The hollow façade of federal environmental and product safety regulation makes it essential that corporate managers and the investors in their companies, look beyond mere compliance with federal law to effectively and strategically manage the business risks from toxic chemicals in the products they manufacture and retail.

The robust media coverage of product recalls in recent months has highlighted the sad state of federal law and regulation. It's truly like the Potemkin villages of old - a false front suggesting that the federal government is protecting public health and the environment when in reality existing laws, regulations, staffing and budgets are grossly deficient and have been for many years. The recent congressional uproar over declining staffing and limited budgets at the Consumer Product Safety Commission brings to mind the famous scene in the movie Casablanca, where Captain Renault closes down the gambling in Rick's café and declares, "I'm shocked, shocked to find that gambling is going on in here," and is then handed his winnings by the croupier.

The following is just one of many available examples: eleven years have passed since Congress told EPA to establish a screening and testing program for hormone disrupting chemicals, EPA's chronically, dismally underfunded programme still is many years away from completing development of the screens and tests. EPA's programme lags even as scientific evidence about the impacts of these chemicals multiplies; without the programme in place, EPA's ability to respond is hobbled.

So individual states are stepping forward to fill the void. California's clearly the leader, inspired by regulatory developments in Europe over the last several years. There are now 27 nations in the European Union; California has adopted so many of Europe's chemical regulations that it's jokingly been suggested that California should consider becoming number 28.

Following the EU, California has adopted new laws on brominated flame retardants, toxic chemicals in electronics goods, cosmetics safety and phthalates in toys. A senior marketing VP for a major retailer commented on this pattern at a meeting with IEHN participants: "We look over there in Europe because what happens in Europe comes over to the States. We look at California and the East Coast because that's what's going to shape the marketplace for us."

California's not alone. Similar initiatives have been launched in Washington, New York, Maine and Massachusetts, among others. In mid-December 2007, Maine Governor John Baldacci announced he will incorporate into his 2008 legislative package some of the recommendations of a task force on reducing toxic chemicals in consumer products. He can select from recommendations including publication of a list of chemicals of high and moderate concern, requiring disclosure by companies of these chemicals in their products and restricting chemicals in consumer products when safer alternatives are available and affordable.

The recommendations from the Maine task force reflect a newly established EU regimen for chemicals management called REACH. For companies managing supply chains, the most noteworthy and potentially worrisome near-term component of REACH is the publication in mid-2009 of chemicals whose characteristics make them substances of very high concern for potential substitution. Regardless of how quickly EU regulators act on the list, there'll be a tremendous incentive for socially responsible retailers to get ahead of the curve and to ask their suppliers to eliminate these chemicals from supply chains.

B2B initiatives complement those from the states. Wal-Mart's sustainability policies, including its precautionary preferred substances (chemicals) policy, have drawn considerable attention. The health care sector, responsible for 16 per cent of US GDP, is a hotbed of safer chemical initiatives, observing the precept of "first, do no harm". Consorta is a group purchasing organisation (GPO) representing 60 per cent of all the Catholic health care systems in the US, and it has just launched Evergreen magazine, captioned "The magazine for environmentally preferred healthcare purchasing." The journal will go to at least 50,000 healthcare managers and its regular chemical feature will focus on such substances as mercury, flame retardants, phthalates and pesticides.

So what do all these developments mean for corporate managers and for the investors assessing their companies? First, a company with a federal compliance mindset has its head in the sand and will be ill-prepared for toxic lockouts of products from various marketplaces. Second, a company needs to systematically gather information from its suppliers on the toxic chemicals in its supply chain, even though this can be quite difficult where supply chains are quite extended and local regulations and political cultures are not supportive of disclosure.

Third, those companies launching sustainability initiatives must have strong chemical foresight mechanisms developed, where appropriate, akin to the foresight mechanisms insurance companies have evolved to flag emerging risks and establish suitable goals and metrics for toxicity reduction to ensure success in potentially turbulent chemicals markets ahead.

Fourth, beginning the safer chemicals journey, especially for companies with no prior experience or internal expertise, can be an intimidating process. Companies should aggressively explore opportunities to partner with companies within and outside their businesses and with those NGOs that have developed strong technical competencies, to speed their journey.

For their part, investors should heed the lessons from 2007's recalls of various consumer products: the companies they invest in need solid policies and practices in place for tracking chemicals in products ... or face toxic lockouts from the marketplace, reputational damage, sizeable reductions in shareholder value and possibly lawsuits.

Richard Liroff is the Executive Director of the Investor Environmental Health Network.

This column first appeared at Greenbiz.com. It is excerpted from a longer article, "Toxic Lockout", scheduled for publication in the May/June 2008 issue of The Environmental Law Institute's Environmental Forum.