Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Chemicals and credit in the US

In this blog, we provide an example of our cross-asset research on the potential investment risks posed by the PFAS group of chemicals (per- and polyfluoroalkyl substances), which has raised important points for us to consider across our actively managed portfolios, and highlighted areas of potential concern for the future.

 

What are PFAS chemicals?

Per- and polyfluoroalkyl substances (PFAS) are a group of man-made chemicals which have been manufactured and used in a variety of industries around the globe. The main properties of these chemicals are that they are very robust and do not break down after exposure to the elements, with the ability to repel and resist grease and water. This means they can be used in many commercial and industrial applications including Teflon cookware, Scotchgard carpets and firefighting foam.

But the strength of the chemical compound that serves to make PFAS useful is also proving to be its greatest liability. Its durability means that it is persistent and bio-accumulative, with a very long half-life, and is consequently present in the environment and in humans. There is evidence that exposure can lead to adverse effects on human health.

It is estimated that PFAS is so widespread that roughly 98% of the US population have measurable accumulations of it in their blood.[1] Most of the exposure is attributable to the food we ingest, as we cook it in Teflon pans, and also to drinking water. Studies have shown that the ground water near military bases has high levels of PFAS given the military’s historical use of firefighting foams with the chemical.

What is the risk for companies?

To date, despite the concerns, PFAS and the related compounds are not deemed a hazardous substance by the EPA (Environmental Protection Agency). But manufacturers of PFAS and those that use the substance are concerned about the health issues raised and the potential for costly litigation and settlements addressing environmental, health monitoring and bodily injury compensation.

Given the number of sites with PFAS contamination greater than the advised 70 parts per trillion located in very large population centres, the industry has good reason to be concerned. Estimates for clean-up, remediation, and medical monitoring continue to climb, with current estimates stretching into billions.

A slow burner?

The current patchwork of state regulations for such chemicals creates a significant degree of uncertainty; consequently, there is a level of support for designating the compound as a hazardous substance with one clear and cohesive Federal position. While the credit impact from PFAS exposure appears manageable at present, we therefore expect the Biden administration to deem the compound a hazardous substance, and to legislate accordingly.

From a research and portfolio construction perspective, we will be monitoring this issue closely, both in terms of the responses of companies to potential legislation and their preparedness to adapt to it, and in terms of judging whether the risks we see on the horizon are reflected in the prices and yields of the assets that we are considering for investment.

This blog is an abridged version of an article in our recent GFI Quarterly Update. To read the full article and Update publication, please click here.

 

[1] Associations of exposure to perfluoroalkyl substances individually and in mixtures with persistent infections: Recent findings from NHANES 1999–2016 - ScienceDirect

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