Reducing plastic waste produced by the economy is not just about plastic bans. Plastic products have important functions in many parts of the economy, including in life saving technologies and in food waste. Packaging alternatives to plastic are not always better in terms of reducing the impact on the environment. Having said that, there is no way around the fact that society has a plastics problem. According to OECD data, annual global production of plastic is over 460 million tonnes, and only 9% is recycled.
The UN PRI created a plastics working group to highlight the risks companies in specific sectors face and provide guidelines on how to engage with companies regarding plastics. It suggests that engagements with packaging companies consider packaging types, packaging design, consumer preferences for product features, and data gaps on plastic use. The UN PRI guidelines on key risks are a useful reference; however, we view the opportunities to generate strong returns as companies invest and innovate to reduce plastic waste as equally important.
As an active fundamental asset manager, our sustainability-focused mandates have made the UN Sustainable Development Goal of Responsible Consumption one of the pillars of how we invest. Our engagement activities with our consumer, industrial and waste management company holdings support the transition to a more sustainable plastics cycle by letting them know it is relevant for our investment decisions, and that we could provide them the capital needed for the transition at attractive returns.
Shareholder proposals and proxy voting further support companies to tackle plastic pollution. Large corporations such as McDonald’s and Amazon had shareholder proposals this year to expand reporting on plastic pollution. While both of those proposals were defeated in proxy voting, a meaningful proportion of independent shareholders supported them and signalled to the companies that plastics pollution is an important issue to address.
Challenges in the Recycling Industry
Historically there has been a market failure to deliver on the desired level of plastics recycling. Waste management companies contracted by municipalities have not expanded their plastics recycling capacity at the rate needed to solve our plastics challenge. According to OECD data, 15% of plastic waste is collected for recycling, but 40% of it cannot be recycled because of contamination, while the vast majority of plastics collected by waste management companies gets sent to landfills. To improve the plastic recycling rate, companies will have to build large-scale facilities and invest in state-of-the-art sorting technology to effectively separate and recycle different types of plastic. Consumer brands are increasingly advertising the recycled content of their packaging to attract environmentally conscious consumers. In our meetings with consumer, industrial and waste management companies we have heard that consumer brands are desperate for high quality recycled plastic at reasonable prices, but there just isn’t enough supply. So why aren’t waste management companies growing plastic recycling capacity at a sufficient rate to meet demand?
A significant hurdle to date has been the economics of recycling. Historically, waste management companies collected and sorted plastic effectively for free, then earned revenue by selling the recycled material. The commodity price of recycled plastic has been volatile and demand has been uncertain. It has been hard for waste management companies to justify large capital spending for facilities with state-of-the-art sorting technology, without more certainty on being able to earn a return on the investment. While for a variety of reasons, including the limited supply, recycled plastic is generally more expensive than newly made plastic.
Investors Playing a Role
Investor proxy voting and engagement with companies and policy makers may be having an impact. There is reason to be hopeful that this market failure will be overcome with new regulations that will create market incentives for private companies to build the necessary level of plastics recycling capacity. Two of the more important forms of regulation for helping solve the plastics challenge are Extended Producer Responsibility (EPR), which requires producers of plastic packaging to pay a fee that is used to partially reimburse recycling costs, and Minimum Recycled Content (MRC), which requires plastic packaging to have a minimum percentage of recycled plastic.
For packaging producers, MRC regulation forces them to use recycled plastic even if it is more expensive than virgin plastic. Packaging producers will therefore be incentivized to ensure a stable supply of the recycled plastic they need to meet all of their packaging requirements. This is expected to result in many of them signing offtake agreements with waste management companies to guarantee a supply of recycled plastic at a reasonable price. Offtake agreements with packaging producers such as consumer companies, combined with the fees from the EPR regulation will provide waste management companies the certainty of revenue they need to make large investments in state-of-the-art recycling infrastructure. The outcome is private companies with market incentives to build a circular plastics economy that dramatically reduces plastic waste.
Bringing Capital to Improve Recycling Outcomes
As a large investor we contributed to Conference Board of Canada Research on how to attract private capital for recycling capacity, and earlier this year spoke to a conference where we engaged with policy makers at different levels of government in Canada on policies that could help attract that capital. Our research has identified at least twelve US states and ten provinces/territories in Canada already have or are in the process of enacting EPR regulations, with more expected to follow. At least three US states are developing MRC regulations, and in Canada the federal government held a public consultation in February 2022 to support the development of MRC regulation. Meanwhile, offtake agreements between producers of plastic products and recyclers are being signed regularly by companies including Berry Plastics, Dow Chemical, and Honeywell.
As the process plays out, our role as investors is to engage and support the companies involved where we feel it can help drive their financial performance in all stages of the plastics life cycle. For consumer companies, the greater use of recycled plastics can support their brand power over time. There is money to be made by providing capital to build recycling infrastructure and develop the innovations in recycling technology and plastic materials as part of our role in using investor tools to reduce plastic waste.
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.