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:
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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
Plastic Taxtics
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.
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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.
ESG investors to enter and alter the playing field
Another player on this field will be ESG investing. ESG investment stands at US$20trn or one-quarter of world investments.
It is already proving influential, particularly in industries that are capital intensive such as thermal coal and coking coal, which rely on investment to fund new projects, upgrades and refurbishments.
Plastic production tends to involve heavy industry at the refining, factory-scale polymerisation, and recycling stages of the value chain.
Cuffelinks identifies plastic as one of the top-10 global ESG issues and MSCI identifies plastic waste as one of five key ESG themes for 2019.
"How the world addresses the disruption it [plastic waste regulation] creates will have ripple effects across multiple industries and countries, ripping the issue from the pages of glossy sustainability reports and thrusting it into investor presentations and financial filings as a subject of business risks and opportunities," MSCI states.
Plastic has both an environmental and social component given the potential human health issues resulting from dumping and littering, which will attract the eyes of different investors, resulting in a broader array of solutions.
Calverts analysts estimate that 4% of the world’s petroleum is used in the creation of plastics, and another 4% is used in providing the energy to produce plastic. This means the product has both a polluting and carbon profile, which will also attract the attention of different types of investors.
The littering problem is being targeted in a trend described as “blue investing”, reflecting plastics' environmental devastation on the ocean. Many analysts and funds have specifically aligned themselves with the blue-investing theme.
According to analysts Sustainalytics, a coalition of 25 major institutional investors with combined assets valued at US$1trn have joined the Plastic Solutions Investor Alliance, declaring plastic pollution a corporate brand risk.
As the Calvert report states: “As the toxic effects of plastics are felt ocean-wide and beyond, investors can impact change by investing in strategies that assess a company’s operator and the impact of its products and services on ocean health.”
Given the vast majority of ocean plastic waste is derived from a handful of second and third-world countries with poor infrastructure, the success of any blue investing initiative will depend heavily on their investments in these countries.
To date, ESG investors with a carbon focus have bigger fish to fry (mainly coal) and plastics barely rate a mention in most climate-change oriented ESG reports. However, the polymerisation companies’ expected transition to renewable energy is likely to attract some investment traction.
Disclosure net tightens for ESG
As is the case with the Sustainability Accounting Standards, disclosure is again being used as a tool to drive change.
The Plastic Disclosure Project, a Clinton Foundation Initiative, “encourages measurement and disclosure and management to improve corporate, community and individual accountability on plastic manufacture, use and disposal.”
The Plastic Disclosure Project’s analysis of 100 large listed consumer goods companies found that less than half reported quantitative data points about plastics. This is set to change, improving transparency for investment purposes.
The Plastic Disclosure Project clearly favours a circular economy over plastic bans. This means that much of the ESG funds will be channeled towards investment in recycling and other technologies, aimed at recapturing value, rather than withheld.
One of the key metrics will be transparency of material composition as this will make it easier for investors to know where to put funds and reduce risk of manufacturers sourcing sub-optimal products. This may prove a problem for recycling initiatives because large manufacturers often have to source plastic from many small suppliers. While virgin plastic is always standard, recycled plastic has greater potential for disparity, creating costly hiccoughs.
There have been some interesting initiatives aimed at attracting the ESG impact investing dollar. In 2017, for example, Apple issued a green bond to fund the research and development of recyclable material for its iPhones.
Recycling pretty much a no-brainer
While investing in recycling is generally a no-brainer for ESG investors, the problem for recyclers remains plastic’s exposure to the oil price.
Fluctuations in the oil price can make massive differences to returns. Lower oil prices have recently hit the recycling market hard.
Unlike coal, where the blast furnaces are expensive to restart if uneconomical, polymisers regularly stop and start as part of their production of different grades of plastic.
This means that recycling won’t have the same capacity to muscle out virgin plastic that renewables have enjoyed with coal, without some other kind of incentive or innovation. Investors will need to keep a keen eye out for taxes on virgin plastics, or regulations, that will permanently shift this balance and assure reliability of income.
There are also many as yet unproved initiatives popping up in new areas of finance, such as Plastic Bank, which enables the exchange of plastic for money, items or Blockchain-secured digital tokens. It is basically a plastics-recycling exchange, funded by an external currency. If successful, there is no reason why standard commodities exchanges could not add it to their offerings.
The disruption has barely begun. Expect further regulations, massive innovation, losses, and gains.
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:
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/
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