February 15, 2022 — Four years ago, Capstone analysts highlighted a disturbing situation that they believed would have significant investment implications for companies and municipalities. They described a family of chemicals known as polyfluoroalkyl substance (PFAS) used in a wide variety of products, including food packaging, firefighting foam, clothing, and semiconductors. PFAS chemicals were used in so many products that they were found in small concentrations everywhere scientists looked. PFAS doesn’t break down naturally hence the nickname “forever chemicals,” and they bioaccumulate in living organisms. With a proven link to several types of cancer, our analysts believed PFAS could be one of the largest legal liability cases in US history.
The topic hit close to home for me. My dad worked for DuPont, which used PFAS chemicals in numerous products, including Teflon, for 40 years. When I was a child, my dad traveled to DuPont’s Parkersburg, West Virginia plant weekly. The plant and the town later became the subject of a critically acclaimed film called Dark Waters, highlighting the deadly impact of PFAS. I had my own contact with PFAS, having spent part of a summer interning at a DuPont plant in New Jersey that used tons of the chemical every day.
Today, Gianna Kinsman leads Capstone’s analysis of the investment implications of PFAS. She leverages Capstone’s experience in modeling legal liability in highly complex situations such as the opioid crisis and the California wildfires. Gianna balances her approach by focusing both on the potential downside to makers of PFAS and the upside to companies involved in the remediation.
Below I had the pleasure of discussing this fascinating topic with Gianna:
How is your work on the PFAS topic different from other work you have done?
The PFAS topic is much broader in scope than anything I have worked on. It involves litigation, legislation, and regulation on a state and federal level. Unfortunately, the chemical has been used in so many products that contamination is everywhere now, making the cleanup incredibly expensive.
There is a perception that PFAS primarily affects the bigger companies that have historically made the chemical like DuPont and 3M? How much further does the impact go?
PFAS affects the entire value chain, from the manufacturers of the chemicals (e.g., 3M), to manufacturers of surfactants or dispersions, to potentially thousands of manufacturers who used the chemicals in their product, to cities and counties or private operators that manage landfills where the chemicals are slowly leaching into the ground.
The negative impacts seem driven by legal liability – it’s a big complex topic. How do you simplify thinking about the issue?
Because the cleanup and ultimate destruction of PFAS are so difficult and expensive, the question of who pays for it is driving the legal liability situation. The numbers are staggeringly large and may eclipse some of the largest product liability cases in history. I think of the problem as waves of litigation, where the next wave will be driven by upcoming federal regulation. Within the litigation arena, there are two primary buckets: one is multi-district litigation focused on aqueous film-forming foam (AFFF), which contains PFOS and, in some cases, PFOA. The second bucket is focused on non-AFFF PFAS industrial discharge contamination. Both resulted in drinking water and groundwater contamination, which has driven litigation.
What is your estimate of the total PFAS liability?
My model currently shows a total liability of $89.4 billion, but that could end up being a very conservative number as federal and state regulation dramatically increases the cost of the cleanup.
How much do you think the liability will be for 3M?
My model shows that the legal liability for 3M will be at over $25 billion by 2030. In many ways, this is a conservative estimate. The legal liability could create serious liquidity problems for the company depending on how large cases are decided.
How much do you think the liability will be for Chemours? Do you think the liability will spread to other DuPont legacy companies?
Chemours and other Dupont legacy companies could share as much as $9.9 billion of liability before the end of the decade.
What would make you change your mind and increase your forecast?
If federal drinking water standards are lower than expected, say in the 5-10 parts per trillion range, that would dramatically increase the cost of remediation to municipal water treatment plants, which would want to recoup that cost through litigation. Also, I am currently only assigning about half of the total liabilities in my model to companies—so there is room for the liabilities to grow substantially.
There is a perception that the issue represents only downside. Are there companies that will benefit?
Definitely. The sheer size of the remediation effort will benefit hundreds of environmental services companies and engineering/environmental consulting companies involved in site cleanup and transporting and storing PFAS waste. We also expect water remediation companies to benefit.
Will landfill operators benefit?
It’s a mixed bag. Operators of existing landfills may have substantial legal liabilities from leachate contaminated by PFAS. However, demand for specialized hazardous material disposal will grow once EPA designates PFAS as hazardous. But new hazardous disposal capacity will likely be very slow to come online due to lengthy, stringent permitting processes. We believe this dynamic will benefit incumbent hazardous waste disposal operators.
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