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Major Risks for
Dow Chemical Investors
Are Under the Radar

The chemical industry has long had significant environmental risks associated with its operations. But do investors get the full story? Innovest Strategic Value Advisors Inc., a leader in analyzing “non-traditional” sources of investment risk as well as higher corporate social responsibility standards, released Dow Chemical: Risks for Investors in New York on April 21, 2004.

This report discusses significant unreported -- or underreported -- environmental risks that the company faces.

Key findings of the report include:

Bhopal

The Bhopal disaster is an ongoing concern with significant potential to harm the company’s reputation or pose material liabilities, as well as constrain the company’s investment in Asia. Continuing and heated controversy over reparations to victims, deaths and birth defects related to methyl isocyanate exposure, and pollution of the city’s water supply could result in potential legal liability.

Dow’s wholly owned subsidiary, Union Carbide has been deemed an “absconder from justice” for failing to appear before the courts in India to face criminal charges stemming from the disaster. Efforts are underway in India to have the courts place responsibility on Dow to require Union Carbide to appear as a defendant in the criminal case. On March 17, 2004 an Appeals Court in New York ordered that U.S. courts consider requests for remediation of contaminated soil and groundwater by Dow / Union Carbide. The Appeals Court’s decision would allow some residents to sue for loss of property value and clean-up of contamination. Further, the Court upheld the plaintiffs' right to seek medical monitoring from Dow for injuries and symptoms related to exposure to contaminated groundwater.

Between 15,000 – 20,000 people are estimated to have died as a direct result of the disaster or from health problems related to it. The $2.18 trillion market currently under SRI management world-wide may remove Dow as a potential investment as a result of these controversies.

Market Risk from Organochlorine Investments

Dow could be pressed by markets and regulations to reduce its production and marketing focus on organochlorine chemicals as a result of mounting scientific findings regarding ecological and human health impacts of organochlorine toxins, dioxins & furans in particular.

Contamination in Michigan

Dow may incur potentially material liability related to dioxin contamination of more than 22 miles of the Tittabawassee River as well as sections of the Saginaw River and Saginaw Bay in Michigan. A class-action lawsuit involving more than 300 plaintiffs is currently in discovery.

Semi-conductor Worker Liability

Union Carbide, a wholly owned subsidiary of Dow since 2001, is currently involved in litigation stemming from the semiconductor industry, to which it is a supplier, involving claims of worker exposure to hazardous chemicals.

Current Financial Obligations

The above issues, added to Dow’s well known obligations under asbestos and breast implant litigation, and a $10.7 billion in debt and a debt-to-capital ratio of 53%, point to further strain on company reserves and thus increase the potential financial risks associated with Dow’s overall product and environmental liability scenario.

Agent Orange

The company is involved in multiple suits resulting from past involvement in Agent Orange manufacturing. U.S. Vietnam veterans are again seeking restitution for exposure related health problems. Numerous foreign veterans groups and Vietnamese citizens affected by Agent Orange exposure are also seeking compensation from manufacturers.

Marc Brammer, the primary author of this report, noted:

Dow Chemical is facing significant environmentally and socially-related pressures. While most chemical companies carry ample environmental liability burdens, Dow appears to have many large-scale challenges converging all at once in this area. While facing shareholder questions about the ongoing Bhopal disaster in its most recent proxy statement, the company is also dealing with major risks such as asbestos, Agent Orange, dioxin contamination in Midland, Michigan, and numerous other risks relating to toxic chemicals and polluting by-products in its product portfolio. All these risks taken together indicate that the company will be under increasing pressure from investors and potential investors to mitigate these issues.

This report is the most recent of Innovest’s work in the chemical sector. Other recent work includes an environmental risk profile report on Monsanto, and a benchmarking study of major international chemical industry players. An update to this benchmarking study will be available in September 2004.

For More Information:

Download the full report:
Dow Chemical: Risks for Investors
(pdf file -- 1.7 mb)

For more on Innovest Strategic Value Advisors,
see their home page.

 

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