December 14, 2018 / In-depth
Asset managers grapple with plastic clampdown
By Cherry Reynard, Expert Investor
Backlash against plastic pollution and its toxic impact presents investment opportunities as policymakers get tough
Plastics are an environmental catastrophe. According to figures from the United Nations, more than eight million tonnes of plastic is dumped into the ocean each year, equivalent to a garbage truck of plastic every minute.
The UN estimates this has caused at least $8bn worth of damage to the world’s marine ecosystems. At current rates, by 2050 the world’s oceans may contain more plastic than fish, and more than 99% of seabirds will have ingested plastic.
Policymakers are slowly waking up to the crisis. There has been a steady drip of measures introduced to tackle the waste problem, including a state-wide ban on plastic bags in California plus ‘latte levies’ on single-use cups, while a ban on plastic utensils will be introduced in France by 2020.
Last year, all 193 United Nations countries signed a resolution to eliminate ocean plastic pollution. Countries around the world have previously sent waste to China for processing, but Beijing has said it will no longer accept plastics. This means countries such as the US can no longer adopt an ‘out of sight, out of mind’ approach.
In October this year, the European Parliament approved a ban on plastic straws and cutlery, and various European countries have established deposit return schemes for drink containers.
At current rates, by 2050 the world’s oceans may contain more plastic than fish, and more than 99% of seabirds will have ingested plastic.
Where policymakers lead, corporates need to follow. Not only is it more expensive, reputations are at risk when there is an excessive use of plastics, and companies are waking up to this threat.
Kate Elliot, senior ethical researcher at Rathbone Greenbank Investments, says many companies may be affected: “It tends to be retailers and consumer goods companies that are highlighted in the media, but it’s important to look across the whole value chain.
“For example, which chemicals companies are producing different types of plastics? Who is designing and producing packaging?
Who is involved in the collection and sorting of waste? And how are all these different agents interacting to promote or hinder a more circular economy for plastic?”
She adds: “Plastic pollution is not only an ethical or sustainability issue. It’s increasingly recognised as something with financial consequences. Not wasting valuable resources makes business sense, but there will be winners and losers from changes in regulation and consumer preferences.”
War against plastics
Environmental specialist Impax Asset Management identifies three areas of potential investment in the war against plastics.
The first is recycling services. Companies that provide collection services or other solutions, such as reverse vending machines, should benefit.
Second is recycling processes. Companies are finding ways to change the chemical composition of plastic to make it easier for recycling. Third, is innovation in packaging with biodegradable or fibre-based renewable packaging replacing plastic, and non-single use food packaging.
Investors can also avoid companies that are over-using plastics. This is not straightforward, though, says Elliot: “It’s not as simple as screening out companies with significant exposure to plastic – you’d be left with quite a restricted universe. Instead we need to understand how companies are positioned on issues such as resource efficiency, design for the environment and innovation in materials or recycling practices.
“Asking whether a material can be recycled is important as you obviously can’t recycle something that isn’t recyclable to start with. But it’s also important to ask about how much recyclable material is sold into markets where the collection, sorting and processing facilities exist to mean it can actually be recycled in practice.”
“We also need to remember that in many cases plastic performs an important function and focusing too narrowly on the issue of plastic pollution could lead to consequences elsewhere.
“It’s not about quick answers that replace one problem with another but encouraging companies to recognise and respond to the issue of plastic pollution as part of their broader sustainability frameworks.”
How investors can help
Pressure from investors is having an impact. In October, a global commitment to eliminate plastic waste and pollution at the source was signed by 290-plus organisations, representing 20% of all plastic packaging produced globally.
This New Plastics Economy Global Commitment – led by the charity Ellen MacArthur Foundation in collaboration with UN Environment – has been signed by many of the world’s largest packaging producers, brands, retailers and recyclers, as well as governments and NGOs.
Among them are Danone, H&M Group, L’Oréal, Mars, PepsiCo, The Coca-Cola Company and Unilever. Major packing producers such as Amcor, plastics producers including Novamont and resource management specialist Veolia have also signed up.
These businesses are committing to publish annual data on their progress towards reaching plastic packaging targets. These targets will be reviewed every 18 months and are designed to become increasingly ambitious over the coming years.
Charlie Thomas, head of strategy, environment and sustainability at Jupiter Asset Management, believes the world is at a tipping point on plastics pollution: “Our experience of how sustainable investment themes evolve tells us to expect an acceleration in the number of investable companies working on finding alternatives to plastics.”
He is investing in groups such as Lenzing best known for its Tencel textile brand. This is made from waste wood and cotton scraps and provides a viable alternative to manmade fibres such as nylon and polyester. He says the ‘eco-innovation’ theme is providing a long pipeline of opportunity.
British asset manager Liontrust’s ESG criteria, meanwhile, now encourages companies to make changes to food production and packaging to deliver food with reduced wastage without reliance on plastic packaging.
The firm also encourages readily biodegradable packaging, plastics derived from natural sources, and improved recycling rates.
Plastics present both an opportunity and a threat for asset managers. There are companies that have exciting potential solutions to the problem, but also companies that may be at risk as policymakers clamp down on plastics pollution.
The backlash against plastic is building momentum and asset managers everywhere will need to take note.
– This article first appeared on ESG Clarity‘s sister site, Expert Investor.