KNOW THY PRODUCT: THE GLOBAL EXPANSION OF PRODUCT STEWARDSHIP LAWS’ IMPACT ON ENVIRONMENTAL LAW
By Travis Miller, Esq.*
The term “globalization” has only become commonplace over the last few decades, as a consequence of the rapid expansion of outsourcing and the economic advantage of producing products in less developed nations. These major changes were driven to a large extent by an increase in the cost of production resulting from increases in regulation and wages in developed economies. The consequence of this phenomenon has been the displacement of the traditional Western manufacturing base to countries with a lower cost of labor and per unit production. This trend has also resulted in traditional environmental regulation, focused on the manufacturing process, to be found wanting by many major economies — prompting the establishment of new regulatory regimes focused on product stewardship. These regulations shift the burden of compliance onto the supply chain and the importer of finished goods. Consequently, companies seeking to import products into regulated markets must maintain complex databases evidencing compliance with the environmental laws that impact the products that will enter such markets.
I. Product Stewardship: It Began at Production’s End
The origin of the new environmental movement can be traced to the concept of product stewardship and the initial packaging regulations that began in the European Union (EU). As with most environmental laws, this regulation was reactionary, and resulted from a growing concern about the capacity of European countries to handle the quantity of imported waste packaging materials. The EU took action by drafting and deploying packaging directives, followed by the regulation of battery waste, and the regulation of waste electrical and electronic equipment. Each of these regulatory schemes adopted a similar approach of promoting the recyclability of the prescriptive waste class and charging a mandatory fee for each unit of waste that was “placed on the market.” The remainder of this paper refers to this form of fee-paying environmental legislation as Extended Producer Responsibility (“EPR”) laws.
This approach fundamentally changed the relationship of environmental regulation by establishing a legally mandated recycling fee for manufacturers, distributors, and importers of record, resulting from the action of placing a product on the market. The next subsections discuss (A) the EU restrictions on the use of hazardous substances in electrical and electronic equipment; and (B) the effect of the Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”) regulation on supply chain data exchange processes.
A. EU’s Restriction of the Use of Certain Hazardous Substances and the Origin of Substance Control Directives
The EPR regulations proved that environmental legislation dedicated to product stewardship could impact upstream producer’s behavior, as recycling and waste reduction rapidly expanded through the EU. As a result, the EU stretched the concept of product stewardship to also include the restriction of the use of certain hazardous substances in electrical and electronic equipment (“RoHS”). The key difference between the EU RoHS law and predecessor EPR legislation was the focus on eliminating the use of substances in a defined product group. The burden of demonstrating compliance also expanded deeper into the supply chain to the business functions of product lifecycle management, engineering, and design.
The EU RoHS regulation quickly became a hot topic in environmental law as RoHS model legislation perpetuated around the globe. To standardize the challenge of exchanging highly detailed substance level compliance data, industry bodies established legally binding material content data exchange standards. These data exchange standards were designed by engineers and regulatory experts to provide two essential functions:
- Provide a mechanism to transfer compliance data throughout the supply chain.
- Offer a legally binding mechanism to certify compliance with a law.
B. EU REACH Disrupts the Supply Chain Data Exchange Process
The EU’s passage of the Registration, Evaluation, Authorisation and Restriction of Chemicals regulation fundamentally changed the data exchange processes. REACH differs from its predecessors: It is broader in scope and updated approximately every six months by the regulatory body charged with categorizing all substances in existence, the European Chemicals Agency (“ECHA”), with special attention dedicated to “substances of very high concern” (“SVHCs”). The rapid evolution and constant change inherent in the REACH regulation’s design fundamentally shifted data exchange standards to allow them to keep up with the exponential increase in available health, safety, and environmental data. Under these constructs, it is no longer a sustainable practice to seek adherence to a specific compliance regulation because, for example, before a complete survey cycle could be finalized, the law itself and the substances being regulated were often different.
II. The Unmitigated Risks of Modern Environmental Product Compliance
Compliance with EPR and substance control regulations place an expanded burden on the global supply chains to collect, share, and produce traceable, transparent product compliance data. Compliance necessitates comprehensive master data management strategies that support legally binding product declarations. However, in practice, many organizations are short-circuiting the requirements of supply chain and material traceability concerning the raw materials and substances that are used to create components. As a result, some individuals within sales, marketing, engineering, or compliance are often delegated the task of balancing the respective risk of lost business against that of legal prosecution. Unfortunately, these agents frequently lack the training or resources to further evaluate the heightened risk of disclosing confidential business information, managing disputes over data rights, or evaluating the risk of anticompetitive or collusive antitrust liability.
This reality is further complicated by the absence of traceability or control over where and when a finished good will eventually be “placed on the market,” or the absence of insights into how customers or the general public will rely on publicized legally binding compliance statements. Product stewardship regulations necessitate proactive business-to-business disclosure or require time-sensitive windows to respond to information requests. Thus, the process of outsourcing production, design, and manufacturing carries the added risk of not knowing and not having the requisite design details available. Essentially, outsourcing these critical business functions results in the same dilemma that is present wherever control is divorced from ownership. The supplier is granted control over the activity; however, the outsourcing firm owns the result. In spite of these risks, companies often fail to understand, put in the necessary controls to ensure legal compliance, and effectively allocate the necessary resources to mitigate the risks of product withdrawal. As would be expected, the number of product withdrawals due to product stewardship violations has steadily increased.
The following table provides a snapshot of the product withdrawal trend by leveraging REACH product withdrawal data from EU RAPEX site.
|Year||# of Product Withdrawals/Recalls||% Change from Prior Year|
|2015||119 (As of March 31, 2015)|
Such data shows that product withdrawals that stem from product stewardship violations is steadily increasing.
III. Managing the Risk of Product Recall and Withdrawal
The default regulatory penalty for product stewardship regulation is a product recall, or the withdrawal of products from the market. Practically, withdrawal is a complete loss of revenue for the withdrawn product. However, the expense to implement and comply with the regulations can make managerial sign-off on investment to ensure legal compliance difficult to obtain. The majority of the anticipated costs arise from the modernization of supply chain tracking systems to meet reporting obligations, while concurrently protecting intellectual property. “Existing supply chain technologies are good at tracking where things are, but they’re not good about tracking the genealogy and traceability of those items.” Yet, monitoring the origination, destination, and movement of materials is precisely the obligation of product stewardship, and the ability to shirk compliance costs continues to dwindle as enforcement increases. To succeed under this framework, a commitment to part- and substance-level monitoring and reporting is required, else one must expect legal implications.
The benefits of a robust compliance system extend beyond legal compliance, as a well-structured system often results in competitive advantage and unprecedented access to regulated states. This economic justification creates a direct impact on downstream users and purveyors of regulated goods who, in turn, increase pressure on suppliers to rapidly implement compliance programs or suffer the consequence of lost customer revenue. Therefore, compliance has emerged as a competitive advantage for manufacturers and importers seeking to ensure products can be used for their intended purposes. If a downstream user intends to use a chemical outside of its registered uses, then that user must develop and register its own approved protocol in accordance with the regulation, which is costly and has the counterproductive effect of disclosing innovative new uses of a constituent article.
The converging economic forces of increased product recall costs, supply chain management expenses, and competitive market access benefits of product stewardship are reshaping the meanings of product stewardship and environmental compliance. The solution to product stewardship compliance establishes an interesting but all too familiar conundrum for affected companies. In practice, the options are binary, either build an internal compliance team or outsource the compliance function to a professional firm specializing in regulatory compliance. With the former, the current phenomenon of re-shoring and bringing manufacturing and design back under the jurisdiction of the parent corporation seemingly gains further traction. However, the expense and time commitment of building a knowledgeable product stewardship team capable of managing many of the most multi-dimensional and complex regulations in existence warrants consideration of an outsourced compliance model.
Conclusion: A Global Call to Action
No one can seriously deny that the scope and complexity of environmental problems facing the world today call for extraordinary regulatory flexibility beyond that contemplated under the environmental movement from the late 1990s. Internationally, product regulation policies are gaining momentum, as governments seek to obtain the benefits of product stewardship, while progressing and improving upon the policies originally set forth by Europe. The European product stewardship initiative has generated significantly broader implications as competing governments attempt to stay relevant in the international environmental dialogue, within which the EU has emerged as the most progressive and innovative voice in recent years. As a result, non-action is not a viable option.
To effectively administer product compliance programs, corporations must integrate the traditional silos of engineering, compliance, manufacturing, supply chain management, and sales. Corporations must also evaluate whether outsourced relationships have stripped it of the knowledge required to demonstrate compliance. Should such circumstances prove to be self-evident, the only viable compliance decision is to rebuild that lost knowledge base by deploying structured data collection and management strategies. With product-based regulations, time is of the essence, as the deadlines for mandatory compliance continue to expire and new regulations emerge. Corporations must embrace the change; there are both strong ethical and business justifications for promoting the regulations. Moreover, in retrospect, few people would now consider environmental laws like the Clean Water Act or Clean Air Act to have been valueless endeavors. The same will be true of product stewardship laws, as the safety and efficacy of the products consumers use transitions from a novel burdensome concept to an expectation.
* Travis Miller is an attorney and environmental scientist with experience in industrial/manufacturing proces auditing for environmental risks, financial consulting, and environmental law interpretation. Mr. Miller serves as the Vice President of Regulatory Services and Business Development for Foresite US Group, Inc. and the Co-Chair of the American Bar Association, Corporate Social Responsibility Cleantech, Energy and Environmental Sustainability Committee. He leads Foresite’s team of consultants that advise international manufacturing clients on environmental legislation and compliance issues, which impact trade and product marketability. Mr. Miller is responsible for developing SaaS offerings associated with Foresite’s industry leading Global Environmental Management System (GEMS) and provides regulatory counsel to Foresite’s development team. Mr. Miller’s particular areas of expertise are legislative risk/liability management, business strategy implementation, and regulatory compliance planning for global compliance obligations.
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