Billions of dollars in potential asbestos-like litigation risks for nanotechnology companies and investors are now hidden due to weak regulations governing disclosures of liabilities, according to a major new report from the Investor Environmental Health Network (IEHN). Nanotechnologies are now commonly found in sunscreen, cosmetics, food, clothing, sporting goods and packaging. Yet some of these technologies are showing signs of posing serious hazards to human health and the environment, including the same kind of grave threats resulting from exposure to asbestos, according to the IEHN report.
The good news for investors is that the U.S. Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) are now in the process of examining disclosure requirements and could remedy the eight securities and accounting loopholes identified in the report. IEHN is a partnership of investment managers overseeing more than $25 billion in assets.
The report and a related video interview with the author are now available online at http://www.iehn.org.
Report author Sanford Lewis, counsel to IEHN, said: “In the midst of the current crisis of investor confidence, our report flags a major new argument for demanding honest accounting. Investors cannot afford the repetition of another asbestos-like wiping out of billions of dollars of equity when it comes to new technologies like nanotechnologies that are seeking investment dollars now. This report is a call to action for regulators to bolster the integrity of securities disclosure and financial reporting, and to restore credibility to the investing marketplace. Based on the identified loopholes in securities and accounting rules, the credibility of corporate reports as a means of assessing the financial value of companies is in doubt. The FASB and SEC must act quickly and decisively to close the eight loopholes identified in the report.”
Commenting on the report, David Rejeski, director, project on emerging nanotechnologies, Woodrow Wilson International Center for Scholars, and former federal agency representative, White House Council on Environmental Quality, said: "While billions of dollars have been devoted to developing nanomaterials and introducing them into commerce, much less effort has been devoted to assessing their toxicity and developing governance systems for them. IEHN’s new report identifies major holes in existing rules for addressing financial liabilities and offers constructive suggestions for filling them. Ultimately, a regulatory system that does not address the liabilities of existing nanotechnologies puts consumers, investors, shareholders, and the environment at risk and compromises the future promise of the technology.”
The new IEHN report concludes: “As a result of weak regulations, companies do not assess, quantify or disclose potential and pending liabilities on a timely basis …. [S]hareholders and analysts are unable to use existing disclosures for a realistic evaluation of many companies. Today, as potentially ultrahazardous nanotechnologies enter the market, the same regulatory weaknesses that allowed asbestos manufacturers to conceal information from investors are being abused once again to conceal information regarding the newer technologies. Regulators must act now to prevent a repeat of past financial disasters, and to ensure that investors’ expectations of forthright accounting are met. Although our report focuses on product-related liabilities, many of our findings are equally applicable to the broader array of contingent liabilities that appear in disclosure reports and financial statements.”
BACKGROUND ON NANOTECH RISKS
Nanotechnology is a rapidly growing force in the marketplace, with worldwide sales of nanotechnology-based products doubling annually. According to Lux research, the medical, pharmaceutical, materials, coatings, catalysts, food and food processing industries, as well as green energy organizations, will spend more than $1 trillion developing products based on nanotechnology by 2015. Current annual worldwide investment in nanotechnology research is over $9.6 billion, and more than two million people work in the development, production, or use of nanomaterials.
This widespread deployment of nanotechnologies in the marketplace is taking place despite evidence that the different size and surface area of nanoparticles may result in dramatically enhanced toxicity and harm to living organisms. Evaluation of the impact on human health and the environment is lagging the rapid introduction of these products to the marketplace, with future liabilities one likely result.
A recent European Agency for Safety and Health at Work (EU-OSHA) report titled “Expert Forecast on Emerging Chemical Risks” identifies the main groups of substances which could pose new and increasing risks to workers. It puts nanoparticles at the top of the list of substances from which workers need protection.
Carbon nanotubes are one type of nanotechnology. Some forms of these materials have already been found to cause granulomas in the lining, or mesothelia, of the body cavity of laboratory animals. Granulomas are pathological responses known to be precursors of mesothelioma, one of the diseases caused by asbestos. Researchers have concluded that “long, thin carbon nanotubes showed the same effects as long, thin asbestos fibers.” Despite all the growing concern, companies producing carbon nanotubes have failed to disclose to investors whether the nanotubes they are producing are in this potentially harmful form, and if so, any studies that might help quantify the potential liability exposures.
EIGHT DISCLOSURE LOOPHOLES THE SEC/FASB SHOULD CLOSE
The IEHN study identifies eight loopholes in the current system of securities and accounting regulation that currently prevent honest accounting for a firm’s potential liabilities and provides practical solutions:
1. SHORTSIGHTEDNESS. Taking the short view and thereby effectively avoiding disclosure or estimation of potential longer term liabilities.
2. CONCEALED SCIENCE. Concealing emerging science that forewarns of potential liabilities in the future.
3. THE KNOWN MINIMUM. Disclosing only the “known minimum” of potential liabilities, even though a more realistic assessment might be so much larger that it would indicate the potential for a total wipe out of shareholder value.
4. PRIVILEGING SECRECY. “Privileging” concealment, by using attorney-client privileges as a shield against generating a public estimate of liability for investors.
5. INCONSISTENT ESTIMATES. Providing inconsistent liability estimates to insurers and investors, with larger estimates of liabilities typically provided to insurers than to investors.
6. HIDDEN ASSUMPTIONS. Using hidden assumptions to minimize estimates of liability.
7. MISSING BENCHMARKS. Refusing to benchmark liabilities against other companies whose published litigation results may demonstrate realistic estimates of liability.
8. RISK-FREE PROXIES. Refusing to allow shareholders to place on the annual proxy ballot questions requesting disclosure of specific risks of concern to investors.
As the IEHN report notes: “Together, the eight loopholes identified in this report allow companies to avoid estimation and disclosure of contingent liabilities. They reflect a pervasive ‘don’t ask/don’t tell’ approach which is no longer tolerable in a public policy environment where restoring investor confidence is the priority. Current regulatory reform efforts already underway at the SEC and FASB provide opportunities to close these loopholes …”