Reach legislation: Christopher Bryce outlines how the duty of care aspect of the new rules is putting global supply chains at risk

More than 100 000 chemical substances are commonly in use within the EU, most of which have not had their properties evaluated and documented for safety.

In response to this, Reach is intended to make the trading, handling and usage of chemicals safer for European workers and citizens and promote environmental protection. As a result, any company trading in the EU that either directly supplies chemicals into the EU, or has investments in the EU that manufacture chemicals or use chemicals, will have to be compliant with Reach.

The registration of chemical substances will be phased over time in order to cope with the large number that will require registration. Pre-registration will take place from 1 June 2008 to 30 November 2008. Substances produced or imported in high volumes and those that are persistent, bioaccumulative and toxic (PBT), very persistent and very bioaccumulative (vPvBs) and those that are carcinogenic, mutagenic or toxic to reproduction (CMR) will have priority registration:

*3.5 years for high production volume chemicals (1000 tonnes or more/year/manufacturer or importer) and CMRs in volumes of one tonne or more; November 2011.
*6 years for production volumes in the range of 100â“1000 tonnes; June 2013.
*11 years for low production volume chemicals (1â“100 tonnes); June 2018.

Reach operates the one substance one registration (OSOR) principle. Under OSOR companies will be able to share the costs of registering chemical substances through formation of consortia. The objective is to minimise costs and animal testing. OSOR also aims to reduce the cost of registration for substances produced in small quantities and with low margins.

Data sharing of all information ‘deemed’ non-confidential will be mandatory as part of this process, which raises concerns around the protection of intellectual property and commercially sensitive manufacturing know-how. Opt-outs from this mandatory principle can be granted to companies who can prove such disclosure would harm their business interests or threaten intellectual property rights, such as data concerning full composition of preparations, precise use, tonnage and links with downstream users. Data protection rights will be limited to six years.

Downstream users

The chemical industry will have to demonstrate how a chemical substance can be used safely. All users in the supply chain will be obliged to ensure the safety of the chemical substances they handle and communicate their uses throughout the supply chain, as well as produce safety assessments and reports under certain circumstances.

Manufacturers and importers are obliged to register the identified uses of their substances communicated to them by downstream users, unless they consider the use to be too risky to register or choose not to register it for commercial reasons and consequently cease supply of the substance to the user. Under these circumstances (or if they do not wish to divulge usage information to their supplier for intellectual property concerns), downstream users may opt to register their use of a substance directly by submitting a chemical safety assessment detailing exposure scenarios. This in turn may also require amendments to safety data sheets, the key tool used for communicating hazard and risk management information up and down the supply chain.

Reach mandates that downstream users of chemicals will also be subject to the full registration process if the substances they use have not been registered by the “upstream” chemical supplier. Where a manufacturer outside the EU does not register or appoint a representative to manage this, then the customer within the EU will become the “importer” and will have to comply with the registration process.

The impact on business

Whilst Reach is a very complex regulation it is clear that it will have a significant impact on the risk profile of chemical manufacturers, importers, and downstream users of chemical substances both directly and indirectly.

We will deal with direct impacts first. There have been many assessments undertaken of the economic impacts Reach will have on the EU chemical industry with estimates of Euro 2.3 billion over 11 years quoted by the European Commission. However, this direct cost of registration does not allow for the downstream user's cost of compliance with Reach, though neither does it take into account the potential health and environmental cost benefits either.

Compliance with Reach will also have a global impact on chemical manufacturing and use. This will likely effect changes in the strategy of non-EU based chemical firms. For example, if a substance is found to be unacceptable for use on safety grounds within the EU, the manufacturer may be open to adverse action from external parties if it continues to manufacture and sell the substance in other global markets.

One of the principal aims of OSOR is to share the costs of registration. It does, however, raise concerns over security of intellectual property for manufacturers and importers as well as for downstream users who will need to disclose, other than data deemed confidential, information relating to their use of chemical substances to suppliers for OSOR compliance. Consequently, companies might seek ways to avoid using the OSOR data sharing process in order to maintain their competitive advantage and intellectual property value, and this will incur added costs.

The indirect impacts of REACH on business are more difficult to assess, prior to implementation. However, new risks created and existing risks increased may include:

*Possible withdrawal or restriction of chemical substances: if the cost of testing is so high as to affect the producers profitability an economic decision could be taken to withdraw the substance;
if the product is restricted or has to be substituted; the impact on output could be a collapse in manufacturing processes, disruption to the supply chain and business interruption.
*Availability of health and safety data via central agency database will increase product liability exposure as a result of third parties being able to access information which is currently not known or publicly available. Retroactive liability and litigation could potentially be significant and this in turn may have ramifications for product liability insurance coverage.
*Reach imposes a “duty of care” obligation within the supply chain. It creates an obligation to communicate substance usage and exposure data to those working with the substance. Manufacturers, importers, downstream users and distributors will have a requirement to keep records for 10 years after the last supply. Breach of duty of care obligations or miscommunication of safety information up and down the supply chain could create liability and precipitate litigation.
*Delocalisation of production outside the EU where lower regulatory compliance exists, particularly for finished products that incorporate chemical substances subject to Reach. Global investment may also shift to favour manufacture in environments having a lower cost of regulation and lighter compliance regime.
*In the event that the Reach compliance process is poorly or negligently managed resulting in damage to the firm, potential exists for shareholder action where they can allege that non-compliance has affected shareholder value. This could precipitate directors' and officers' insurance claims.

Although Reach poses many significant risks, the process of registration and evaluation will have a positive benefit for the chemical industry. It will respond to concerns that exist on the ‘safety’ of chemical substances and the increased knowledge of exposure coupled with improved risk management will directly lead to benefits in public and worker health and the environment. In time, the insurance industry will need to respond to this positive development and its effect upon their rating models when granting insurance cover.

Conclusion

Reach will have a significant impact on both the chemical industry and the downstream users of chemicals. The larger chemical companies will likely be better equipped to absorb the costs of compliance with Reach. Small firms and specialty chemical manufacturers will face a disproportionate increase in their costs.

Reach also imposes a duty of care upon producers and downstream users of a substance. However, this duty of care consideration extends beyond ‘substances’ to also include ‘preparations’. Therefore it is not only individual “substances”, but ‘preparations’ which may be comprised of many ‘substances’, where a duty of care also exists.

There will be sanctions that will be applied where there is non-compliance with the regulation. These sanctions have not yet been identified but are likely to be at the discretion of the member states.

The protection of intellectual property and technical know-how will require a mixture of risk management and insurance, if a risk transfer option exists. Whilst disclosure of commercially sensitive information can be safeguarded, data-sharing of all non-confidential information as deemed by the agency will be mandatory. A request for exemption from this requirement will have to be argued.

The risks arising from Reach are many and varied and its effect will be strategic, operational and financial, the mix depending on whether a firm is a manufacturer, importer or downstream user. There will be specific risks, such as the effect upon the product portfolio, intellectual property or the impact upon the supply chain, which will have to be assessed and managed. Insurance contracts will need to be reviewed to assess what elements of risk are capable of being transferred under those contracts but ultimately risk management processes will have to be reviewed and adapted to ensure that they can comply with the obligations that Reach will impose.

Marsh has a dedicated team positioned to help companies understand and manage the risks that Reach presents and assist them in developing cost effective compliance, risk mitigation and transfer strategies.

Christopher Bryce is Industry Practice Leader, Chemicals and Life Sciences EMEA with leading risk and insurance services company Marsh. The risk management impacts of Reach