ESG Focus | Jun 20 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:
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.
This story continues on from "Plastic – Not So Fantastic But Pretty Elastic", published as Part 1 on [date].
• Anti-plastic sentiment is building among consumers
• The plastics industry is scrambling to pivot and is seeking R&D funding from existing waste levies and any new taxes
• ESG investors have their sights on plastic – it’s called blue investing - and it will have its greatest influence on capital intensive industries
• Less capital-intensive industries such as packaging are expected to struggle
By Sarah Mills
Many governments are considering using the tax system as another lever: either taxing plastics, or introducing tax incentives for products with recycled content. This would have a significant impact on investor profits and industry viability.
France recently announced different tax rates based on the level of recycled or virgin plastic.
In the EU, the European Plastics Strategy states the Commission will “explore the feasibility of introducing measures of a fiscal nature at the EU level.” Commissioner Gunther Oettinge, who is responsible for the budget, proposed a “national contribution calculated on the amount of non-recycled plastic packaging waste in each Member State”, emphasising recycling over production cuts.
In a British report, Chancellor of the Exchequer Philip Hammond says the Treasury will explore "ideas to use tax to shift demand towards using recycled plastic in manufacturing, to encourage more sustainable design of plastic items and discourage those that prove difficult to recycle such as carbon black plastics, to reduce demand for commonly littered single use plastic items, including single-use coffee cups and takeaway boxes, and to ensure the right incentives are in place to encourage recycling of waste that is currently incinerated”.
A Credit Suisse report says China’s import restrictions have had a "colossal" impact on Australia and warns of an "impending plasticide". It has forecast that the Federal Government will introduce an emergency tax on virgin resin or unused and unprocessed plastic as early as next year – 2020.
If all else fails, there is always the least-favoured prospect of fines and jail terms for producers. In Kenya, anyone making, selling or importing plastic bags could face fines of up to $19,000 and four years in jail.
Path to a circular economy
There is no doubt that a tax on plastic production would be the most effective method of cutting waste. However, the plastic industry decries the use of taxes (and fines) as blunt tools, claiming taxes would kill off moves to recycle and create a circular economy.
Plastic companies are calling on governments to subsidise innovation and the necessary restructuring to move to a circular economy and recapture the $120bn lost to the economy in plastic waste each year.
In NSW, $720m in taxes goes into consolidated revenue through the waste levy. But to date, there has been little traction on subsidising such a shift globally, possibly because governments are focusing on dealing with the coal industry as a priority.
Plastic companies fighting uphill battle
The one clear message that comes from examining all of the above developments is that the plastics industry is unlikely to innovate faster than countries regulate.
The plastic industry is scrambling to prepare for the imminent tsunami of regulation. Since the bans were introduced, apart from a stellar lobbying response against changes, there appears to be a considerable mismatch between the industry’s commitment and government expectations.
Plastics Europe, for example, published an alternative scheme to the EU setting a voluntary timeframe a full decade later than that of government. Cross-industry platforms to phase out certain products is occurring but it is a typical lobbying delay tactic and unlikely to be effective in this instance.
The industry is also working with municipal waste organisations around the world, and companies with deep pockets such as Coca-Cola are embarking on ambitious waste collection projects. Coca Cola has committed to collecting and recycling the equivalent of all its packaging by 2030. McDonald’s claims that all of its packaging will come from sustainable sources by 2025.
Nearly 30 multinational companies have banded together to form the Alliance to End Plastic Waste, which plans to invest $1.5bn over five years to develop, deploy and bring to scale solutions that will minimise and manage plastic waste and promote post-use solutions. These will need to materialise if the industry is to avoid excoriation.
Plastics companies are also introducing lifecycle assessment tools to allow brands and consumers to determine which products have a better environmental footprint – plastic or alternatives – given paper substitutes, depending on their sourcing can also have environmental implications. However, the market may prefer independent assessment tools, given “the fox guarding the henhouse” risks.
Anti-plastic consumer sentiment building
Let’s not forget the consumer. While typically consumers prefer to be regulated into action, there is a growing tide of anti-plastic sentiment. This is particularly dangerous for consumer goods companies that use plastic packaging, as it affects consumption of their core product. It may also threaten plastic companies’ licence to operate.
In what is being described as the Attenborough Effect, a survey of 3,833 people by GlobalWebIndex shows that people in the US and UK reduced their use of single-use plastic by -53% in the past year. The survey shows 82% prefer sustainable packaging.
Citi believes that increased consumer and regulatory concern toward single-use plastic and other packaging materials is a critical investment theme, especially for asset managers with an ESG (Environmental, Social and Governance) mandate.
Plastic has a big future – recapturing value
Plastic is a multi-billion dollar industry representing 3% of the world’s economy. It is critical to the functioning of some aspects of modern life, but certainly not the majority.
Despite the huge forecast disruption and regulation, worldwide plastic production is forecast to rise 3.8% every year until 2030, according to The Conversation and plastic production is forecast to double within 20 years according to the World Economic Forum. Similarly, the World Bank expects the quantity of waste and costs related to its treatment are likely to double by 2025.
The Ellen MacArthur Foundation estimates that $80bn to $120bn is lost to the economy every year – about 3m to 5m tonnes.
This value is set to be recaptured through recycling and other initiatives - that’s $80bn to $120bn worth of opportunity every year for investors. Not since the disruption to the media industry have the stakes been so high.
Plastic turnover in Australia is approximately US$38.1bn turnover and the industry contributes $11bn to the economy, according to Springer Link. It is the second largest manufacturing sector with more than 50,000 direct employees.
It is this reach that is the industry’s greatest defence. Many plastics may be unnecessary but few politicians have the political will to stomach the economic fall-out.