Turning the tide on plastics

investment viewpoints

Turning the tide on plastics

Alina Donets - Portfolio Manager

Alina Donets

Portfolio Manager

Plastic pollution has become an imminent threat to natural capital, putting biodiversity in danger and putting pressure on the long-term health and stability of natural systems and the global economy. This represents a major sustainability challenge that requires stringent and coordinated action at multiple levels of industrial and human activity.

Plastic has become a ubiquitous material that provides essential applications in many sectors. Specifically, the proliferation of plastic in short-lived and single-use applications has led to a massive rise in the quantity of plastic pollution. Other sources, equally as threatening, are linked to industrial activities and the production and use of synthetic textiles that have given rise to unacceptable levels of nano-plastic pollution. The amount of non-biodegradable plastic in the oceans is currently believed to stand at 150 million metric tons and this trend looks set to accelerate. Just plastic waste is now believed to be entering the ocean at a rate of approximately 11 million metric tons a year and this annual flow of plastic is on track to reach 29 million metric tons per year by 2040 – nearly triple the current rate.

The harmful impact of plastic pollution on oceanic ecosystems is undeniable. Plastic waste affects habitats and wildlife, and can cause serious damage to ecosystem function. More than 800 species, including sea turtles and nearly half of marine birds, are known to be at risk by the seemingly unstoppable tide of plastic waste pouring into the biosphere. The food chain is also at risk of lethal and sub-lethal harm from contamination by plastic and associated contaminants. This vulnerability is only enhanced by the contributing factors of climate change and overfishing.

At Lombard Odier, we have identified eight key sustainability challenges that underpin the transition to a sustainable global economic system, as well as environmental and social health. Addressing these eight challenges is critical to deliver the CLIC ™ economy, one that is Circular, Lean, Inclusive and Clean. In our view, these challenges require targeted action in the form of adjustments to both economic systems and human behavior, and as such represent important areas of investment. 

The proliferation of plastic waste is an imminent component of the zero-waste challenge within the CLIC ™ framework. This dimension represents a vital goal without which no economic model can be sustainable. Currently, waste flows are growing at twice the rate of population growth and will reach 3.4 billion tonnes by 2050. Improved waste management could not only unlock billions in economic value, but would also benefit from shifting economics through the avoidance of carbon emissions. Investable opportunities can be found in the waste management and recycling activity, plastic substitution and circular solutions, as well as repair services and the production of more durable goods that minimise the use of plastics.

 

Regulatory and political initiatives

The detrimental impact that plastic waste has on both the environment and health, has prompted both governments and regulators worldwide to take action. The EU, the US, the UK and China, for example, have all announced measures in recent years that are designed to curb the use of plastic products and packaging. The EU’s circular economy action plan is one of the main building blocks of Europe’s new agenda for sustainable growth, and specifies the need for a concerted approach to tackle plastics pollution at a global level. The commission proposes mandatory requirements for recycled content and waste reduction measures for key products such as packaging. The European strategy for plastics has recognised and prioritised the need to develop smarter and more recyclable plastics materials, to make recycling processes more efficient, and to trace and remove hazardous substances and contaminants from recycled plastics.

The UN Convention on Biological Diversity has also unveiled a draft plan, reminiscent of the Paris Agreement, to halt biodiversity loss. The plan states that “urgent political action” is needed “globally, regionally and nationally to transform economic, social and financial models so that the trends that have exacerbated biodiversity loss will stabilise in the next 10 years and allow for the recovery of natural ecosystems in the following 20 years”. The plan has 21 action-oriented targets for urgent action over the decade to 2030, including eliminating the discharge of plastic waste in order to reduce harm to biodiversity and ecosystem functions and human health.

 

Risks and opportunities

Plastic is on its way to becoming a regulated material, which is a trend that will create both winners and losers. Those companies which elect not to take action on their plastic output risk alienating a sizable proportion of consumers who have soured on the use of plastics. More than half of US consumers have registered concerns about the environmental impact of packaging, while between 60 and 70% have stated they would be prepared to pay more for sustainable packaging. A separate investigation found that 91% of consumers are concerned about plastic waste issues, even if that is not yet fully reflected in purchasing habits.

Large consumer brands that have demonstrated a commitment to reducing plastic packaging, or replacing it with other materials, will also find themselves in a position that is aligned with this direction of travel. Greater regulatory pressure will also present a boost for providers and producers of plastic alternatives. It is our view that the pulp and paper packaging industry, for example, is well positioned to benefit from a transition away from plastics. 

 

Leading the way

A number of companies held as part of our Natural Capital strategy have made demonstrable progress in reducing the amount of plastics used in packaging. Marks & Spencer, for example, has already incorporated this priority into its sustainability agenda. The high street chain now has targets on reduction of plastic, and recyclability of packaging. M&S claims that more than three-quarters plastic packaging is now recycled, with the goal of meeting 100% by 2022.1

Another key aspect of reducing plastic pollution is setting up waste management collection and processing capabilities to ensure any plastic still put through the waste streams is effectively collected and recycled. Veolia and Hera are among the industrial leaders in their regions, and are focused on waste management services across the entire chain. Veolia has said it aims to recycle 610,000 metric tons per year by 2023, up from 350,000 in 2019, and is a founding member of the Alliance to End Plastic Waste, which has collectively committed to contributing $1.5bn to help eliminate plastic waste. Hera, meanwhile, has partnered with NetChem  to build a plastics recycling plant capable of producing up to 30,000 metric tons per year of recycled-content polymers.1   

The intermediate solution is to reuse and extend the life of plastic products, where companies like consumer electronic group SEB are, in our view, taking a promising lead. SEB is increasing the utilisation of its electric appliances, which reduces the amount of waste with plastic content that is hard to recycle. In addition, SEB aims to achieve zero plastic packaging and expanded polystyrene by 2030, and for all packaging to use at least 90% recycled fibers.1

Plastic pollution is only one of the challenges when it comes to preserving and repairing natural capital, but it is an important area of focus. Government action and regulatory pressure are having an effect on the presence of plastic in the supply chain, consumers are adjusting their choices to the benefit of the companies that are working to address the challenge pro-actively, and there now exists a range of potential solutions that we believe can have a real impact. Crucially, any transition away from the widespread use of plastics will create winners and losers, thereby presenting a number of promising investment opportunities.  

 

sources

1Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

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