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New Bottom Line Volume 13.8 – It Began With a Dot: Product Regulation and Future Markets

Friday, December 31, 2004

It began with a dot, and has now turned into a significant driving force in world trade. The European packaging “take back” laws and the German “Green Dot” have evolved into a growing set of product design & content directives with teeth — the teeth being a 350 million plus population European marketplace.

Those crazy Europeans — the ones Bush and Rumsfeld like to dismiss as “old Europe” — have for some reason been paying attention to the requirements — and security — of living systems as a key factor in industrial policy. US companies, with some notable exceptions have been slow to take notice, and may pay the price at the bottom line.

A recent article in The Nation, New Power for ‘Old Europe’, summarizes a series of related initiatives from the European Union, including their proposed REACH (Registration, Evaluation and Authorization of Chemicals) regulation: “REACH is the first effort to secure environmental data on some 30,000 chemicals that have been on the market in the United States and around the world without any significant testing of their toxicity on human health and the environment. These include an array of highly toxic substances that were effectively grandfathered into the market by TSCA [the Toxic Substances Control Act of 1976]….

“The REACH directive,” author Mark Schapiro further observes, “represents an upheaval in the basic philosophy of chemical regulation, flipping the American presumption of ‘innocent until proven guilty’ on its head by placing the burden of proof on manufacturers to prove chemicals are safe–what is known as the ‘precautionary principle.’ REACH adds extra bite with a requirement that toxicity data be posted publicly on the new agency’s website. Thus, test results that were once tightly held by chemical companies will suddenly be available to citizens and regulators across the globe. That prospect foreshadows trouble for US chemical producers.”

The US chemical industry and government have been hard at work to block REACH, with arguments we’ve heard before on such issues as fuel economy, global warming, pesticide regulation, and more: disruptive impacts, too expensive, restraint of trade, etc. The cosmetics industry, the auto industry and others are in various degrees of denial and combat.

Similarly, the global electronics industry has been slow to respond to the EU’s product take back and product content directives, which come into force in mid-2005 and mid-2006 respectively. WEEE (Waste Electrical and Electronic Equipment ) will require producers of electronic and electric equipment to accept and properly recycle “end of life” equipment. RoHS (Restriction on Hazardous Substances) will ban the manufacture or import of equipment containing lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls or polybrominated diphenyl ethers.

Some companies have embraced the inevitable, diligently investing time and money in reaching goalposts that the EU is still moving. Hewlett Packard, for example, has made “design for environment” a key part of product design strategy, and has created a joint venture with mining giant Noranda to field an efficient — and hopefully profitable — take-back system, mining the exceptionally rich ores of modern society’s high tech detritus.

Others have taken a “do as little as possible, as late as possible” strategy — a strategy based on a pervasive and deeply wrong-headed assumption: that designing and delivering better, more efficient, less toxic, more recyclable products would necessarily cost more money and yield less profit. The bottom line impact of losing access to the European market aside, the assumption is patently — and demonstrably — false.

Why does it persist? Let me offer some perspective on both the barriers and the opportunities — and how companies that understand the ecosystem drivers behind these new regulations can potentially get out ahead of them.

First, there’s the great power of “we’ve always done it this way,” with its impact on habits (of thought as well as of action), on cost analysis methods, on capital budgets. What’s worse, changing what “we’ve always done” engages the tacit admission that “what we’ve always done” may not have been as good as we could have done. This is hard on the human psyche and murder on corporate lawyers.

Second, change is not easy, and is inescapably multi-dimensional — change in technology, processes, roles, ways of thinking, and more – can demand investment, in time and money, that conflict with other perceived needs.

Third, business is hampered by analytical methodologies that fail to accurately capture and value the full spectrum of costs and benefits. Boundaries of consideration are typically drawn too narrowly, whether to exclude factors that are considered “someone else’s problem,” or because it’s simply easier to do it that way. Multiple benefits and synergistic impacts are commonly ignored, because familiar financial analysis tools commonly ignore them.

What can be done about it? Here are four steps to consider.

1. Understand the drivers.

No CEO wants his or her business led around by the nose by regulators. No one wants the strategic diversion or the expense of changes that can’t be planned for. But the European directives — both past and future — are predictable, not random. Those who understand what’s driving the EU directives could have seen WEEE/RoHS coming, and can start aligning their future design trajectory with the future regulatory trajectory, eliminate a random factor in their product development cycle, and shift budget from lawyers and lobbyists to engineers and marketers.

“It’s alarming how many semiconductor and other component manufacturers seem to be unaware of detailed and precise information regarding the material content of their products or are unable or unwilling to provide this information to their customers,” Michael Kirschner, wrote recently in Electronic Business. “And many of them are extraordinarily prominent.”

The drivers are evident from careful consideration of the requirements and constraints of living systems, and an understanding of the importance of living systems to the human economy as well as to human health. While regulatory policy and its supporting science have focused on tolerable thresholds and acceptable risk — a tradeoffs-based approach rooted in the “costs too much” assumption noted above — the underlying science is crystal clear.

For example, we know — universally and umimpeachably — that living systems can’t sustain a steady increase in the concentrations of toxic materials — like the substances flagged by RoHS, for example. Given that, we could argue endlessly about what thresholds will deliver what level damage with what probability. Or we can choose to stop putting ever-increasing amounts of those materials into living systems.

This is the logic — elegantly conveyed by the Natural Step approach, among others — that informs the EU’s trajectory.

In some cases — such as metals — the offending substances are clear, and will be steadily, if gradually, engineered out of commercial (and ultimately biological) flows. You start with the worst offenders (those with the greatest biological impact), typically the heavy metals, and those whose anthropogenic (human induced) flows most significantly exceed the natural flows with which living systems have evolved. John Holmberg in the early 1990s pegged the anthropogenic-to-natural flow ratio for cadmium 390%, chromium 400%, mercury 650%, and for lead, 1200% — that’s 12 times natural flows. You can see the seeds of RoHS right there, published in 1992. (By contrast, the flow ratio for aluminum, the most abundant metal in the earth’s crust, is less than 5%.)

What’s next? Consider those flow ratios, and the place – or lack thereof — of metals in biological processes. In terms of flow ratios, keep your eye on copper 2400%, silver 2200%, selenium 1100%, molybdenum and zinc 800%, antimony 600% and nickel 500%. Whether they will be banned entirely, left alone, or their use restricted to keep them out of biological cycles, will depend on both their biological impact and the results of RoHS. But a prudent business strategy — or at least contingency plan — will be thinking about designing out dependence on at-risk materials, through both dematerialization and material substitution strategies.

In some cases — such as the tens of thousands of chemicals in industrial commerce — the ranking of offending substances is less clear. Most of these substances have never been adequately studied; hardly any of the millions of potential synergic combinations have been examined at all. REACH will take on this challenge, by classifying these chemicals and then restricting their use. “Under REACH,” Schapiro writes, “chemicals determined to be ‘carcinogens, mutagens or repro[ductive] toxins’ would have to be taken off the market within a decade. According to the EPA’s own standards, this could amount to as many as 1,400 chemicals. For other chemicals, REACH establishes several layers of testing for toxicity–with strictures that grow tougher as the quantity and risk increases.”

What’s next there? The battle will shift from individual chemicals to classes of chemicals, initially classed by impact but eventually, perhaps, by chemical formulation — a broader brush approach, but one that will prove simpler for industry as well as society. Does your business depend on “carcinogens, mutagens or repro[ductive] toxins”? or on “persistent, bio-accumulative, toxic” substances (PBTs)? If so, your company is at risk, and you would do well to start thinking about design strategies to reduce that risk — now, not when predictable regulations “suddenly” hit you in the face.

2. Drop the assumptions. Face the facts.

The notion that better environmental performance necessarily reduces financial performance is all too often rooted in habit, not evidence.

It’s easy to make design improvements that cost more — just add “green” criteria on to an existing design. It’s more challenging — and more profitable — to integrate “green” into the design process, by including stakeholder expectations and the system conditions for sustainability into the design specification from the very beginning.

Electronic Business expects (http://www.reed-electronics.com/eb-mag/article/CA481430?pubdate=12%2F1%2F2004) that “The cost of metals will be about 30 percent higher in the first year of RoHS implementation…. Companies also will face higher energy bills, because alternative processes such as using lead-free solder or brominated flame retardants require anywhere from 6 to 18 percent more energy.”

It also reports that because of price resistance from the OEM’s (the folks, like Dell, HP and IBM, who put their brand on the box), “suppliers can expect to eat the costs associated with creating RoHS-compliant components.” So those suppliers — the contract manufacturers who make most of the branded gear you buy — will be driven to innovate, around everything from materials selection to process efficiency to data management.

That innovation can belie the projected cost increases. The rapidly growing world of green building provides a useful prooftext: “LEED Silver” buildings that might have cost 20% more to build two years ago are now being brought in at 0-2% incremental cost; operating expense savings that were paying back in five to eight years are now paying back in weeks or months.

3. Design what works – before it’s demanded.

It will happen eventually; the biochemistry of living systems isn’t likely to change in our lifetimes. The only question is how quickly, and with what degree of pain. Some companies will be dragged there, kicking and screaming, by the gatekeepers to a sophisticated, affluent, and growing market. Some will be left in the dust by competitors willing to embrace physical — and biological — reality as an indispensable part of the landscape of business. Others will take the initiative, follow the guidance of 3.8 billion years of nature’s R&D, and design products and processes that are both compatible with the inescapable requirements of living systems — and profitable to boot.

Design not just products that contain no hazardous substances; design processes that generate none — and that ultimately use none. Because that constraint will come down the regulatory pike, too, since the impact of your products is what’s generated throughout their entire life cycle. You may think it unreasonable, but your kid’s bloodstream doesn’t care what you think.

It may be unreasonable. It may be very hard. But it will come – and what if your competitors figure out how to get there first?

4. Steer by the logic, not the thresholds

Much of environmental regulatory policy, for the past three decades, has focused on a political/scientific process of setting acceptable thresholds for problematic materials – always a compromise, usually a painful one; always uncertain and unsettled, and ripe for litigation. The biological logic provides a simpler, clearer, more predictable decision path – and one that can make compelling business sense as well.

Dupont set a goal in the early 1990’s to reduce various waste streams by 35% to 90% in 5 years, and succeeded — no small accomplishment, in itself. When they regrouped in the mid-90’s to ask, “What’s our next goal?” the decision was zero – zero waste, zero defects, zero injuries. Ed Woolard, chairman and CEO at the time, said that the decision to go to zero was easier than the earlier decision to reduce the waste by 90%. Why? It eliminated the endless – in fact unendable – debate about reasonable thresholds, and replaced it with a clear, binary logic: some waste, defects and injuries, or none at all. Ask Dupont about practicalities and pushback, and they’ll tell you “We run the numbers, and the zero waste initiatives have been consistently more profitable.”

A number of companies have figured out that managing to a single regulatory regime – the highest standards anywhere, applied everywhere – is a simpler, more sensible and more powerful way to run a business. The smartest companies will “answer to a higher authority” – the physics and evolutionary biology that constitute the unrepealable laws of nature.

With all that said, let’s acknowledge that it’s not an easy job. While the decision to lead the pack can be hard enough, implementing that decision can be harder still. Companies need to master the complexities of replacing materials, redesigning processes, bringing their supply chain along, and — perhaps most frustrating of all — tracking the moving target of the EU regulations. Even some member countries are frustrated, according to Rachel King (Electronic Business); the UK has issued lists own maximum concentration guidelines, and some companies are moving forward on that basis. “Many U.S. electronics companies are presuming that the UK guidelines will be the final limits,” King observes.

But “regulatory insulation” — running so clean that you don’t really need to care about the regulations — makes far more sense than regulatory guesswork. “Numerous chip companies,” King notes, “are redesigning parts so that they contain no hazardous substances, so they’ll be compliant no matter what the final requirements specify.”

Which, as radical as it may sound, is in fact the most prudent course of all.

(c) 2004 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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