEC filings refer and civil society organizations during the past to their participation in the program as evidence of two decades; ongoing advertising of unsubstan- strong environmental management. tiated claims is among the persistent problems documented by such monitoring efforts. Another particularly relevant convention, with substantial normative force in the developing world, is Properly documented and publicized, such cases would the FAO’s International Code of Conduct on the demonstrate that many companies are out of step with Distribution and Use of Pesticides (referred to as the internationally accepted standards and norms for good Code of Conduct). CropLife International, the trade management and corporate responsibility. This issue association representing the pesticide industry, has comes up again in the section on reputational risks “actively supported the FAO Code of Conduct, and has below. made compliance with the FAO Code by national asso- ciations and their members a condition of member- PRODUCT USE IN DEVELOPING ship.” Given the broad level of support for the FAO NATIONS AND CONSISTENCY OF Code of Conduct, and the industry’s professed desire to CORPORATE BEHAVIOR comply with it, the Code is a good measuring stick by Many of the problems discussed above regarding viola- which to evaluate company practice and management. tions of codes and conventions relate more generally to Feedback from the field, especially from devel- the inconsistencies and double standards employed by oping countries, suggests that these standards of behav- the pesticide industry in dealings with developing ior and self-regulation are frequently ignored in daily countries. Perhaps the most famous example is that of practice: the “Circle of Poison,” where pesticides banned in •Guidelines for partnerships between interna- industrialized countries are nevertheless produced there tional organizations and the private sector and then exported for use in developing countries, only emphasize transparency and avoidance of con- to be re-imported to the developed world as residues on flict of interest. However, a review of partner- foods. This tidy concept has captured the public’s ships with pesticide companies under World imagination, but double standards and inconsistencies
POCANTICO PAPER NO 5 15 CONDITIONS OF PESTICIDE USE IN DEVELOPING COUNTRIES
The idea of the “Circle of Poison” usually refers to pes- •Absence of a separate storage facility clothes used ticides that have been banned in the industrial North, in spraying pesticides but are still used in the Global South. In fact, relatively •Absence of disposal facilities for either large obso- few pesticides are actually banned; many more are lete stocks or for small containers restricted with respect to uses. Use can be restricted to •Reuse of pesticide containers for storage of food particular applicators, or such restrictions can refer to and water conditions of use. Monitoring of actual field conditions •A lack of access to health care services in developing countries universally reveals serious •Poor literacy levels, making complex labeling obstacles to protecting human health and the environ- instructions meaningless ment from significant pesticide damage, including •Poor quality (leaking) application equipment, some or all of the following: and lack of equipment maintenance •A lack of protective clothing and face masks for There may be formal legal requirements for the provi- pesticide applicators. sion of storage facilities, access to health care, etc., •A lack of water for washing after spraying, or for before certain restricted pesticides can be sold—but laundering work clothes. such requirements tend not to be heeded by those actu- •Absence of a separate storage facility for pesticides ally responsible for marketing pesticides to users. are much broader and much more damaging than the pesticides is also reflected in policies of the World “Circle of Poison” concept conveys. Bank, the Organization for Economic Cooperation and Whenever a pesticide is restricted or banned for Development (OECD), and the FAO. actual or potential health or environmental problems in a particular locality, data exist to demonstrate reasons DISPOSAL OF OBSOLETE STOCKS for the ban. At the very least, it must be considered eth- Obsolete stocks of pesticides are a growing internation- ically questionable to continue marketing those chemi- al environmental health problem. The FAO has docu- cals in countries that lack the ability to effectively regu- mented more than 47,000 tons of obsolete pesticide late or enforce restrictions on their use, or that have not stocks in 53 countries, but this is far from a complete yet performed the local tests likely to result in a ban. inventory; global estimates suggest that the actual Nonetheless, companies routinely and aggressively mar- amount of obsolete stocks may be closer to half a mil- ket chemicals that they know have serious human health lion tons. It is likely that nearly every developing coun- consequences to people in the developing world. (See try has obsolete stocks of pesticides, and clean-up costs box above.) The high proportion of women and children range from $2,500 to $5,000 per ton, depending on in the agricultural workforce in the developing world, volume and circumstances. who often perform such tasks as spraying pesticides or Pesticides become obsolete if their use is banned picking crops soon after they have been sprayed, brings while the product is kept in store, or if a product has additional concerns in this regard. deteriorated due to poor storage. In some cases pesti- In response to widespread public concern about cides were imported (frequently under “foreign aid” these practices, many companies have embarked on programs) to combat a particular pest emergency that “Safe-Use” programs designed to train growers in never came to pass. Some stockpiles have been accu- developing countries on how to handle and apply these mulating for as long as 40 years. Frequently these pesticides. There is a substantial body of literature stocks are not stored securely and may cause environ- showing that Safe-Use training does not provide work- mental contamination and human health problems. ers with adequate protection. One industry-funded Regardless of how these obsolete stocks come report even stated that any pesticide manufacturer that into being, governments generally feel that companies cannot guarantee the safe handling and use of its toxic- themselves should bear a significant share of the dis- ity Class I products should withdraw these products posal responsibility for them—particularly if supplying from the market. A particular concern for high-toxicity
16 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY companies irresponsibly pushed to have them import- clearly or specifically identified in shipping manifests. ed in the first place. For example, company representa- Many products are shipped unlabeled or are labeled tives or others that stand to gain financially may over- incorrectly. It is likely that a significant percentage of estimate the amount of a pesticide needed for a partic- these products would qualify as “hazardous materials” ular project or pest outbreak; sometimes, poorly-super- and thus would be required under federal regulations to vised company agents will suggest chemicals that are specifically name the product in shipping documents. not technically appropriate for a given agricultural proj- In addition, the Hazardous Material Regulations of the ect. There are also cases where companies have explicit- Code of Federal Regulations set out specific require- ly used donor projects or loans to off-load stocks that ments for interstate shipping of chemicals, covering are about to be banned in a developed country. Yet issues such as appropriate classification, packaging, companies have adamantly refused to contribute signif- labeling, and training for persons who transport the icantly to the clean up and disposal of their stocks. Of materials or prepare them for shipment. A significant the $30 million that has been spent worldwide in the percentage of the 1.5 billion pounds of pesticides last 12 years on the disposal of obsolete pesticide stocks, exported during the 1996–2000 period were identified the pesticide industry has contributed less than one only as “weed killing compound” or “pesticide” rather percent of cleanup costs. than by specific names. While there is currently no legal mechanism to Federal regulations also state the type and ade- require companies to take responsibility for their role in quacy of emergency responses that must accompany handling obsolete stocks, there is growing public pres- any hazardous material shipment. A lack of adequate sure for companies to live up to their own claims of information increases the likelihood of massive dam- “cradle-to-grave” product stewardship and contribute ages and liabilities associated with a spill or other emer- to clean-up and disposal. A continuing refusal to accept gency. Because the U.S. lacks a centralized database for responsibility and to play a meaningful role in reducing tracking international pesticide shipments, it is difficult the problem creates a reputational risk and demon- to fully assess how often these regulations are consis- strates a failure to meet the principles of corporate envi- tently met. In any event, shipping unlabeled hazardous ronmental management systems, provisions of the FAO substances either out of the country or interstate is ille- Code of Conduct, program guidelines for Responsible gal. Irregularities in or an absence of labeling can raise Care, and other relevant standards. the costs of disaster response, thus increasing exposure to liabilities, and poor labeling clearly indicates poor COMPLIANCE WITH EXPORT implementation of environmental management and LABELING AND SHIPPING quality control systems. The extent of problems, including unknowing violation of the Federal Arguing that it is unfair for competitors to have ready Insecticide, Fungicide and Rodenticide Act (FIFRA) access to details regarding their production and trade, and local law resulting from import of products pesticide companies have sought to have export label- incompletely or incorrectly labeled, has not been inves- ing and shipping notification requirements considered tigated. That these commodities are poisonous in every “confidential business information,” not to be shared case—the question only being the degree to which with the public. This presumption prevails at the glob- they are poisonous—should serve as adequate justifica- al level. Even in the case of international treaties tion for full disclosure of production and trade figures. intended to reduce or eliminate trade in specific chem- It would be reasonable to question corporate managers icals, the industry has insisted that it will release only that tolerate or encourage lower standards of disclosure. limited information regarding production and trade of the target chemicals. Huge quantities of chemicals are shipped inter- OTHER CONCERNS state and internationally without adequate labeling In addition to the issues raised above, several other con- and/or with product documentation that is out of com- cerns were touched upon at the Pocantico meeting. pliance with legal requirements. It is estimated that, Participants cited informal reports suggesting that the from 1992 to 2000, approximately 3.8 billion pounds bribing of foreign officials in order to win supply con- of pesticides—63 percent of total exports—were not tracts, ease import licensing, or to evade health and
POCANTICO PAPER NO 5 17 environmental regulations is still widespread. A U.S. ple, a coalition of NGOs successfully lobbied Home statute, the Foreign Corrupt Practices Act, prohibits Depot to halt sales of wood from endangered rain- bribing foreign officials. For obvious reasons the extent forests, and to give preference to sustainably harvested of this problem is not well documented, and therefore wood products. Treated lumber manufacturers and little attempt was made at the meeting to elucidate ille- retailers have also been persuaded by public interest gal business activities as a risk under “quality of man- activists to stop stocking lumber treated with chromat- agement.” Meeting attendees knowledgeable about the ed copper arsenic and other arsenic compounds. These chemical trade also suggested that pesticide smuggling campaigns have involved a combination of “street the- is big business; whether or to what extent there is cor- ater” tactics at Home Depot stores, media, shareholder porate complicity in this smuggling is unknown. activism, and dialogue with senior management—but Another risk mentioned is the trend toward also the provision and promotion of viable alternatives. increasing conflict of interest disclosure requirements “Fairness” is another area of strategic impact. in peer-reviewed journals regarding sources of research Public opinion in industrial countries is increasingly funding, which could affect scientists who, concerned swayed by arguments that companies should hold them- for their own reputations, may prefer not to participate selves to the same health, safety, and ethical standards in research programs funded by pesticide companies. abroad that they observe at home. A law pending in the Netherlands, for example, would require Dutch corpora- tions to apply prevailing domestic standards to operations REPUTATION MANAGEMENT worldwide. Arguing that access to global markets entails a global sense of responsibility, activists are increasingly All of the concerns and behaviors described in the above urging companies to fully embrace the normative stan- section would risk damaging name brands and corporate dards” hammered out in international fora, particularly reputations. The idea of reputational risk is difficult to those convened under United Nations auspices. define but is becoming increasingly accepted as an The pesticide industry, and food and fiber com- important business issue. This risk has been more obvi- panies further down the production chain, may be ous for consumer product companies: campaigns against quite vulnerable to issues of reputational risk. Many of Nestle and other corporations have shown that concerted the issues described in the above section—as well as public education and media outreach efforts can have a more common concerns about lobbying activities, lasting impact on a company’s reputation. This, in turn, labor relations, and environmental damages—may can affect a corporation’s market share, damage investor cause profound reputational risks for companies that relations, and hinder its ability to move into new business define their missions narrowly. areas and attract quality employees. Of course, corporate image and reputation are important for all companies, not just those that have retail product brands. This can be RISKS FROM seen from the fact that several of the major pesticide pro- LONG-TERM UNCERTAINTIES ducers have recently attempted to “reposition” themselves as “life science” companies—a generic but appealing Participants at the Pocantico meeting examined many term, behind which it is more difficult to perceive an issues of pesticide manufacture and use that should explicit association with chemical pesticides or genetical- concern investors, even if the immediate financial ly engineered crops. impacts are unclear. These issues are being raised with Reputational risk is an area where NGOs and investors even as our collective understanding changes public interest activists have had substantial impact. of what fiduciary responsibility actually entails. Establishing reputational risks requires working to doc- ument and dramatize the bad actions of particular GAPS IN SAFETY TESTING companies to the public, as well as to document and communicate bad press and on-going public concerns The approval and registration of pesticides in the to company managers and investors. NGOs have used United States is managed primarily under the Federal this strategy very effectively in other sectors. For exam- Insecticide, Fungicide and Rodenticide Act (FIFRA).
18 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY FIFRA, which sets requirements for the testing, regis- assessment. Pesticides that were registered tration, use classification, and labeling of pesticides, before 1972, when regulations were significant- has been amended many times since it was first passed ly less rigorous, were supposed to be re-regis- tered under the new guidelines. However, that in 1947; it is now administered by the Environmental process has been extremely slow, and conse- Protection Agency (EPA). With EPA oversight, many quently many pesticides still on the market have investors and consumers believe that pesticides on the not been adequately re-tested for long-term market are safe, or at least that their risks are well environmental and human health risks. known and managed. But this is not necessarily true. •Testing of chemicals is not actually performed FIFRA mandates that registration decisions be made by the EPA. In the interests of “commercial using pseudoscientific risk/benefit analyses that give security,” companies perform those tests in- greater weight to benefits and costs to specific manu- house, and submit their results to the EPA for facturers and users of pesticides than those that accrue review. This system creates a great deal of leeway for companies to choose which results and to the public. Not surprisingly considering both the which data sets to submit. This means that the financial stakes involved and the costs of following and EPA may be approving and registering pesti- effectively participating in FIFRA processes, pesticide cides on incomplete or possibly even misleading testing and regulatory decisions are influenced more information, sending to market pesticides that easily and often pesticide manufacturers and users than may in fact pose significant health risks, and cre- by representatives of consumer organizations, exposed ating large liabilities for the companies involved. Without a more stringent system of workers, vulnerable populations including children and third-party review and testing, the risks posed health affected groups, health specialists or wildlife and by pesticides will not be well known and man- environmental groups (for example). aged. It is worth noting that in-house testing of Pesticide testing requirements are extremely asbestos (and tobacco) failed to effectively pre- complicated and technically arcane, and subject to dif- vent product-related injuries—or to prevent ferent interpretations of adequacy and veracity. The lawsuits resulting from these injuries. ever growing list of products once judged beneficial •Pesticides produced only for export are not and harmless enough to be registered under FIFRA and required to go through the safety testing required for U.S. registration. However, these later discovered to have serious health and/or environ- chemicals are still manufactured and transport- mental consequences begins with DDT. Furthermore, ed within the U.S., creating the same risks of the statute requires comparing health and environment exposure and contamination. risks, to the aggregate financial benefits from pesticide use. Not only is the former more difficult to quantify than the latter, the resulting figures, like apples and DISASTER RESPONSE, DISPOSAL, oranges, and not strictly comparable. Public interests AND CLEAN UP COSTS activists suggest that this approach creates a strong bias By far the best-known case of widespread harm caused toward product approval, even in the face of consider- by pesticide manufacture is the case of the 1984 explo- able scientific uncertainty, and propose the “precau- sion and release of toxic gas from Union Carbide’s tionary principle” as a preferable conceptual framework plant in Bhopal, India. While Union Carbide settled for FIFRA (and other laws with important environ- with the government of India, the case nonetheless has mental and health implications). dragged on in various courts since then. The Bhopal incident did lead to changes in how agrochemical firms In addition to concerns over the conceptual viewed their liability—most companies moved to iso- framework underpinning the registration process, there late, to the maximum extent possible, the legal liability are some specific gaps and structural concerns that for particular manufacturing plants or subsidiaries weaken the safety testing system: from the parent corporation as a whole. • Although in 1972 FIFRA was amended to The body of law regarding this restricting of require all pesticides used in the U.S. to be legal liability is quickly evolving. Disposal costs, proce- assessed for long-term environmental and human health impacts, many pesticides in pro- dures, and liabilities are also changing rapidly. It has duction have not gone through that level of become much more difficult for industrialized nations
POCANTICO PAPER NO 5 19 to export hazardous wastes to the developing world. produce or store large quantities of pesticides are Just as firms in other industries have had to shoulder exposed to additional risks (and costs) associated with major clean up costs for oil spills and other disasters, it the potential for terrorist use of these materials. should be expected that pesticide companies would Lawmakers are making their presence known in this also be liable for such costs in the event of a major spill. field: a bill pending in the Maryland State Legislature Finally, it must be acknowledged that national would require background checks on anyone seeking security concerns now extend to the possibility of access to restricted use pesticides. Other risks—termed attacks on chemical industry production facilities. “Unwelcome Surprises”—are described in the box Unfortunate and unfair as this may be, companies that below.
UNWELCOME SURPRISES
In addition to known data gaps, researchers continue to •A report published by the World Resources bring forward unexpected data about pesticides. These Institute raised the possibility that pesticide expo- revelations serve as a reminder that important questions sures, by reducing immune function in already often go unasked before new chemicals are introduced weakened populations in developing countries, into the environment and the food chain. In the last might be contributing to excessively high death decade, such revelations have included: rates from infectious diseases in these regions. • The emergence of a previously unexamined cate- •It has been discovered that pesticide overuse is gory of risk—hormone disruption—for which contributing significantly to an international few pesticides have been tested. This emerging decline in the population of insects, birds, and body of data has sent shock waves throughout the other animals that perform pollination functions, international environmental and policy commu- frogs and other amphibians, and other animals. nities, in large part because effects have been The economic value of animal pollination to noted at exposure levels as low as parts per bil- world agriculture has been estimated to be $200 lion. In addition to pointing to the need for more billion per year. One recent effort to assess the research regarding such effects, these findings economic significance of this newly identified highlight the weakness of relying upon cancer as problem concluded, “serious problems for world the main endpoint in risk assessments. food supply, security, and trade could be in the offing if current declines in pollinator abundance, •Research in recent years, including a ground- diversity, and availability are not reversed.” breaking study from the National Research Council, has demonstrated that childhood expo- Many pesticide risks may remain incompletely sures to pesticides is associated with increased described or still unrecognized. Certainly there are cancer risk. With these findings came the realiza- many examples from other products of risks that were tion that safety thresholds for childhood expo- underestimated or initially not observed, indicating that sures had never been evaluated as part of EPA’s precautionary approaches are a far more appropriate and registration process. For decades, then, pesticide serviceable basis for pesticide regulation than the products flooded onto the national and interna- risk/benefit framework underpinning most national sys- tional markets whose effects on this particularly tems and trade agreements. susceptible population were unknown.
20 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY REACHING THE MARKETS
The group that gathered at the Pocantico Conference •End direct and indirect public subsidies to the Center to consider the risks described above also pesticide industry and increase public support addressed the question of whether these risks are ade- for sustainable alternatives. quately acknowledged and accounted for in financial •End public agencies’ partnerships with pesticide markets. The sense of the group was that improved companies wherever these partnerships create a communication regarding risks is badly needed. clear conflict of interest or violate the codes of the public agency in question. Continuing lack of awareness in the finance communi- ty with respect to these risks allows corporations to pur- •Use the pesticide industry as an important “test case” to enhance current efforts to improve cor- sue “business as usual,” including routinely marketing porate disclosure, governance, accountability, extraordinarily toxic chemicals and taking advantage of and ethics. under-regulated developing country environments. While ongoing regulatory changes and public actions Any attempt to use financial leverage in the ways can help to curtail some of this irresponsible behavior, described above must be multi-faceted and reach a wide it is not sufficient to fulfill the demand for improved variety of audiences. Different strategies are required to corporate accountability and disclosure now growing reach these different aims, and to bring the different among investors. To protect investors (and public and constituencies into stronger alignment. In considering environmental health), and to create market incentives what strategies would be most effective, the group for developing sustainable alternatives such as IPM and looked at several key actors in the financial markets. organic agriculture, it is essential that financial markets accurately account for the true costs and risks of pesti- THE SOCIALLY RESPONSIBLE cides. Improved communication of such information INVESTMENT COMMUNITY will also fill an important gap in the materials available The research and investment companies involved in the to the public regarding pesticides. SRI movement have helped lead the way in making In order to achieve more accurate accounting of financial markets account for the environmental and these risks and costs, participants strongly recommend- social costs of different industries. Different SRI firms ed the following actions: use different strategies. These strategies include screen- •Document the true extent of the global risks and ing (choosing not to invest in companies that create liabilities associated with this industry, and seek environmental and social risk, or investing only in legal and financial accountability. those companies considered “best in class”); sharehold- •Increase the Socially Responsible Investment er activism (seeking to improve corporate behavior (SRI) community’s engagement with the pesti- through dialogue and resolutions); and community cide industry and related issues. development (investing in opportunities that support •Use the power of private and institutional communities and sustainable development). Although investment monies to move the agricultural sec- most SRI funds are not invested in pesticide compa- tor away from a financially risky and environ- nies, they are well positioned to play a lead role in mentally destructive over use or abuse of pesti- strategies involving shareholder activism, and in cides and toward more socially responsible, ben- eficial, and accountable industries and activities. improving the level of due diligence on pesticide com-
POCANTICO PAPER NO 5 21 panies. Other SRI investors, pursuing a “best in class” fund managers to buy or sell the stock. How an ana- approach, can help strengthen support for international lyst perceives and values a company can affect how its codes of conduct and other mechanisms that distinguish stock is treated on the market. While analysts work in pro-active management from mere legal compliance. an information-rich environment, they often rely pri- marily on company-based sources and may not be PENSION FUNDS AND OTHER aware of broader contextual issues, or of the views of INSTITUTIONAL INVESTORS other stakeholders. Analysts with interests in long- term market forecasting would be particularly inter- Pension funds and other institutional investors are a ested in the kinds of materials and information pre- strong force in financial markets, commanding (for sented here. example) 30 percent of invested capital in the New York Stock Exchange. They represent concentrations of investor power, and thus are an easier target for public THE SECURITIES interest activists than are individual investors. Many EXCHANGE COMMISSION pension funds are quite sensitive to concerns not con- The Securities Exchange Commission (SEC) oversees sidered strictly financial. For example, public pension the U.S. stock markets and regulates company-report- funds in some states have a mandate to invest in ways ing requirements. There is an ongoing effort encourag- that benefit the state, and might view support for com- ing the SEC to improve enforcement of existing report- panies producing products that degrade groundwater ing requirements on social and environmental issues, and surface water quality (for example) as inimical to and to expand and enhance these requirements. state interests. Foundations, particularly those with Working with the SEC could be important both in programs in health, environment, or rural develop- improving data disclosure and reporting across the ment, should be willing to vote their proxies or invest industry, and in pursuing omissions or misleading in ways that support their program goals. Universities statements by particular companies. The impact of can come under pressure from the student body to use impending regulatory changes in Europe may be con- their endowments and consumer power in socially sidered as material business issues, subject therefore to responsible ways (as has been demonstrated both in the disclosure. Recent events make it more likely that the fight against apartheid in South Africa, and more SEC will have a stronger role in monitoring the corpo- recently in anti-sweatshop campaigns). Given these rate sector by adopting broader definitions and stan- other interests, institutional investors may become dards of disclosure. allies for shareholder activism, and potentially for pur- suing divestment. PUBLIC AGENCIES Public funding from governments and international SHAREHOLDER ACTIVISTS bodies such as the World Bank continues indirectly to In addition to SRI and institutional funds, there are support the pesticide industry around the world. This other types of shareholder activists that could impact support can be in the form of tax-breaks, subsidies, investment patterns in the pesticide industry. There is funding for “safe-use” programs, or procurement of presently a great deal of shareholder activism on issues products through foreign aid programs. International of good corporate governance, including improved agencies such as the UN and the World Bank have reporting, which would overlap with efforts to more begun to establish “public-private partnerships” with accurately reflect the disclosure concerns discussed here. these companies, partnerships that provide positive public relations benefits to the companies, and some- ANALYSTS times help to open new markets for them. However, governments and public agencies are accountable to the Financial analysts play an essential role in the financial public, and are required to act in the public interest. markets, researching and valuing companies according Multiple opportunities exist to work with governments to various models, and providing recommendations to and public agencies to re-direct these monies to more
22 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY sustainable alternatives. For example, improved imple- INSURERS, BOND mentation of World Bank Safeguard Policy 4.09, which ANALYSTS, AND BANKS requires the use of farmer-based integrated pest man- Insurers may prove to be an interesting audience for agement strategies in the pest management component pesticide concerns in two ways: as major investors and of any agriculture loan, is an important vehicle by as underwriters of disaster insurance to specific compa- which a public agency could assist in shifting this sec- nies. Indeed, the underwriting industry estimates the tor away from its current costly and damaging over cost of complying with environmental cleanup costs reliance on pesticides. and legal fees to be in excess of $100 billion; insurance companies obviously have a strong interest in reducing CONSUMERS such costs and fees. Bond analysts are at first glance an Consumers are important actors in corporate account- unlikely target audience. But several participants sug- ability efforts. Working with consumers is essential to gested that analysis done for bond markets is frequent- raise social awareness around the health and environ- ly both more thorough and more long-term in its ori- mental impacts of pesticide use. Consumers obtain entation, which may suggest a direct interest in improv- investment advice and use financial service products; ing data disclosure requirements for companies floating use foodstuffs and fibers that may be contaminated commercial paper. Companies planning major new ini- with pesticides; and may purchase other products sold tiatives are likely to have a close relationship with one by the same companies (e.g., Bayer Aspirin, DuPont or more investment banks, so these banks may be an cookware). important future target.
POCANTICO PAPER NO 5 23 2001 TOP SEVEN AGROCHEMICAL COMPANIES
The gap in sales between the world’s seven largest largest decrease of the top seven companies in 2001. agrochemical companies has narrowed, according to The company lost money in Europe as a result of 2001 sales reports published in Agrow: World Crop Brazilian currency exchanges and Argentinean credit Protection News. Swiss-based Syngenta continued to policies, and because of reduced crop acreage in the maintain highest revenues, with nearly $5.4 billion in United States. Syngenta seed sales dropped overall by pesticide and seed sales. However, Bayer’s purchase of 2.1 percent to $938 million. However, sales of geneti- the French company Aventis CropScience (formerly cally engineered seed continued to increase and Rhone-Poulenc and Hoechst/AgrEvo) will increase totaled 17 percent of seed sales. 2002 sales of the German-headquartered company to The U.S.-based Monsanto suffered overall 2001 rev- over $6 billion. enue losses of 3.3 percent, while sales of its flagship BASF, another German multinational, reported the herbicide, Roundup (glyphosate), dropped by 8 per- highest revenue increase of 39.4 percent, primarily the cent to $2.4 billion. Sales of Roundup decreased most result of its 2000 acquisition of Cyanamid, a U.S.- significantly in Latin America and Asia. based agrochemical company. In 2001, BASF sales increased in North America by 65 percent, in Europe TOP SEVEN AGROCHEMICAL by 45 percent and in Latin America by 6.5 percent. COMPANIES 2001 SALES Sales of BASF herbicides increased by 47.3 percent, fungicides increased by 27.5 percent and insecticide and other pesticides increased by 53.5 percent. Syngenta (Swiss) $5.385 -8.5% U.S.-based Dow AgroSciences also reported a signifi- cant increase in sales (11 percent), 9 percent of which Aventis CropScience $3.842 +5.0% is attributed to its recent purchase of Rohm and Haas, (French) another American agrochemical firm. Monsanto $3.755 -3.3% Bayer and Aventis CropScience both reported steady (American) increases in sales of herbicides and insecticides in BASF $3.105 +39.4% European, Latin American, and North American mar- (German) kets. Bayer’s top selling insecticides, Confidor, Dow AgroSciences $2.612 +11.3% Gaucho, Admire, and Provado (all based on imidaclo- (American) prid), increased in sales by 5 percent to $540 million. Sales of Bayer’s fungicide, Folicur/Raxil (tebuconazole) Bayer $2.418 +7.4% also increased by 5 percent to $240 million. (German) Sales of Aventis’ herbicides increased by 8.1 percent, DuPont $1.917 -4.6% insecticides increased by 7.5 percent, and fungicide (American) stayed at 2000 levels. Aventis’ top four pesticides— herbicides, Hussar (iodosulfuron-methyl sodium), Sources: Agrow: World Crop Protection News, March 1, Balance (isoxaflutole) and Liberty/Basta (glufosinate- 2002, March 15, 2002, March 29, 2002 and June 28, ammonium), and insecticide, Regent (fipronil)— 2002. accounted for 47 percent of its 2001 agrochemical Global Pesticide Campaigner, Vol. 12, Number 2, sales. August 2002, Pesticide Action Network North Despite maintaining the largest overall sales, Syngenta America, San Francisco, CA pg. 26. (formerly Novartis and AstraZeneca) suffered the
24 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY STRATEGIES AND OPPORTUNITIES
Given the risks and liabilities outlined above, and the science solutions for agriculture and pest management potential target audiences, the group identified several in the United States.” Its member companies “produce, immediate opportunities. sell and distribute virtually all the crop protection and biotechnology products used by American farmers.” CropLife International will roll out a new, aggressively RESEARCH AND ANALYSIS positive public relations initiative, “Promoting Capacity Building for Sustainable Agriculture,” at the Meeting participants agreed that a first and essential Rio+10 World Summit on Sustainable Development. step is to improve understanding of the major pesticide Researching individual companies and their manufacturers worldwide, manufacturers that current- industry associations helps to identify areas of engage- ly control upwards of 80 percent of the global pesticide ment. At the same time, research remains to be done to trade. (See box on previous page.) Several types of better understand the risks and liabilities described research, for several different purposes, are needed, above, and their potential impact on business valua- including: tions. This type of research could include: •A thorough assessment of their finances and •Case studies regarding other products once in financial accounting procedures; common use, later withdrawn due to health •A thorough assessment of their product lines, concerns, which led to massive industry liabili- past and current behaviors, and potential liabil- ties. The best known examples are the asbestos ities; cases. •Information on their corporate structure, •Studies of legal trends related to liability. including relationships to other companies, •Sector-specific research on the financial implica- developing world subsidiaries, board members, tions of environmental performance. An excel- conflict of interest policies, public relations pro- lent example of such work is the World file, etc., as well as information on the internal Resources Institute report on the pulp and paper corporate culture; industry. • The status of various mergers and divestitures, Credible research is required for continued work on which has rapidly changed the face of the pesti- cide industry in recent years. corporate accountability. Results must be prepared in formats most useful to target audiences, and thus dif- The “Big Seven,” along with other manufacturers, have ferent products may be needed to target the financial made considerable investments of staff time and money services community, the media, etc. in shaping the strategies and targets of CropLife International, the pesticide and agricultural biotechnol- ogy industry association. CropLife International was ADVANCING SOCIAL REPORTING formally launched in June 2001 (the industry associa- tion was formerly known as the Global Crop Protection The Securities and Exchange Commission requires Federation). Its U.S. affiliate, CropLife America, companies to disclose information judged material to describes its mission as representing the “developers, its business concerns, so that potential and current manufacturers, formulators, and distributors of plant investors have an accurate picture of the firm’s health.
POCANTICO PAPER NO 5 25 The SEC has not, and probably cannot, provide a without these data. For example, information about quantitative (numerical) definition of materiality; cur- exports of pesticides is extremely difficult to pin down: rent regulations require disclosure of “information that aside from the inadequate labeling issues described ear- a reasonable investor would be likely to consider lier, some pesticide companies even withhold their important in the context of all the information avail- names from shipping manifests. able.” The SEC goes on to say that, “facts can be con- sidered material if they bear on the ethics of manage- DISCUSSION OF RISKS ment, its integrity, or its law compliance record, irre- AND UNCERTAINTIES spective of the sums involved.” The requirement Many issues regarding pesticide industry practices, as includes forward-looking statements, market uncer- well as pesticide market and regulatory trends, are not tainties, and trends that may affect financial perform- adequately or accurately described within company ance in the future. reports. To take one example, in its 2001 SEC filing, However, many companies fall short of fulfilling Syngenta stated, “We are subject to stringent environ- these reporting requirements. Even when adequacy of mental and health and safety laws, regulations and stan- compliance is more precisely defined, company report- dards which result in costs related to compliance and ing is often found to be lacking. For example, the SEC remediation efforts that may adversely affect our results has stated that companies must report on any pending of operations and financial condition.” But Syngenta legal proceeding, specifically, “[e]nvironmentally relat- made no mention of the new EU Directive on ed proceedings must be disclosed if: they are material; Environmental Liability, although it had filed a com- they involve a claim for more than 10 percent of cur- ment about the proposal when it was being developed; rent assets; or they involved the government and poten- nor did it discuss specific changes in regulatory trends tial monetary sanctions greater than $100,000.” elsewhere in the world. The Syngenta report did take Studies have found that companies often fail to report note of consumer concerns about biotechnology in on legal proceedings fitting this definition. Superfund agriculture, but made no mention of growing con- liabilities must also be disclosed, but frequently are not. sumer concerns about pesticide residues in food. Improving data disclosure across the board is Controversies surrounding specific products are essential for improving the performance of financial rarely reported in company literature. Specific exam- markets and creating appropriate incentives for strong ples of this phenomenon include controversies related environmental management. Information disclosure to molinate, atrazine, and paraquat. Syngenta acknowl- has been shown to improve environmental manage- edged the risk of product liability lawsuits in its 2001 ment, and companies practicing improved disclosure annual report, but concluded by describing its environ- are less vulnerable to adverse market impacts when out- mental management system as follows: side information becomes available. Event studies show We designed our environmental management that stock market prices do react to environmental program with the aim of ensuring that our prod- news, confirming that investors do consider environ- ucts and their manufacture pose minimal risks to mental and social information relevant. the environment and humans. The crop protec- The pesticide industry in particular needs to tion industry is subject to environmental risks in improve its data disclosure, particularly in two areas: three main areas: manufacturing, distribution and operating data and discussion of risks and uncertainties. use of product. We aim to minimize or eliminate our environmental risks by using appropriate equipment, adopting “best industry practice” and OPERATING DATA providing grower training and education. The Pesticide companies frequently do not disclose accurate entire chain of business activities, from research and development to end use, operates according data regarding their products, export practices, sales in to the principles of product stewardship. We are developing countries, location of obsolete stocks, and committed voluntarily to the responsible and eth- production-related pollution issues. Activists, investors, ical management of our products from invention and other stakeholders cannot adequately assess a cor- through to ultimate use. poration’s environmental management or risk exposure
26 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY This stance is reflected in the literature of most compa- equate environmental disclosure. Enforcement activity nies, and that of CropLife International. Agronomists, in the environmental arena has been weakest with health professionals, and public interest activists ask regard to MD&A disclosure of prospective issues and that such statements be evaluated against some of the trends; WRI notes that “without such enforcement patterns of behavior noted above, such as promoting action, companies’ disclosure practices or compliance use of WHO Class 1 products in developing countries; with existing rules are unlikely to improve.” manipulating procedures and rules to speed access to Another important effort has been the markets; providing financial incentives to decision- Environmental Fiduciary project of The Rose makers to over-ride health and environmental con- Foundation for Communities and the Environment. cerns; and refusing to assist in the disposal of obsolete This project makes the financial case for incorporating pesticide stocks. In sum, critics of the pesticide indus- environmental factors into portfolio management poli- try suggest there is a major gap between stated corpo- cies, and urges “institutional investors such as pension rate environmental management objectives and actual funds, foundations, and charitable trusts...(to) encour- field practices. Although the SEC has been reluctant to age good environmental performance in equities they enforce environmental risk reporting requirements, it is own through specific portfolio management policies.” likely that a “reasonable investor” would be interested Socially responsible investor groups are also pushing in information about the perceived gap between rheto- the SEC on disclosure requirements. Amy Domini ric and actual business practices. reports that Domini Social Investments has asked the SEC to require that all mutual funds publish their SEC INITIATIVES proxy voting policies and votes. There are several coalitions working to improve SEC In conjunction with such efforts, the group at guidelines on social and environmental risk disclosure, Pocantico found two approaches particularly relevant and to improve enforcement of regulations pertaining to for advancing social reporting: these disclosure requirements. The Corporate Sunshine •Filing challenges and complaints with the SEC Working Group (CSWG), a coalition of more than 60 regarding specific omissions or misleading state- organizations, is urging the SEC to hold corporations ments in a particular company’s filings. The accountable for reporting significant environmental SEC imposes specific requirements on the accu- expenses. The Social Investment Forum (the trade asso- racy of communications associated with proxy fights, including information that a company ciation of socially concerned investors) is also asking for may publish in response to a proxy. Increasing SEC action on these compliance issues. the number and specificity of challenges on The CSWG notes that an EPA study of corpo- these issues helps to build demand and momen- rate compliance with the SEC’s Regulation S-K finan- tum for change within the SEC. Such challenges cial reporting requirements, found that 74 percent of can also be used in public information cam- publicly traded U.S. corporations have violated the paigns to bring attention to issues of corporate misrepresentation. environmental financial debt accounting regulations. Item 303 of Regulation S-K requires a “Management •Requesting improved guidelines for social and environmental reporting. Reiterating such Discussion and Analysis (MD&A) in which companies requests alongside specific challenges would are required to disclose known future uncertainties and build public pressure on the SEC to improve trends that may materially affect financial perform- reporting requirements and compliance moni- ance.” World Resources Institute (WRI) has also paid toring. careful attention to the SEC’s Administrative Proceedings, noting that “of the more than 5000 Administrative Proceedings initiated by the SEC over INVESTOR EDUCATION the last twenty-five years, only three are based on insuf- ON DATA DISCLOSURE ficient disclosure of environmental risks or liabilities.” In addition to those at the SEC, there are ample oppor- In that same 25-year period, the SEC brought only one tunities to work with and educate investors directly Civil Action against a company on the grounds of inad- about data disclosure problems. Several strategies were
POCANTICO PAPER NO 5 27 discussed along these lines, including the preparation of companies to implement similar measures was suggest- “Addenda to the Annual Report.” These would detail ed by participants at Pocantico. This strategy could be for circulation to investors particular areas where the particularly conducive to shareholder activism, and is company has provided incomplete or misleading infor- appealing to SRI funds that hold shares in food and mation. Working with shareholders to file resolutions fiber companies but not in agrochemical companies. requesting that specific reports and data be disclosed While attention to biotechnology was beyond the scope can also create pressure on companies, and lead to of work for the group at Pocantico, several participants opportunities for dialogue with management on felt it imperative that concerns raised around supply improving disclosure. Again, SRI firms are in the van- chain issues also focus on issues related to the intro- guard of this effort. duction and marketing of genetically engineered crops. Most major pesticide companies make questionable claims promote genetically-engineered (GE) crops as a SUPPLY CHAIN MANAGEMENT— means of reducing pesticide use. Furthermore, because INVESTOR AND CONSUMER ACTIVISM GE crops present multiple environmental and ethical concerns, and serve to detract support from, and other- Although pesticide companies may not be particularly wise undermine farmer-centered IPM, organic and sus- vulnerable to consumer pressures, their downstream tainable agriculture, and broader efforts to ensure food customers are. As described in the section on Market security. Thus participants noted that agricultural pes- Trends, major food and product retailers are moving ticide-related initiatives must also deal with GE issues. toward tighter management of their supply chains so as to reduce pesticide contamination in their purchasing. This is part of a larger trend toward supply-chain man- INCREASING FUNDING agement as a form of corporate responsibility. The TO ALTERNATIVES Global Environmental Management Initiative, a con- sortium of 37 corporations committed to improving Working with food and fiber companies on supply- environmental management, recently published a chain management nicely complements the goal of primer titled, “New Paths to Business Value: Strategic increasing funding to more sustainable alternatives, Sourcing—Environment, Health and Safety.” This including farmer-centered IPM and organic agricul- primer states, “today, most goods and services [that ture. As consumers drive food and fiber companies to companies] procure have an impact on the environ- use and produce products according to these principles ment and/or the health and safety of your employees, and standards, farmers will have an increased econom- customers or surrounding communities. These impacts ic incentive to pursue such alternatives. It is hoped that can affect the total cost of goods and services, the qual- these companies may provide, or expand access to, ity of your products, your ability to conduct business training and support for IPM and organic agriculture. and the reputation of your company. Greater awareness The group looked at several ways to increase public and of these impacts can increase the business value of your private funding to promote farmer-centered IPM and procurement decisions.” Kodak, Volvo, Ford, Proctor organic agriculture: & Gamble, Toyota, Texas Instruments, and many other •Pesticide companies actively solicit public capi- firms have pursued better supply-chain management, tal (through bilateral aid programs, multilateral working with suppliers to improve corporate safety and development banks, or Department of environmental performance and/or to support “design Agriculture programs) in support of their “Safe- for environment” production goals. Use” and so-called IPM training programs. As mentioned earlier, these programs can actually Given the trend towards supply-chain manage- increase pesticide use, introduce small farmers ment, and precedents set by Campbell’s, Unilever, the to pesticides they cannot afford to use properly, U.K. Co-op Group, Fairtrade Label Organization and and reinforce a “chemical-centered” view of agri- others with respect to pesticides, prioritizing work with culture. Chemical centered IPM considers pesti- food retailers, food processors, and fiber and clothing cide use as the primary mode of crop protection, while ecologically-based IPM takes pest preven-
28 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY tion as the starting point. For instance, a toma- ity. One current focus is finding new legal avenues for to IPM program of AgroEvo in Brazil reduced foreign workers affected by pesticides. Efforts to find the number of pesticide applications from 40 to new legal strategies within the U.S. and Europe estab- 28, while Campbell’s Soup achieved a reduction lishing the right to bring suit over occurrences in the from 40 to 2 applications in Mexico by using an ecologically-based approach. In Brazil, farmers developing world may broaden the liability applied to have remained heavily dependent on AgroEvo the pesticide industry. Of course, it is also necessary to pesticides, and AgrEvo obviously has little increase public and investor awareness of such cases incentive to promote the type of IPM used in and their outcomes, so as to establish the public per- this example from Mexico. Re-directing these ception that these companies are responsible for the funds to farmer-centered, ecologically-based impact of their products. IPM training programs, such as those run by the Global IPM Facility and other financially disin- This is difficult and long-term work, but it is terested IPM programs, would promote better not without precedent: such litigation was essential in farm economics and reduced pesticide use. helping to curb tobacco industry abuses. Decades of lit- •Removing existing subsidies and tax-breaks that igation were key to forcing the tobacco industry into benefit pesticide companies and redirecting legal settlements and acceptance of new regulations. It them instead to organic and other least toxic, is possible that litigation will play a similar role in sustainable farmers and suppliers would help changing market perceptions and creating for corpora- change the incentive structure to promote sus- tions unwanted public exposure on pesticide issues. tainable agriculture. Public information is need- ed to bring pressure on governments and public agencies to reallocate their subsidies and fund- ing for research. One ongoing effort, Pesticide DE-CERTIFICATION CAMPAIGNS Action Network North America’s “World Bank Accountability Project,” attempts to push this Like other companies concerned about reputational largest of the multilateral development institu- risks, pesticide firms crave recognition by international tions to embrace organic and sustainable agri- bodies. As described earlier, there are a number of con- culture principles, better implement its own ventions and codes that apply to the pesticide industry, Safeguard Policy 4.09 on IPM, and clarify the nature of its partnerships with pesticide firms. including the FAO Code of Conduct and the industry- led Responsible Care program. Pesticide companies • As mentioned earlier, community development is one of the central tenets of socially responsible also have been actively pursuing partnerships with the investing. Working with SRI funds to identify World Bank and the United Nations. The participation investment opportunities that support farmer- of agrochemical companies in the UN’s Global centered IPM and organic agriculture would be Compact has been something of a public relations dis- a natural fit for many funds, providing much- aster for this global institution. Finally, several pesticide needed capital to those efforts. Efforts to broad- companies have been included in indices such as en investor awareness generally can start with the SRI community. FTSE4Good and the Dow Jones Sustainability Index that are intended to highlight “best-in-class” compa- nies, or firms with superior environmental manage- ment records. ADVANCING LEGAL PRECEDENT The Pocantico group agreed that efforts to research and document instances of corporate non- Clearly, establishing greater legal and financial liability compliance with the FAO Code of Conduct and stated for the negative health effects of pesticides is a very guidelines for public/private partnerships, or question- powerful way to change investors’ perceptions of risk able listings on certain indices purporting to advance with respect to this industry. In recent years the level of particular standards of sustainability, may alter public legal activism regarding pesticide misuse has intensi- perceptions of these companies. For example, all com- fied. Groups such as EarthJustice and the panies that are members of CropLife International or Environmental Working Group have ongoing efforts to its member associations are supposed to be in compli- bring suits against industry actors and in so doing ance with the FAO Code of Conduct, but it is not clear advance precedents that establish or expand legal liabil-
POCANTICO PAPER NO 5 29 that all of them are. Performing rigorous “audits” that invested in pesticide companies, there may be some document violations and cases of insufficient or inac- opportunity to work with the SRI community on this curate reporting and publicizing the results can help issue. In addition, it may be possible to align with other investors understand the degree to which companies institutional investors and shareholder activists to work have made compliance with the Code a routine part of with companies to request data disclosure or company corporate behavior; such audits can also shed light on action on the issue of obsolete pesticide stocks. Several management’s decision-making procedures. Applying participants in the meeting felt that how companies pressure to the UN to end pesticide companies’ partic- dealt with obsolete stocks was an issue fundamental to ipation in the Global Compact and other partnerships the pursuit of social justice, and should be used as a would both remove any inappropriate public relations basic litmus test of corporate responsibility. advantage that companies gain from participation and signal that there are well-founded concerns regarding those companies’ performance. The FTSE4Good and WORKER-ORIENTED STRATEGIES Dow Jones Sustainability Index includes companies with “best in class” records; but it excludes companies The Pocantico group did not fully explore the issue of that deal in what are clearly socially harmful products, working with organized labor, although participants such as weapons and tobacco. Some advocates believe affirmed the importance of developing worker-oriented there is no place for agrochemical companies in these strategies. The group noted several different labor con- indices, and attempts to get them de-listed would cer- stituencies (waged agricultural workers, workers in pes- tainly send a strong message regarding the perceived ticide production facilities, workers in food/fiber pro- social utility of pesticides in light of available alterna- cessing and retail sectors) with specific occupational tives. interests in pesticides, and also considered how best to work with labor pension funds. Unions have particular expertise and sophistication regarding these issues. SHAREHOLDER ACTIVISM Indeed, some of the strategies described above are ON OBSOLETE STOCKS already being used by the International Union of Foodworkers, and public interest advocates involved The sense of the meeting was that the issue of obsolete with pesticide issues should improve their understand- pesticide stocks lent itself well to engagement by share- ing of worker concerns and objectives. holders. Although most SRI funds are not likely to be
30 ACCOUNTABILITY IN THE PESTICIDE INDUSTRY CONCLUSION
The issue of corporate social responsibility has greater tions (“sustainable agriculture”) from those advancing a salience and attention today than at any point since the different, more ecologically-based and social-benefit ori- 1930s. Participants at the Pocantico conference felt ented development agenda. The strategies outlined here that the time is ripe for improving accountability in the will increase engagement with additional actors involved pesticide industry. Participants did not suggest that this with the industry. This broadening of tactical approach- meeting would mark the opening of a “new campaign.” es can be expected to create new opportunities and On the contrary, the sense of the group was that all the incentives for change within the industry and the mul- information presented could be incorporated into tiple arenas that constitute its operating environment. existing work on sustainable agriculture, corporate Finally, this report frequently uses the term responsibility and accountability, and multilateral insti- “investors.” Who are these investors? One participant tutional reform, and that each of these different cam- summed it up this way: “They are retired teachers, paigns should understand and develop initiatives per- public employees, steelworkers, widows and orphans, taining to the financial risks of continued pesticide use. colleges, hospitals, and foundations.” In other words, The gathering at Pocantico provided a clearer sense of they are all of us. Building a broader engagement to how we might “connect the dots” between these differ- pursue social change necessitates that we all look to our ent reform efforts. investments. At the very least, we should not be com- Two final points should be made. The first is plicit through our portfolios in funding activities that that the tactics discussed here are strategies of engage- run counter to our beliefs and values. Nor should we ment. Sustainable agriculture activists have frequently ever be placed in the unfortunate position of being sought direct engagement with pesticide producers and duped, watching our investments crash down around distributors, but for the most part they have been frus- us, simply because a company that wasn’t required to trated. As can be seen from the new “sustainable agri- disclose certain information didn’t do so. To ensure that culture” program announced by CropLife International, our investments uphold our values, we must first seek the industry frequently appropriates approaches (e.g., to obtain the information necessary to make those crit- Integrated Pest Management) and manipulates defini- ical judgments.
POCANTICO PAPER NO 5 31 THE ROCKEFELLER BROTHERS FUND AND ITS POCANTICO PROGRAMS
The Rockefeller Brothers Fund was founded in 1940 as a vehicle through which the five sons and daughter of John D. Rockefeller, Jr., could share a source of advice and research on charitable activities and combine some of their philan- thropies to better effect. John D. Rockefeller, Jr., made a substantial gift to the Fund in 1951, and in 1960 the Fund received a major bequest from his estate. On July 1, 1999 the Charles E. Culpeper Foundation of Stamford, Connecticut merged with the Fund. The Fund’s major objective is to promote the well-being of all people through support of efforts in the United States and abroad that contribute ideas, develop leaders, and encourage institutions in the transition to global interdependence. Its grantmaking aims to counter world trends of resource depletion, conflict, protectionism, and isolation which now threaten to move humankind everywhere further away from cooperation, equitable trade and economic development, stability, and conservation.
The Fund currently makes grants in nine program areas: Sustainable Resource Use, Global Security, the Nonprofit Sector, Education, New York City, South Africa, the Charles E. Culpeper Arts and Culture program, and Health; in 2001, the RBF approved a three-year program in the Balkans as a Special Concern. The RBF periodically reviews its programs and strategies. Please visit the RBF’s website (www.rbf.org) for an up-to-date statement of the Fund’s mis- sion and grantmaking guidelines.
The Pocantico Conference Center of the Rockefeller Brothers Fund is located in the Pocantico Historic Area, the heart of the Rockefeller Family estate in Westchester County, New York. The Historic Area, which is owned by the National Trust for Historic Preservation and leased by the Fund, includes John D. Rockefeller’s home, Kykuit, the surrounding gardens and sculpture collec- tions, and the Coach Barn meeting facility. At Pocantico, the Fund convenes a wide range of meetings and conferences related to its philanthropic programs.In connection with its conference program, the Fund publishes a series of occa- sional reports, called Pocantico Papers, designed to widen the impact of select- ed RBF-sponsored meetings at the Conference Center. The Pocantico Programs also include a public visitation program and year-round stewardship of the site.