What Dow Knows (But Won't Tell)

At this week's annual stockholder meeting, Dow Chemical will surely tout the fact that its stock has outperformed the S&P 500 for the better part of the last five years. But can a company as environmentally burdened as Dow keep it up? Dow is being sued in the U.S. and overseas for environmental damages that stem from both its core products and from the toxic chemicals that are byproducts of its big manufacturing processes.

Take Dow's dioxin liabilities. Dioxins, which are a byproduct of production of some Dow chemicals, are known to cause cancer, immune suppression, reproductive, developmental and liver damage. A class action lawsuit by Michigan residents is seeking compensation for the contamination. Residents in the region are asserting approximately $100 million in property damages and seeking medical monitoring. The medical monitoring claim is now before the Michigan Supreme Court.

Dioxin is also a severe problem in Agent Orange hotspots including Vietnam, New Zealand and Australia, where the Dow-produced herbicide was sprayed as a lethal war defoliant and released at manufacturing facilities. Roughly 100,000 claims of Agent Orange exposure-related health problems by U.S. veterans have been filed with the government since 2000. U.S. and Vietnamese veterans and their families are suing Dow for compensation.

The unfinished legacy of the 1985 Union Carbide chemical factory explosion in Bhopal, India became Dow's problem when it acquired Carbide in 2001. One hundred and fifty thousand survivors and residents of Bhopal are still suffering from the after-effects of that explosion, which has killed 20,000 people to date. These survivors are seeking additional compensation and the environmental cleanup that was never performed.

But it's not just Dow's past that should make investors, by nature a nervous bunch, more nervous. Developing legal and public policy trends raise a big question mark as to whether Dow's reliance on organochlorine chemistry is the way to go in the 21st century. Just last month a landmark U.S. Supreme Court decision, Bates v. Dow Agrosciences, affirmed the right of citizens to sue chemical manufacturers for harm caused by their pesticides. Thousands of people harmed by pesticides will now be able to hold pesticide companies accountable in state courts for making and distributing dangerous chemicals.

In the last 15 years, Dow has already been sued in 300 lawsuits claiming damage from Dursban (the trade name for the neurotoxic pesticide chlorpyrifos), which can cause respiratory paralysis, convulsions, nausea, headaches and other symptoms with acute exposure. Last year, the Centers for Disease Control (CDC) reported that 93 percent of the U.S. population had this chemical in their bodies and one market analysis indicates that Dow Chemical likely contributed at least 80 percent of public exposure to chlorpyrifos.

Just over the horizon is the European Union's REACH (Registration, Evaluation, and Authorization of Chemicals) policy, which will require chemical companies to provide data on their products including toxicity and exposure to humans and the environment. Toxic chemicals must be registered, and the worst could be restricted in favor of safer alternatives. Some industry associations suggest that up to 20 percent of chemicals on the market will be discontinued. Approximately one-third of Dow's revenues are derived from Europe. Other international documents such as the Great Lakes Water Quality Agreement and the Stockholm Persistent Organic Pollutants Treaty are paving the way for the elimination or restriction of certain chemicals that Dow produces. Dow appears to be bound for a head-on collision course with changing public policies.

Incredibly, Dow's filings with the Securities and Exchange Commission fail to mention any of these factors except the Dursban suits. The SEC requires discussion of "any known trends, demands, commitments, events or uncertainties" that are "reasonably likely" to have a material effect on the bottom line. Unfortunately, the Commission is notorious for failing to enforce these rules.