Plastic phase out - The investor view
13 November 2018
After a short, single use, 95% of plastic packaging material value, or US$80-120 billion annually, is lost to the global economy.
The plastic problem
Plastic waste is now recognised as a major environmental problem. For decades, its ubiquity of use combined with low recoverability and recyclability, as well as a lack of waste management solutions, means the planet now faces a monumental pollution crisis.
A large amount of this plastic waste finds its way in to our oceans. It's now estimated that eight million tonnes* of the stuff enter the marine environment each year and is responsible for the deaths of more than a million seabirds annually, as well as more than 100,000 marine mammals†. Rather alarmingly, it has also been recently confirmed that microplastics (the tiny particles that occur as plastic waste breaks down, and which are consumed by fish) have now entered human food chains.
The numbers elsewhere are also startling. For instance, the World Economic Forum estimates that after a short, single use, 95% of plastic packaging material value, or US$80-120 billion annually, is lost to the global economy. A staggering 32% of plastic packaging escapes collection systems, generating significant economic costs by reducing the productivity of vital natural systems such as the ocean and clogging urban infrastructure.‡
Cost and action
The cost of such 'after-use' externalities for plastic packaging, plus the cost associated with greenhouse gas emissions from its production, is conservatively estimated at US$40 billion annually - exceeding the plastic packaging industry's total profit pool.‡
Acknowledgement of the scale of this problem is now gathering momentum. Policy makers are increasingly developing mechanisms to either price-in the external costs associated with dealing with plastic waste or introduce regulations to limit its use and production.
Last month, the European Parliament overwhelmingly approved limits on the production of single-use plastics, with items such as cotton swabs, plastic straws and cutlery to be banned by 2021, and EU states to recycle 90% of plastic bottling by 2025. The proposed legislation is by far the most ambitious regulatory action so far by a major government to tackle plastic use and follows on the back of other steps by individual nations such as levies on single-use plastic carrier bags and the ban of microbeads in cosmetic products.
Eight million tonnes* of plastic enters the marine environment each year, responsible for the deaths of more than a million seabirds and more than 100,000 marine mammals annually†.
Implications for companies
So, what are the ESG implications for companies and how do we build this into our analysis? Materiality is an important consideration here. Consumer goods companies in particular, have significantly higher value at risk from a dependency on plastic use, either directly in their products or through packaging. For these companies we spend considerable time understanding how their business models and, ultimately long-term margins, would be impacted by the regulatory imposition of external costs or the outright ban on the plastics integral in their offering.
We also look for the companies that are taking the lead in dealing with this problem. Not only are these businesses likely to benefit from longer-term cost reduction, there will undoubtedly be positive reputational uplift as public consciousness of the problem increases. There are opportunities here as well for companies that can innovate solutions such as bioplastics or sustainable packaging, and this is an area generating increasing investor interest.
Licence to operate
From here, we expect 'plastic phase out' to continue at apace. Regulation is likely to intensify, but more importantly (and harder to directly quantify) will be the behavioural shift from consumers. In my view, this has the potential to move faster and be more impactful than much of the policy directives we have seen already. With plastic pollution now so high on the public agenda, consumer goods companies will undoubtedly need to adapt. Maintaining their 'licence to operate' through the use of sustainable plastic products may soon become a necessity.
* Source: NRDC.
† Source: UNESCO. Facts and Figures about Marine Pollution.
‡ Source: World Economic Forum, ‘The New Plastics Economy – Rethinking the future of plastics’, January 2016.
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