Reduce, reuse, recycle: why the markets are key players in the war on plastic waste
Investors should focus on collection and recycling to have the greatest impact in targeting plastic waste.
Of all the shocking statistics that now surround the growth of marine plastic waste, one stands out in particular: according to research undertaken by the World Economic Forum, UK charity The Ellen MacArthur Foundation and consultants McKinsey, unless current trends are reversed by 2050 the world’s oceans could hold more plastic than fish by weight.
The scourge of ocean plastic waste is now top of the global agenda. At the June’s G20 summit held in Japan, world leaders committed to The Osaka Blue Ocean Vision, which aims to “reduce additional pollution by marine plastic litter to zero by 2050”.
Corporates are also increasingly aware of the reputational and business risks they take if they do not address this issue. Research by Morgan Stanley found that the number of corporate earnings calls that mentioned “plastic waste” increased by 340% over the year in 2018.
Momentum to tackle the challenge has been building across many sectors for some time, driven by growing public awareness of the situation. Second only to global heating as a threat to life as we know it, the volume of plastic waste risks imminent environmental breakdown unless something changes, fast.
According to the United Nations Environment Programme, consumer plastic and packaging causes nearly $140 billion in total environmental damage every year, including $13 billion to the marine environment alone.
Unfortunately, the rate of plastic production is increasing rapidly. Oil and gas companies, responsible for over 90% of all plastic produced, have been increasing investment in plastic production infrastructure. At current rates, yearly virgin plastic output will increase from 311 million tonnes in 2014 to over one billion tonnes in 2050. It is crucial both from an environmental and an economic perspective to prevent all this new plastic from becoming waste.
The global plastic packaging market grew by 5% annually from 2000 to 2015, and plastic as a share of total packaging volume grew from 17% to 25%. Some 72% of this plastic packaging is not recovered at all: 40% goes to landfill, and 32% leaks out of the system — either by not being collected or being collected but then illegally dumped.
In 2015, only 5% of the material value of plastic packaging – approximately $4 billion to $6 billion – was retained for future use each year.
The overwhelming nature of the task at hand nonetheless presents a rich opportunity for impact investment. Funds could be targeted at accelerating and scaling alternative materials, promoting innovative products and circular business models or advancing plastics collection, tracking and sorting.
Dealing with plastic waste has become an increasingly urgent issue for developed nations since China, previously responsible for importing the greatest proportion of the world’s plastic waste, suddenly banned most of these imports in 2017 under its National Sword policy.
Maxime le Floch,
“China’s National Sword policy has been a major problem,” explains Maxime le Floch, investment analyst at UK-based Hermes Investment Management, which has $44.4 billion of assets under management. “It’s been a wake-up call for countries where ‘recycling’ really meant ‘sorting before exporting’, mainly to China.”
In early 2018, Hermes launched its £179.4 million Impact Opportunities Fund, which uses the 17 UN Sustainable Development Goals as a framework. The fund invests in a global equity portfolio of 25 to 50 primarily mid-cap securities, typically held over five to 10 years. It is representative of an overall trend towards an increase in environmentally sensitive finance.
In response to China’s change in stance, le Floch says: “The only solution is to have better local recycling facilities. Landfills are expensive, both financially and environmentally. We need to invest in increased recycling capacity.”
For now, recycling seems to be the point in the plastics chain at which impact investors can be the most immediately effective. Over 95% of plastic is used once before leaving the economy – a financial loss of $80 billion to $120 billion a year.
Keeping plastic in circulation will require sweeping changes at all points in the plastic chain, but improving and expanding recycling facilities is an obvious place to start. This part of the chain is also easily accessible to capital markets investors: many waste collection firms are well-established issuers in the corporate debt markets, while the municipal debt markets are frequently used to fund recycling initiatives.
But more direct investment in recycling capacity is clearly needed as well.
Seema Suchak, ESG analyst at Schroders, agrees that the initial focus needs to be on the end of the plastics chain.
“Waste management is a particularly local and fragmented industry,” she says. “Since China’s National Sword policy was introduced, this industry has, ironically, been slowest to respond when it could be the one to benefit the most. There has been a build-up of rubbish and waste that can’t be recycled in western countries: waste management companies need to respond.”
This is where investment can act as a catalyst for change. The pace and scale of activity urgently needs to increase, but there is no clear blueprint for investors to follow.
Suchak observes: “The problem we encountered when we started our research into plastic waste was that there was not enough information to determine whether a company would have the right impact, and whether it was an investment opportunity or not. To solve this problem, we have targeted engagement with companies – either those we are already invested in, or those in which we are interested – in many different sectors: packaging, chemicals, oil and gas, waste management, and right across the consumer sector.”
Le Floch agrees that detailed research on a company-by-company basis is essential: “Although the SDGs were not designed for investors, we’ve been able to translate them and create a taxonomy that better enables us to identify companies that have a sustainable impact.”
He acknowledges, however, that while this top-down approach is a useful place to start, “you need to dig in and do proper research on individual companies as well”, since “there’s no database that tells you what companies are sustainable”.
Stimulating greater recycling of plastic waste requires investment not just in recycling technology, but also in mechanisms for collection that make recycling more efficient.
“To have a circular system, you need to address each part,” says le Floch. “You need to be able to recycle the plastics, but to do that you need to be able to collect it. If you can’t collect and sort it properly, then the circle isn’t complete. Globally, there aren’t enough collection schemes in place, which is a massive problem.”
In regions where collection points are ubiquitous the impact is remarkable. “Countries that don’t have a deposit-collection scheme plateau at recycling rates of 10% to 20%,” explains le Floch. “Those that do can achieve rates of more than 90%. The impact is pretty demonstrable and clear.”
Hermes is one of 25 institutional investors from four countries with a combined $1 trillion of assets under management that has pledged to interact with leading consumer goods companies on the threat posed by plastic pollution and the associated corporate brand risk. Aviva Investors has also signed up to the scheme.
A key initiative in plastic collection is reverse vending machines. An empty bottle is exchanged either for cash or a coupon. Not only does this incentivize people to recycle, but it addresses one of the banes of plastic recycling: the sorting of the dozens of different types of plastic that arrive at recycling plants as a single chaotic mass.
Le Floch explains: “Aluminium, by comparison, is quite well recycled because it’s easy to collect and sort with magnetic devices. Plastic waste isn’t easy to sort: often recycling facilities get clogged with plastic bags and have to stop and restart several times a day. So, it makes sense to have a dedicated waste stream for plastic bottles, which is where the reverse vending machines come in.”
The Norwegian recycling solutions provider Tomra is the world’s largest producer of reverse vending machines, operating in approximately 40 markets worldwide. Its machines scan the barcodes on bottles enabling them to identify and recycle the many plastics from which they are made.
Tim Crockford, lead portfolio manager of the Hermes fund (which has invested in Tomra), expects the reverse vending machine market to grow six-fold over the next 10 years.
Truls Haug, Tomra’s UK country manager, explains the benefits of deposit-return systems (DRS): “When you capture the material with a DRS you capture it in a clean way because it isn’t contaminated, unlike with a kerbside system where all the materials are mixed. Also, you are able to capture more of the material: a kerbside system only captures 60%, with a DRS you can capture 90% to 95%. In the UK, this would save 400 million objects a year from being littered.”
With a DRS it is possible to recycle 95% to 100% of the plastic back into the same value chain – meaning bottle to bottle, or bottle to food-grade material. With a kerbside system it is possible to recycle only up to about 30% to the same level, with the rest being either down-cycled or incinerated.
Le Floch also emphasises the economic incentives for a clean waste stream: “The recycling industry is fairly capital intensive for something that’s quite low margin, and very volatile because you end up selling what’s effectively a commodity. It’s very useful, therefore, as a recycling company to make the process as efficient as possible to increase your margins.”
In the UK, nearly a million plastic bottles are discarded each day. But polyethylene terephthalate (PET), the type of plastic most bottles are made of, is relatively high in value because it can be easily recycled – a used bottle can be back on the shelves in a new form within weeks.
Post-collection, recycling facilities are an obvious target for impact investment. “Investing in downstream capacity is still easier to understand and a safer bet for investors than innovative new upstream technologies,” explains Michiel de Smet, head of the finance programme at The Ellen MacArthur Foundation, a UK charity that is pushing for a global transition to a circular economy.
But more of the focus should be on the beginning of the plastics chain.
“We’re not going to recycle our way out of this problem,” he warns. “Thinking about the bigger picture, many of the solutions are embedded in how you design your system. For example, you shouldn’t be asking: ‘What’s better, a single-use polystyrene cup, or a paper cup with a plastic lining?’ if reusable cups are a viable solution. Instead of thinking about what material you should use for your single-use cup, you should simply look into reuse models which solve upstream many of the related issues downstream, regardless of whether it’s made from tougher plastic, bamboo, or some other material.
“If you include circular economy principles from the design of the object onwards, you create less of a problem later on.”
It is essential to attract investment into these types of disruptive technologies at the beginning of the chain too. This is where green bonds can help.
“The green bond model is a good one, especially for companies that need to invest in things like R&D or better production processes,” says Audrey Choi, chief sustainability officer and chief marketing officer at Morgan Stanley. “We were the sole underwriter with the World Bank on their Sustainable Development Bond aimed at drawing attention to the challenge of plastic waste pollution in the oceans.
“We want to get more issuers doing these kind of bonds, in larger volumes.”
Morgan Stanley has prioritised the challenge of plastic waste through its new Plastic Waste Resolution. The firm hopes to “prevent, reduce and remove 50 million tonnes of plastic waste from entering rivers, oceans, landscapes and landfills by 2030.”
To put that number in context, 100 million tonnes of plastic has accumulated in the oceans since 1950, and 8 million tonnes enters the marine environment every year – the equivalent of a rubbish truck dumping its load every minute.
“We started looking at how we could play a meaningful role in addressing plastic waste more than a year ago,” says Choi. “The issue of plastic waste is a global, systemic problem. Morgan Stanley clients are at every point of the plastics value chain and we want to drive capital towards opportunities for better use of plastics and better management of plastic waste. What’s really exciting is that there is a high level of engagement at the top level of the firm.”
A plastic waste revolution
Tackling the urgent challenge of reducing plastic waste is one which requires a change in mindset throughout the industry.
“Each part of the value chain doesn’t see plastic waste as their own responsibility,” says Suchak at Schroders. “This must change: the entire chain needs to work together to close the loop.”
Indeed, le Floch warns that rolling out reverse vending machines across a whole country requires more than just investment.
“For collection schemes to be introduced, you need a government push: public policy that says there needs to be a collection scheme put in place,” he says.
In Norway, Germany, and Denmark, government policy has enabled reverse vending machines to become as recognizable a part of the national fabric as the supermarkets in which most of them are located.
On March 9 this year, the EU published a comprehensive report on the implementation of the Circular Economy Action Plan it adopted in December 2015. It launched a voluntary pledging campaign on recycled plastics through which 70 companies have so far made pledges. This will increase the market for recycled plastics by at least 60% by 2025, it says.
The measures include a ban of certain single-use plastic products (such as straws and cutlery) when alternatives are available, as well as actions for consumption reduction targets, product design requirements, and schemes to increase producer responsibility.
Le Floch notes that “the EU’s circular economy package specifically includes deposit-return systems, and in December last year the UK announced a similar circular economy policy that recommended such a scheme be implemented by 2025.”
This target should be achieved easily. In fact, Scotland has been going through public consultations and passing the necessary legislation faster than the rest of the UK; it should see reverse vending machines in early 2021.
Tomra expects to begin to roll out its products in England, Wales, and Northern Ireland in 2023. Haug emphasises the need for government support: “Without the right laws in place, it becomes too costly to be environmentally friendly.”
Regulation acts not only as a positive pull for change but also as a negative push.
“From a policy point of view, there is ever-increasing regulation of plastic,” de Smet at The Ellen MacArthur Foundation tells Euromoney.
This is forcing corporates to make changes to their products and encouraging innovative companies to introduce new technologies.
“Finally, consumer pressure is forcing governments and companies to take action,” he says.
The risk of being left with stranded assets in the portfolio is a very real one for impact investors targeting plastic waste.
Michiel de Smet,
“If investments are exposed to certain single-use products or a certain polymer, and then new regulations restrict or ban them altogether, these investments may become redundant,” says de Smet. “Or, if you’ve invested in current practices or models that aren’t future proof – such as machinery that produces particular single-use items or hard-to-recycle packaging items – the risk of disruption increases because of emerging solutions, such as systems based around reusability, new reuse models, or improved product design.”
Morgan Stanley estimates that the cost of plastic packaging materials as a percentage of sales can range from 1.5% to 13.9%; for most firms there is, therefore, a clear incentive to reduce this expense.
A coordinated approach between governments and industry players is crucial. “There is no magic bullet – you cannot solve the plastic waste issue with one wave of the magic wand,” says Choi. “There is no single company, no single industry sector, and no single government that can solve it alone. What’s needed is a holistic approach across the entire plastic value chain, from the engineering of the materials, R&D and product design, to the collection, sorting, and recycling of plastic waste.”
Of the 10 rivers that together are the source of over 90% of marine plastic pollution, eight are in Asia and two are in Africa. It seems crucial, then, for investment to be targeted in that region, where environmental damage from plastic pollution is disproportionately high.
De Smet is optimistic that both economic and environmental pressures will trigger systemic change.
“With emerging economies, even though demand for plastic is estimated to increase, the linear system eventually won’t work, since the economic loss and environmental damage will be too great if plastic is used once then discarded,” he says. “And even though environmental concerns may not yet be as much of a priority as they are in developed economies, at some point plastic pollution will be too invasive, and will affect people’s daily lives to the extent that it will be impossible to ignore.”
De Smet is hopeful that these regions may even be able to overtake developed nations in making the transition to a circular economy.
“It is possible for emerging economies to leap-frog developed countries if they design new systems with circular economy principles in mind from the outset,” he says. “In developed economies, certain systems are already in place that make it more difficult to shift to a circular economy, such as waste-to-energy plants that encourage the incineration of plastic.”
The age of bioplastics?
Maxime le Floch, investment analyst at UK-based Hermes Investment Management, explains that his firm is avoiding them for now: “We are not invested in bioplastics because it doesn’t appear that there is a strong impact case for it yet. It is interesting and we are following the development of the technology closely, but it’s yet to be demonstrably better than conventional plastics.”
The problem with bioplastics, he says, is that “you might be shifting the problem somewhere else. Some of the claims around biodegradability aren’t how most people would use the term: you need industrial facilities that heat the waste to 60°C before it degrades. This uses a lot of energy.”
Not only is the process more complicated than it seems at first glance, le Floch also warns that “there are issues around land use, since bioplastics use agricultural products.”
He compares them to biofuels, which were held up as a promising idea, but, in reality, were less effective than conventional options.
“Biofuels used palm oil, requiring vast amounts of deforestation in places like Malaysia and Brazil, contributing massively to loss of biodiversity,” says le Floch.
For now, it makes more sense for impact investors to focus on prevention – investing in recycling technologies to keep conventional plastics from becoming waste – so long as a biodegradable cure remains a distant prospect.