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ESG Focus: Plastic – Not So Fantastic But Pretty Elastic

ESG Focus | Jun 13 2019

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Plastic – Not So Fantastic But Pretty Elastic

This article (part 1 & 2) is the first in a three-part series. It examines the global plastics context, the regulatory and tax landscape, the consumer and the ESG situation. The second article examines the core economic, technological and digital changes transforming the industry, such as recycling and competition from other substances. The third examines the plastics value chain, and which sectors and stocks will be hardest hit, and which are best placed to profit.

•    Profound disruption is about to hit the plastic sector
•    Plastic is problematic from both a pollution and carbon perspective and falls foul of Sustainable Development Goals (SDG) 6, 12, 11, 13 and 14
•    There are many plastics, and not all plastics are equal under ESG investing
•    Global regulations are mounting with single-use plastics in the spotlight

By Sarah Mills

Plastic has been rated public enemy No.2, second only to coal, by most of the world’s governments. While single-use plastics are the prime targets, the world is being forced to rapidly rethink its approach to the material, and the industry is preparing for a period of profound disruption within a very short timeframe.

It is estimated that single-use plastics could be banned within five years. At least 50% of plastics worldwide will be re-used or recycled by 2030, and all problematic plastics will be phased out.

Yet, unlike coal, which is to be eliminated, plastics are still perceived to have a future – it will be a matter of which plastics and which industries. So the imminent disruption represents both a risk and an opportunity for investors.
Plastic falls foul of the United Nations’ Sustainable Development Goals (SDGs): 6, clean water and sanitation; 12, responsible consumption and production; 11 sustainable cities and communities; 13, climate action;  and 14, life below water.

But it is also has the potential to contribute to the achievement of many SDGs, such as: 7, affordable and clean energy; 9, industry innovation and infrastructure; and 11, sustainable cities and communities.

Change will come from many quarters, ranging from regulation to innovation, and every move is likely to have a sizeable impact on companies in service to the product. Some analysts estimate that a shift from disposable to durable plastics for products such as water bottles will result in a -65% reduction in polymer volume alone. That’s a lot of dollars.

The scale and complexity of the world’s plastic problem is confronting and confounding, and its solutions are varied and often complex.

The problems with plastic

Plastic is the most prolific material on the planet, and boasts an extremely stable molecular composition. It is designed to be indestructible yet only 10% of global production is recycled. As a result, the world is literally choking in plastic: single-use plastics, micro-plastics, bio-plastics, industrial plastics and other plastics with distinct chemical compositions used for distinct purposes.

Mountains of plastic waste are building in the West after China stopped importing the world’s waste for recycling. Much of this is now being illegally dumped on foreign shores, thanks to rogue operators, and is becoming a point of conflict between nations.

It is also presenting a social/sanitation problem. Plastic packaging is clogging city sewer systems, causing flooding. Abandoned plastics create breeding grounds for mosquitoes in tropical regions, and can leach toxic chemicals such as styrene and benzene as they decompose, posing a health risk.

The devastating affect on the world’s oceans and bird-life has been well documented.

As if litter were not bad enough, plastic also has a very high carbon footprint. Its production is energy intensive, and options such as incineration of waste yields carbon dioxide emissions and other toxins.

There are many plastics, and not all plastics are equal under ESG investing.

There are also many different types of plastics: For starters, there are macroplastics and microplastics, both of which will require separate solutions.

Macroplastics are the large, visible plastics such as bottles, plastic bags and fishing lines. It is meant to be destined for landfill but often finds its way into the oceans through fishing, littering and poor waste management.

The worst macroplastic offenders are single-use plastics. They comprise about 50% of the world’s plastic production, are used once and tossed on the rubbish heap.

They include plastic bags, cotton buds, cutlery, plates, straws, drink stirrers, and balloon sticks. Litter audits have found Coca-Cola to be the world’s top plastic polluter, followed by PepsiCo, Nestle and Colgate-Palmolive.

Microplastics appear to have a lower-level of impact in the ocean but are more insidious, making their way into the bodies of every animal on the planet. They are the particles caused by erosion on plastic products: tyres, synthetic clothes (from washing) and plastic shoes are the main offenders.  Plastic paints on buildings and road markings are also problematic.

Polystyrene is also on the hit list given it is at present unrecyclable. IKEA, for example, started using fungi packaging, made from mushrooms, as a replacement last year. Mycelium packaging can be moulded to any shape and it decomposes in weeks. It is just one of many plastic packaging alternatives. At present, alternative packaging constitutes just 1% of the global market but this is expected to rise to $142bn in coming years.

Seven sectors account for almost all primary plastic waste generation: packaging; construction; consumer and institutional products; electronics, electrical and machinery; transportation; and footwear, textiles and apparel. These will be a key focus for ESG investing and companies making the smartest decisions around plastic are likely to represent the better investments as regulations toughen.

Single-use plastics first target in government sights

Governments around the world are addressing plastics as a matter of urgency after China executed its National Sword Policy and stopped recycling the world’s plastic. A swathe of second-world countries have followed suit, after being inundated with China’s reject waste.

All plastic-use will be reviewed but single-use plastics are first on the chopping block.

China, India and many western states have had bans on plastic bags for decades. Past success with such initiatives – a rapid -80% reduction in plastic bag use has been recorded at minimal economic cost (less than 1% of turnover) – makes bags low-hanging fruit; and they are the first on governments’ single-use plastic hit list.

The East African legislative assembly, for example, has banned the manufacture, sale, import and use of certain plastic bags across six members states with a combined population of about 186m people.

Nearly 200 United Nations countries are signatories to the UN plastic bag ban.

Other single-use plastics are set to follow, with many of the world’s major polluters planning to phase them out within five years.

All 193 UN countries have signed a resolution to eliminate plastic pollution.  More than 60 countries and many more local jurisdictions have introduced bans and levies to curb single-use plastic waste.

Britain plans to ban all single-use plastics by the end of this year. Closer to home, the Australian government plans to ban single-use plastics by 2025, and Tasmania became Australia’s first state to ban their use by 2020.

Regulations on the way but plastics have power

These are just the first drops in a deluge of regulation about to bear down on the entire plastic industry. Bans are just one component of a much larger strategic approach to the plastic issue.

The global plastics industry is huge, employs large numbers of people and touches nearly every sector in the economy. Plastic is used in packaging, 3D printing, manufacturing and construction and in every sector from health to education.

In the West, the majority is used for packaging (30%), building and construction (17%), and transportation (14%). Governments will regulate in that order.

Given the pivotal role of plastics in the economy, governments need to tread carefully and are turning to circular models to deal with the plastic disposal issue.

This year, the European Commission reaffirmed their support for the Circular Economy Package targets:

•    Zero plastics to landfill by 2025
•    55% plastic pack packaging preparing for re-use and recycling by 2025
•    Mandatory separate collection of all packaging from residual waste by 2025
•    A regulated uniform methodology for the calculation of re-use and recycling targets
•    An EU wide standards for plastic waste and treatment
•    Innovation in technologies to be enhanced across the value chain

Australia too is taking steps to address the plastic problem. Last year, the Federal Government published the National Waste Strategy, which commits to promoting a circular economy, and endorses a target to make all Australian packaging recyclable or compostable or reusable by 2025.

Most governments are aiming for an 80% recycling rate within five-10 years. That’s a lot of change in a short time, particularly given much will rely on innovation and extended producer responsibility schemes, in which producers pick up the cost of collection and treatment.

There is also talk of a global plastic treaty. The Montreal protocol to rid the world of fluorocarbons proved highly successful, although China’s recent FCF bloom has raised a few eyebrows, and other initiatives have proved less so. It would certainly help streamline and standardise responses to the problem, which is likely to be cost-effective for the global economy and producers.

To be continued in Part 2.

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