Hand In Hand - Compliance with regulations implemented to protect humans and the environment has been a top priority for chemical companies in Europe in the recent years. On the other hand, sustainability is gaining in importance in all industries.

Brandi Schuster caught up with Prof. Dr. Martin Hill, vice president of sustainability EMEA at SAP, to talk about the correlation of the two topics. Hill has many years of experience in chemical compliance consultancy and sustainability. He also teaches entrepreneurship and sustainability at the University of Siegen, Germany.

CHEManager Europe: Martin, in your opinion, what are the biggest challenges for European companies regarding chemical compliance?

Prof. Dr. Martin Hill: The biggest challenge is to comply with the Reach regulation. This EU regulation aims to centralize and simplify chemicals legislation throughout Europe. The declared objective was to improve the level of knowledge about dangers and risks that chemicals may pose. Companies are expected to assume even more responsibility for the safe use of their products. As a consequence, Reach brought about a plentitude of tasks the European chemical industry had to fulfill during the past years. And it still keeps them busy.

Now the chemical industry has all the necessary knowhow about the requirements. What is crucial now is that companies must integrate their Reach processes in their supply chain communication and in their IT environment. Reach is not a one-time effort; the real challenge is to stay compliant. It will be vital to include compliance checks e.g. into procurement and sales processes. By doing so, they secure the transparency and efficiency of their compliance processes connected to Reach.

What steps can companies take to make sure they are compliant?

Prof. Dr. Martin Hill: Firstly, they need to understand the Reach requirements applicable to them, based on the role they have in the Reach context. A second step would be to translate those requirements into process requirements and to reorganize business processes accordingly. Finally, they need to implement those business processes with IT solutions. For example, a company has to detect its role or roles under Reach. Most of the companies will not only have one role, for example as a downstream user.

For some substances or products they might have the role of an importer. So they have to check those products and substances first and then initiate the next steps, including registration etc.
The crucial point again is not to do it one-time and then being in a position "Hurray, we are compliant!" This would be a mistake. The important thing is to install processes to observe the product and substance portfolio and detect your obligations. It might be that the change of an International Commercial rule could already change your position in a supply chain.

The European Chemicals Agency (ECHA) recently said that after screening over 400 registration dossiers for intermediates, 86% of them seem not to contain sufficient information to demonstrate that these conditions are fulfilled. Where do you see the major hurdles in compliance: In companies who don't have the proper workforce to deal with compliance issues such as Reach; or inside the watchdog organizations, who might not be clear on their requirements?

Prof. Dr. Martin Hill: ECHA said that 86% of the dossiers were insufficient in terms of some data were missing. That does not necessarily mean that the dossiers were totally wrong and not justifiable. I am sure the chemical industry has the right people on board to deal with Reach and other compliance topics.

I think we have to grant a period of time were such issues caused by lack of clarity or different interpretations can happen. And this is a real hurdle. We have to remind ourselves what Reach means for companies and within what timeline they have to fulfill these obligations. I am sure some of the issues concerning the dossiers were caused by evolving and not always finalized interpretations and discussions.

Does compliance give Western chemical companies a competitive advantage over their Asian counterparts?

Prof. Dr. Martin Hill: Fulfilling the regulatory requirements for things such as Reach also brings about an innovation process. For example, chemical producers develop new substances that are less hazardous or new production processes. And they learn more about the substances they have been using in the past. We also have to consider the dynamic evolvement of, let's say, "Reach-like" upcoming regulations especially in the Asia/Pacific region. These regulations will set the same level playing field for all companies and this is good. The still outstanding Toxic Substances Control Act (TSCA) reform in the U.S. can already be a disadvantage for U.S. companies.

Using an integrated IT system that involves all locations and production sites worldwide enables them to react quickly to new and changing compliance requirements - no matter from which world region they derive. This definitely means a competitive advantage. From our experience, more and more countries put regulations into practice, despite the efforts to harmonize regulations worldwide. In 2009, there were more than 2000 Environment, Health and Safety (EHS) regulations worldwide, that was a rise of 72% compared to 2007.

Are European companies well prepared to do business in Asia? What are the biggest pitfalls and what steps have to be taken in terms of compliance?

Prof. Dr. Martin Hill: From all that I have seen at European chemical companies, they are well prepared to do business in Asia. In fact, they could not afford to be badly prepared, in times of global competition. The challenge they have to take is to fulfill all the Asia specific product notification systems like China New Chemical Substance Notification, Japanese Chemical Substance Control Law (CSCL) or Korean Toxic Chemical Control Act (TCCA).

Some of them are quite similar to Reach, so companies can reuse the data they already have in their IT systems. Others require data on different substances or similar data but in another format. This makes it quite complex to comply with all the different notification systems.

Does regulatory compliance automatically equal sustainability in the chemical industry?

Prof. Dr. Martin Hill: Some people say regulatory compliance is only one part of the story. Due to the complexity of worldwide regulations and the necessity to be compliant with those, we believe it to be the cornerstone of a sustainability strategy in a chemical company. For many of our customers, compliance has first priority.

You cannot operate in a sustainable manner if you are not compliant. For example, how could you secure markets in the future if you would risk losing the permission to sell your products due to incompliance with a local regulation? But, of course, the concept of sustainability goes far beyond being compliant. We identify it to increase short and long-term profitability by holistically managing economic, social and environmental risks and opportunities.

Martin, from your discussions with the chief sustainability officers of SAP's key customers, what are some of the most direct needs in the chemical industry in terms of sustainability?

Prof. Dr. Martin Hill: As I said, the first priority is regulatory compliance in order to be able to do business worldwide and so to protect revenue, as we see with the no data, no market principle. Secondly, in times of rising energy costs, energy efficiency is crucial to drive profitability. Thirdly, brand protection and brand innovation are necessary to protect and grow revenue.

Just think about BP, whose market cap was cut in half in just two months during the oil spill and has gone from being no. 1 in its category to the last on the brand-loyalty index maintained by Brand Keys, a research consultancy in the world that specializes in customer loyalty. Another priority in order to intensify stakeholder communication and improve reputation is sustainability performance reporting. This means, gathering all sustainability relevant data of an organization and to make it transparent and vivid to all stakeholders regularly or whenever required.

Is sustainability business critical for the chemical industry?

Prof. Dr. Martin Hill: Yes, and not only for the chemical industry! According to the UN Global Compact CEO Survey 2010, 93% of CEOs state that sustainability is critical for the success of their future businesses. This is an astonishing big%age; it shows that business leaders have understood that sustainability is not only a trend topic like many others, but a new management approach.

Implemented thoroughly, it brings about a business transformation to cover the future challenges like rising energy costs or worldwide regulations, just to name a few. In the years to come, companies need to manage their resources in a different way.
On the other hand, a lot of companies from different branches climb on the sustainability bandwagon or use "green washing" for their marketing campaigns.

It is my firm conviction that within the next few years, business reality will separate the wheat from the chaff - sustainability needs to be an integral part of a business strategy, not only a campaign. Already today, companies with a positive sustainability rating are more successful than others: In 2010, A.T. Kearney Consultants analyzed companies from the Dow Jones Sustainability Indexes (DJSI).

For the months May to November 2008 they found out that DJSI listed companies from 16 out of 18 branches experienced a stock market value enhancement of 15% compared to the average of the respective branch. The Corporate Knights Global 100, which lists the 100 most sustainable cooperations, showed a similar development: Since its inception in 2005, the market indicator has grown 16% more than the comparable index MSCI All Country World, which measures equity market performance of developed markets.