ESG Checklist -- A Prop 65 Compliance Program?

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In California, the Proposition (“Prop”) 65[1] landscape continues to evolve – notices of violations (“NOVs”) issued for products that do not contain or emanate a Prop 65 chemical,[2] novel constitutional theories raised by defense attorneys, and increasingly complex regulations with tailored warning requirements for specific industries or products. [3]

Companies are responding in different ways – some electing to wait until they are served with an NOV by a Prop 65 plaintiff – but some choosing instead to implement a Prop 65 compliance program.

A trend toward proactive compliance may be driven in part by retailers requiring indemnification (or in some industries, an affirmative demonstration of compliance). Another factor, however, may be heightened attention to corporate responsibility – e.g., data supply chain management and Environmental Social Governance (ESG) considerations.[4] While climate change has dominated the environmental aspects of ESG among institutional investors, ESG casts a wide net and can include environmental stewardship and public health (at the intersection of environmental and social issues).[5] Moreover, private investors, customers, and shareholders are considering broader indicia of corporate environmental responsibility.

For example, As You Sow is a company that has been recognized as one of the better resources for individual investors looking to invest in socially responsible companies. [6] As You Sow has gained influence on the ESG stage by introducing shareholder resolutions on a broad range of ESG issues such as environmental health and the use of pesticides in the supply chain.[7] As You Sow also has a long history as a Prop 65 plaintiffs’ group (having filed over 700 NOVs) with a special interest in food safety. In 2021, the company filed several NOVs alleging failure to warn for the presence of cadmium or lead in leafy greens. While falling short of a Prop 65 shareholder resolution, As You Sow’s position as an ESG influencer coupled with its Prop 65 activity could shine a spotlight on Prop 65 compliance for some investors.

Beyond the ESG platform, more active and informed consumers coupled with social media platforms also play into the mix. Consumers are demanding information about the ingredients and risks associated with their products – sometimes specifically asking about Prop 65 compliance.

The elements of a Prop 65 compliance program will vary from company to company based on a variety of factors, including product lines, supply chains, number of suppliers, and other compliance programs the company may already have in place relating to other labeling requirements. The basic features of compliance programs, however, include identifying the potential chemicals at issue, testing products, calculating the average daily exposure, and evaluating whether the average daily exposure exceeds levels that present a significant risk.[8]

In addition, companies should evaluate how frequently product lines should be retested to ensure ongoing compliance – a decision which may implicate manufacturing, marketing, inventory, and other operational concerns as well as consideration of efficiencies of scale, such as dovetailing with other ongoing compliance measures.

Companies that launch a Prop 65 compliance program should be prepared for the possibility that chemicals are present in their products at levels that may trigger Prop 65 warning requirements. They will need to decide whether to give Prop 65 warnings, to reassess assumptions incorporated into the exposure analysis, or whether to take measures to reduce exposures. For example, reformulating ingredients in a product, finding other sources for the ingredients, or changing the instructions for use.

Companies should be aware that a compliance program can mitigate risks but may not deter Prop 65 plaintiffs from instituting an enforcement action. Among other things, plaintiffs may challenge various aspects of the program, including testing results, average daily exposures to chemicals, and what benchmarks should apply in the absence of a safe harbor level. Moreover, some plaintiffs may prefer to pursue a claim for other reasons (and recover their attorneys’ fees as allowed under Prop 65).

In conclusion, a Prop 65 compliance program will present challenges and may not shield a company from a private enforcement action. At this point, it is unclear what role, if any, compliance with consumer protection and "right to know" laws like Prop 65 will have in the global or national ESG arena; it is a large field and a crowded agenda. For some companies – and some industries – however, a compliance program may align with company values and customer and/or investor demands by providing information about potential exposures which in some cases can be reduced or eliminated – and in some cases, customers/retailers may require compliance with Prop 65.

[1] Prop 65 requires businesses with ten or more employees that “knowingly” expose persons to Prop 65 listed chemicals (either as carcinogens or as reproductive toxicants) to provide “clear and reasonable” warnings about the exposure unless they can establish the exposure is below significant risk levels. California Health & Safety Code § 25249.5 et seq. Whether a business is required to comply with Prop 65 is beyond the scope of this article, but key elements of the requirements are still largely unsettled and subject to dispute. Prop 65 is primarily enforced through private citizens’ suits, initiated by notices of violations (NOV). In 2021, plaintiffs served more than 3,000 NOVs.

[2] These NOVs allege that the “reasonably foreseeable use” of the product – when combined with other products that do contain a Prop 65 chemical – trigger warning requirements. Environmental General Counsel PC is handling an appeal of such a claim, after prevailing on a motion to dismiss in Alameda Superior Court. Environmental Health Advocates v. Sream, Inc., California Court of Appeal, First District, Case No. A163346 (pending). https://unicourt.com/case/ca-sca1-environmental-health-advocates-inc-v-sream-inc-155781.

[3] While this article discusses Prop 65 warning requirements only in the context of consumer product exposures, Prop 65 also applies to environmental exposures (e.g., air emissions) and occupational exposures.

[4] ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. The movement has gained traction as larger institutional investors are looking at ESG metrics for their own investments. Some companies have adopted their own ESG platforms, which standards may vary from company to company depending on their industry and priorities of their stakeholders and customers.

[5] RepRisk, a research group that markets its proprietary software as a way to identify ESG risks, tags health and environmental issues in products as a cross-cutting issue – one of 28 factors it considers in evaluating ESG risks. https://www.reprisk.com/content/static/reprisk-esg-issues-definitions.pdf

[6]Environmental Social and Governance: What is ESG Investing?, Forbes Magazine, March 1, 2021.

[7] See, As You Sow webpage for a list of shareholder resolutions introduced by As You Sow. https://www.asyousow.org/resolutions-tracker

[8] Where available, companies can use safe harbor numbers established by the Office of Environmental Health Hazard Assessment – the regulatory agency responsible for administering Prop 65 – but otherwise must develop or use other benchmarks.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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