Risk Management for Brands: Navigating New Trends in Regulation

By Kirsten Wallerstedt

Whether a company is involved in electronics, oil and gas, chemicals, or other consumer products or services, a range of new regulatory trends is already having an impact on business and supplier relationships. An evolving norm in the marketplace is that companies are accountable for the actions and decisions of the suppliers in their upstream network.

Risk Management for BrandsThe force holding them accountable can take the shape of consumer pressure, business-to-business requirements, or regulatory attention—but in all cases, the brand owner’s reputation is at stake.

Nonprofit and consumer action groups have increasing influence in the market, empowered by social media to spread their message and change consumers’ minds. As an illustration, the Environmental Working Group (EWG), a nonprofit organization that researches the effects of chemicals and other products on human health, recently issued an action alert to consumers about the use of suspected endocrine disruptor TPHP (also known as TPP) in fingernail polish. The chemical is absorbed into the body through nail polish, yet remains a common ingredient in many popular brands. EWG’s report, released in October 2015, targeted specific brands by name.

Similar findings are likely to affect brand owners’ decisions about exposures from potentially harmful substances in their products. Fueled by social media, consumer action can have a significant negative impact on brand value. As a result, the potential risks to brands from using certain substances are increasing, even when a company remains in compliance with the law.

Risks of Public Exposure

Consumer actions are also now more likely to lead to regulation. Given this prospect, it can be a wise practice for owners of similar brands to keep an eye on consumer group activity. If environmentalists are targeting TPHP, for example, a savvy brand owner might wonder: “What other products carry this substance?” In other applications, TPHP is used as a plasticizer and flame retardant. Since consumer actions can lead to regulatory examination, the EWG report might prove to be an early warning for a manufacturer using TPHP as a flame retardant in furniture, for example, or as a plasticizer in PVC pipes. Once the chemical is “outed” as potentially hazardous to human health or the environment, the potential to put all brand owners at risk emerges.

So it can be prudent to track consumer attention to new chemicals that may be receiving scrutiny from the media and regulatory agencies. This can give a company the lead time needed to take action and reformulate ingredients, redesign products, or reduce exposure routes.

Five New Regulatory Norms

Business concerns are steadily moving from the consumer-driven space into the regulatory landscape. To further strengthen a company’s compliance risk management, brand owners should be aware of the following trends in regulation and public scrutiny of the consumer products industries:

1.Public attention to hazardous chemicals in consumer products

New regulations pay attention to potentially toxic substances in consumer products. This trend has been advanced by laws such as California’s Safer Consumer Products program and the proliferation in the United States of state regulations addressing toxic substances in children’s products.

2.Product-level regulation

It’s no longer just a substance but an entire product that can be regulated, and it often becomes subject to public awareness campaigns by consumer groups.

3. Exposure, not just hazard

More regulations are incorporating effects of exposures from a hazardous substance within a product, rather than a black-and-white assessment of whether the hazardous substance is present. Why? A mildly hazardous substance may cause more harm to a person than a very hazardous substance. This may be the case when the chance of exposure is higher to the mildly hazardous substance. Even a very hazardous substance in a product will not cause harm if a person, animal, or the environment does not come in contact with that chemical. It depends on how the product is made. Thus, regulators have begun integrating this knowledge into their rules by requiring “alternatives assessments” under which a chemical of concern can be compared to other chemicals with similar functional properties, so that safer alternatives to the chemical of concern may be discovered and used in the product instead.

4. Due diligence

Supply chain due diligence is popping up more as a requirement in regulation. This obligation requires companies to be further integrated with supply chains, even beyond their immediate suppliers.

5. Different compliance risk across jurisdictions

Compliance protocols are often totally different for the same product in separate jurisdictions. More countries are adopting regulatory programs that address hazardous substances on their own and in products and materials.

What makes this imperative is that consumers have grown more knowledgeable. Social media serves as a lubricant for awareness and education—as well as for misinformation. Getting ahead of consumer concerns can save a brand owner a lot of pain down the line, and the best practice remains to find out before the public finds out.

Business-to-Business Requirements

The third major area of compliance risk involves requirements imposed by businesses. These types of private manufacturer programs are becoming a norm. For example, more businesses are creating “supplier rating” programs, and big box retailers such as Walmart have banned some products that contain toxic chemicals. Many companies under the U.S. conflict minerals law (Dodd-Frank Act, Section 1502) have decided to go beyond the letter of the law and require their products to be “conflict-free”—and then impose this standard on their suppliers.

Some large manufacturers are now imitating certain nonprofit and industry groups by compiling their own “banned substances lists” and imposing these rules on their suppliers. They incentivize compliance with their programs through brand labeling on items such as cosmetics products. Industries such as automotive manufacturers have maintained substance restrictions lists for years (in this case, called GADSL, or Global Automotive Declarable Substance List), and now retailers are following suit. In fact, their market clout gives them the ability to impose “green” standards and sustainability restrictions on their suppliers.

The impetus for these new norms is the realization that companies may be responsible for suppliers’ behavior. The public and regulators may not care whether the brand or a supplier included a banned or hazardous substance in a product—the brand owner itself, not the supplier, usually gets penalized. A supplier compliance program is essential because the responsibility and the risk are ultimately with the brand owner.

Adapting Risk Management Strategy

Increased public and regulatory scrutiny means more reputational risk for a business. Social media makes it much easier for one mistake to potentially destroy a brand. It's in a company’s best interest to have all partners—internal teams and external suppliers—equipped with full knowledge of requirements, both existing and upcoming. A company’s workflow processes should enable pertinent information to reach all parts of an organization and its supply chain. Effective, early feedback, for example, can help product design and R&D teams.

A corporation’s compliance strategy needs to adapt to avoid damages to a brand. Any effective strategy should incorporate multiple parts of an organization and multiple facets of a business. It must also reflect the tiers of a company’s supplier network. In today’s compliance risk market, It's become necessary to go beyond regulatory requirements to address these concerns. To prevent the potential for brand damage and regulatory backlash, the time has come to actively manage these new types of risk.

 

Kirsten Wallerstedt

Kirsten Wallerstedt is a senior regulatory analyst at 3E Company, a Verisk Analytics (Nasdaq:VRSK) business.