ESG Focus | Oct 17 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:
Prepare for the plastic revolution
Plastic has become an intractable problem and intractable problems require revolutionary solutions.
The world may be standing on the brink of a transformation as radical as the iPhone. This series of articles attempts to catalogue some the scenarios and opportunities that could unfold as the world grapples with plastic.
This first article focuses on the state of play, non-recycling, non-bio-plastic plastic substitutes, solutions and plastic waste collection, including taxes and regulation, social and cultural revolution and the evolution of the e-commerce portal.
The other articles in the series will focus on plastic, bio-plastic and recycling opportunities. Hang on to your seats.
By Sarah Mills
Plastic has become an existential threat. Governments and ESG investors around the world have announced a war on plastic and the sector is preparing for a period of profound disruption, one that will present investors with great opportunities – and risks. Plastics are used in nearly every industry.
Governments have already fired warning shots across the bows of the industry; and plastic producers, users, and disposers are either fortifying their defences or adapting, or both.
Based on the current technology and economy, the plastic problem appears intractable, so the first step in the solution has to be government regulation.
From there, given the breadth and complexity of the plastic problem, multiple solutions will present themselves. For example, governments will play an active role, either by regulating, or throwing vast sums at the problem through subsidies or skewing the playing field through carbon taxes and other taxes.
This alone will represent a market in the hundreds of billions to trillions of dollars. Investors will want to be on the right side of this equation.
Governments and philanthropists will also be offering inducements such as prizes to individuals and corporations that develop the best solutions for the most intractable problems.
The first round of innovation will have to come in the fields of capturing plastic, either from the environment, or before it enters the environment because without these innovations, plastic (at least single-use plastic) is dead in the water, excuse the pun – a form of karmic justice perhaps.
The next step is the development of a cradle-to-cradle circular economy for plastic. Investors can expect a two-pronged battle on this front: chemical and mechanical plastic recycling, backed by the powerful plastics and oil industries, on the one hand; on the other, natural carbon-neutral substitutes, led by a plucky band of bio-plastics producers and impact investors, who may find support from large corporations seeking specific solutions, and environmentally conscious consumers.
Other industry-specific opportunities are likely to arise, and there are also opportunities to be found in the traditional cradle-to-grave non-plastics markets such as paper packaging and hemp, particularly if recycling initiatives fail to deliver.
Governments are already expressing a bias towards circular economy initiatives.
Consumer goods companies are also demonstrating a clear bias towards recycling, and significant investment is flowing in this direction from the likes of giants such as Procter & Gamble and Coca-Cola. Coca-Cola has announced that 100% of its bottles are now made from recycled plastic.
This article focuses on the further recent entrenchment of plastic in the economy, taxes and subsidies, inducements, plastic-capturing/clean-up solutions such as waste collection, the role of government funding, and taxes, non-plastic substitutes, and consumer choices; social engineering and re-use; the sharing economy and the evolution of e-commerce portals; and ESG impact investment and best-in-class investment.
The intractable problem has become more intractable
The plastic industry constituted 3% of the world’s economy in 2015, according to the United Nations Environment Program. The World Bank estimates the global economy should tip $89trn in 2019, which puts the value of the plastics market at roughly $2.7trn (estimates from other sources are half this at $1.2trn). Its production also contributes to 6% of global greenhouse emissions. The stakes could barely be higher. And they are rising.
Fossil fuel companies have invested more than $180bn since 2011 into the coal-seam gas industry – primarily in the United States – unlocking an abundance of gas. But oil prices have fallen and US gas prices have collapsed.
As fate would have it, shale gas contains high levels of ethylene, which is easily converted into the resin required to make virgin plastic, and the beleaguered industry has been pumping out pellets as if there is no tomorrow. As a result, the world has been flooded with cheap plastic in the past few years.
The US government and taxpayer have also bailed out the shale gas industry, subsidising a massive Royal Dutch Shell factory in Pittsburgh to produce the pellets.
It is estimated that these new facilities, being built by fossil fuel companies such as Exxon Mobile Chemical, Saudi Aramco and Shell Chemical at fracking plants around the world, will help fuel a 40% rise in plastic production in the next decade, experts say.
Once carbon credits are introduced for capturing greenhouse gas emissions, it is conceivable that fossil fuel companies could receive credits for this ethylene capture in the plastic. They make money creating the problem and money to clean it up. Good money if you can get it. Certainly, if they can develop carbon capture technology, they will be paid for both selling carbon and capturing it.
Despite recyclers being paid to take plastic waste; sorting, transport and collection costs are relatively expensive, making it impossible for recycled plastic to compete with the glut of super cheap, government-subsidised, virgin plastics derived from fracking.
While coal-seam gas has a dreadful environmental profile, the elimination of coal is the first ESG target, and gas is not expected to be targeted or be subject to a carbon tax until post 2025, so without regulation, this will be the investment reality for the medium to long term.
Meanwhile, since the China Sword policy, hundreds of thousands of tonnes of plastic are piling up on the fringes of Australia’s largest cities – a similar story around the world.
Something has to give – and soon.
Unless serious carbon reform is enacted, virgin plastic is here to stay. If serious carbon reform is enacted, then recycled plastic is here to stay. Either way, expect an avalanche of change as the world rebuilds around the substance.
Regulation is inevitable
Recycling legislation is well under way in many major economies and it is essential to combat the unsurpassable competitive advantage of cheap virgin plastic.
The EU has stipulated that 100% of all plastics and 55% of all waste must be recycled by 2025. France has already legislated that 30% of all plastics in consumer goods must be recycled content, and Britain has introduced a tax on plastic packaging containing less than 30% recycled material. At home, Australia is aiming for 30% average recycled content across all goods and infrastructure procurement by 2030.
These and similar moves have disconnected the interests of plastic producers and the world’s biggest users of single-use plastics – the consumer goods companies. Add to that the potential damage to major brands core markets arising from a consumer backlash against plastic; and the consumer goods sector’s links to virgin plastic are fragile.
Major consumer goods brands are seeking solutions (not just recycling) to the provision of their goods.
Leading brands, retailers and packaging companies are working towards 100% reusable, recyclable or compostable packaging by 2025 or earlier. Evian, L’Oréal, Mars, PepsiCo, The Coca-Cola Company, Unilever, Walmart, Werner & Mertz, Amcor ((AMC)), Nestle and Colgate Palmolive, are among the leaders. Coca-Cola has already modelled the cost of recycling into its prices. It may well hope to get an offset through ESG investing.
This solution seeking also has the potential over the next decade to shake up the retail industry and foster a move to vertical integration and create interesting developments in e-commerce portals (more on this later), which could alter the traditional wholesale/retail model that has dominated modern economies to date.
Taxes and subsidies – a trillion-dollar honeypot
The tax and subsidies-dollar for cleaning up plastics is expected to be one of the biggest games in town.
While some governments are opting for regulation as outlined above, which will result in shareholders and consumers sharing the cost impost via market forces, others may charge the taxpayer directly to subsidise the recycling industry and clean-up efforts.
It is difficult to put a dollar-value on this at this stage, but if you consider the world has subsidised the fossil fuel industry alone to the tune of nearly $5.2trn in 2017, according to The International Monetary Fund (IMF), then it is not inconceivable that the fossil-fuel backed plastic industry is already being subsidised to the tune of roughly $60bn. (IMF data also includes the cost of societal and environmental subsidies that depress the nation’s tax base).
Direct government subsidies totalled $296bn (at 6%, plastics’ share would represent roughly $17.8bn). The taxpayer already pays for more than 90% of the cost of recycling ($296 globally) and disposing of plastic.
The world’s waste-management industry is valued at $360 billion, according to the World Bank. Landfill taxes are common globally.
Australia already exacts waste levies. Australia may also have to introduce an emergency tax on virgin resin or unused and unprocessed plastic as early as 2020.
Environmentalists favour regulation over taxes, saying taxes and subsidies would be a fraught and wasteful exercise given tax breaks often result in the adoption of the cheapest approaches and shortcuts. Similarly, certification could prompt unscrupulous operators to meet the minimum requirements only, resulting in unintended consequences.
Plastics and packaging firms on the other hand, decry regulation as a blunt tool and are lobbying hard to receive tax subsidies from the waste levies to shift to a circular economy that pivots on recycling. This would likely favour existing players at the expense of innovators.
Direct taxes on virgin plastic, or a shift to recycling, would hit every industry according to its exposure, and investors globally have been quantifying the impact and re-rating industries.
No subsidies were received by the media industry during its disruption, and it is a difficult stance to justify given the lack of predictability inherent in disruption and the natural predisposition of incumbents to protect their existing markets (which proved the downfall of media giants).
But then again, plastic is a major employer and it would not be the first time nations have subsidised manufacturers. It is also a fossil-fuel based product and has powerful backers.
Carbon tax would shake up the field
One wildcard is the impending carbon tax. It is difficult to predict how this will affect an already super-cheap plastic’s market dominance, particularly now the mining of raw material for shale-based plastics and the polymer factories are being fused in one location, cutting transport costs and fuel and carbon usage. Pellets are being dropped on to trains and shipped out, further cutting the carbon profile.
As consumers increasingly turn up their noses at plastic packaging, plastics producers are quick to point out that plastic packaging substantially increases the shelf life of food, reducing transportation and related carbon costs.
The American Chemical Council has produced research comparing the carbon footprints of different materials such as glass, wood, paper, plastic and recycled plastic; and packaging companies such as Amcor have produced life-cycle models that show the full life cycle.
However, these industry models do not specifically isolate highly carbon-efficient, renewable substitutes such as hemp. Independent carbon modelling for the plastics industry may not be far away.
Waste management industry disruption
The global waste-management market was estimated at $330.6bn in 2017, according to the World Bank, and is expected to hit $530bn by 2025, posting a compound average growth rate of 6% between 2018-2025
The World Bank expects the quantity of plastic waste and costs related to its treatment are likely to double by 2025 – many would say this is a conservative estimate. Recycling alone was estimated as a $37bn global market in 2017, representing 9% of the world’s plastic production.
Some might think that the waste management industry is among the best-placed to benefit from these developments, but the opposite is true. The EU is planning zero waste to landfill regulation by 2025 and other nations are likely to follow suit.
Landfill is the cornerstone of the waste management industry’s business model in Australia, and is the preferred option given it requires little expertise and offers higher margins. Any additional impost is an additional cost that needs to be subsumed or passed on to customers.
Landfill taxes also automatically hit waste management companies’ profits. If the cost of collection becomes too expensive, then the waste producers are likely to scale back on producing waste – not a bad thing unless you are a waste management company.
They would have to cannibalise their existing revenue to innovate but lack the complex knowledge-capital required for plastic recycling, and are ill-placed to acquire it. The industry has not been helped by the recent high-profile breaches by SKM, which highlighted dubious and corrupt disposal practices.
Mergers and acquisitions with plastic recyclers could be a solution. Already joint-ventures and alliances are being formed. Cleanaway Waste ((CWY)), for example, is joint-venturing with TOMRA – the Norwegian reverse vending machine giant.
Some suggest that landfills could be designed as future mines when recycling comes of age. Both options would require developing strong waste sorting capabilities at a minimum. Acquisitions of plastic recyclers by major plastic companies is also an option.
Regardless, given the technical challenges in plastic production, it is likely that polymer producers, or their subsidiaries, will also be well positioned to provide services in the collection and sorting market, backed by the consumer goods sector and supermarket chains.
The one bright spot for the Australia’s waste-management industry is that the waste China has rejected will probably have to be buried in the near to medium term until recycling scale is developed.
Unlike other western nations, Australia’s manufacturing base is weak, so it will be virtually a ground-up build and will take some years. Construction companies, consultants and sub-contractors should benefit.
And it isn’t just the infrastructure. Downstream markets for the mountains of recycled plastic also have to be developed.
Inexorable drive to a circular economy
It seems the first and most obvious solution to the problem is to stop using plastic. However, that still leaves the world drowning in existing plastic, which is a resource of $120bn a year, according to the Ellen Macarthur foundation.
Given the recent massive investment in shale plastic, with the exception of certain types of unrecyclable plastics, plastic is here to stay.
The only problem is that the technology, systems and infrastructure to support a circular economy do not exist, particularly, and most importantly, at the waste collection and sorting level.
And the waste keeps piling up.
This is the point where the unstoppable force meets the immovable object. This is where the bulk of opportunity for investors lies.
Inducements for innovation
Which takes us to the next solution: inducements for innovation. Governments and philanthropic institutions are offering hundreds of millions of dollars in prizes or subsidies to individuals or companies that can solve this problem or require funding for promising prospects.
The holy grail would be a system that can offer 100% recycling of all plastic that would sidestep the sorting process altogether, keeping the focus on collection and recycling. But that’s still a way off.
In the meantime, a strong bias will exist to waste collection, clean-up and sorting technologies. Given as the cost of collecting waste from the oceans in particular is never likely to be recouped by recycling, it is likely that much of these endeavours will be paid for by governments and philanthropists, some of the cost of which may also be passed on as a tax on virgin resin.
Collecting plastic waste – the great race
Harvesting the world’s plastic for recycling is a prime target. If this doesn’t happen effectively and soon, plastic is likely to be regulated out of existence.
Innovators are likely to find powerful backers in the plastics producers, packaging companies, consumer brands, ESG impact investors and philanthropists. Crowd-funding will play a small role.
We have all heard of the Dutch teenager Boyan Slat, who developed a floating plastic-removing machine and dispatched it to the great Pacific garbage patch between Hawaii and California. The aim was to collect and recycle, and halve waste within five years. It raised GBP1.57m and formed the Ocean Clean-up Company.
Unfortunately, it hit a snag in that they discovered the garbage moved faster than the machine. The team is revisiting the concept but they are already three years into development, illustrating the likely lag between ideas and their deployment.
Drones are being developed to locate, map and collect ocean waste. A marine drone called WasteShark, also of Dutch origin, has been launched in the United Kingdom. A 12-year-old girl has created a robot to detect plastics in the ocean; Australians surfers have invented Seabins, and the Japanese are experimenting with similar devices.
Other ideas more far-fetched ideas to harvest ocean plastic include proposals to build vertical recycling skyscrapers on abandoned oil rigs, or floating waste-to-energy high-rise plants within the ocean gyres rubbish patches and convert it to energy.
Again, the timeframes and expenditure required for building and deploying these technologies appear dubious, particularly given the weak recycling infrastructure and downstream markets. But they are all attracting funding.
A more promising set of waste-collection solutions involves harvesting waste before it hits the oceans.
Some are starting in the rivers, ports and harbours. For example, a Florida-based company called 4Ocean has developed a machine that skims waterways collecting waste. It is planning to deploy these internationally. The shark robots would also operate well in the harbour environment.
Others believe the trick is to collect all plastic waste within 31 miles of a waterway to prevent leakage to the ocean. These concepts typically revolve around reverse vending machines in an automated version of the old glass bottle deposit schemes. It makes sense, money is made of plastic but very little seems to make its way into the Pacific garbage patch.
Germany has made solid inroads into this market. Consumer brands such as Coca-Cola Amatil ((CCL)) have also announced their support for deposit schemes in supermarkets, and reverse vending machines are expected to be a feature of cities in the future.
TOMRA, a company founded in Norway, is the world-leader in reverse vending systems and its machines collect more than 40bn empty bottles worldwide. The company attempts to align itself with the United Nations Sustainable Development Goals, which suggests it is a likely recipient for ESG funding.
TOMRA Collections Australia is a joint-venture partner with ASX-listed Cleanaway Waste, something of a coup for Cleanaway, and TOMRA Cleanaway is a separate company. In a tainted industry, an association with an organisation of TOMRA’s credentials sets Cleanaway apart.
This is just one example of the types of partnerships and mergers that will feature in this space.
Companies in Australia, such as Envirobank, are already selling reverse vending machines. Envirobank’s rewards partners include Coles ((COL)).
Microplastics collection – solutions please
There is even hope for collecting the more insidious microplastics, caused mainly by footwear, clothes and tyres, from water. Macroplastics clearly threaten marine life and the food chain, but microplastics go one step further and threaten human health. Every creature on earth now contains microplastics.
An Irish teenager Fionn Ferreira recently won an international science award for his project, which removes microplastics from water.
Ferreira used ferrofluids, a combination of oil and magnetite powder, and magnets to extract microplastics from water. In 1,000 tests, Ferreira was able to remove more than 87% of microplastics from water samples.
At present, no screening or filtering for microplastics takes place in any European wastewater treatment centres. This technology could be developed and deployed at an industrial scale to treat water for plastic before it enters the ocean.
Versions of this technology could also be deployed the household context for products such as washing machine filters.
The technology could augur well for the ferrofluids market. Persistence Market Research estimates the global ferrofluids market will witness a compound average growth rate of 5.5% from 2017 to 2025 to US$73.9m from US$48.2m, based on demand from the medical sector and mobile phones. This does not include its potential application in the plastic recycling industry.
Companies operating in the magnetic liquid space include Ferrotec, Liquid Research and Strem Chemicals.
Waste sorting technologies in demand
Until all plastics can be recycled using one waste stream, innovation will be required to efficiently sort plastic into separate recycling streams, and to separate it from other waste.
General waste sorting is likely to become a specialisation of waste-management companies, whereas increasingly, plastic sorting is likely to become the preserve of recycling and companies.
Some estimates peg the potential value of the plastic sorting industry at $6.6bn.
There are several technologies relating to different types of plastics. One branch are chemical and frequency based sorting application, such as the separation of polyefinols; others on solutions using the first permanent magnetic liquids.
Others are in robotics. In the US, Max, an artificially intelligent sorting machine, has been the subject of some interest and has already received orders from European and British material recovery facilities.
Max is a robotic suction arm with a high-tech optical sorter (read camera and computer), that scans for specific objects, starting with plastic bottles and then other plastic groups. It picks 60 pieces a minute compare with human averages of 20-40. The arm extracts the items ranging from glass to plastic.
Other prototypes are sorting 70-80 items a minute. Tech engineers are trying to build sensors into the robot “fingers” to augment the primarily vision based sorting system. There will no doubt be opportunities for companies producing parts and developing improvements in different components.
Robots could conceivably be used to sort plastic from general waste. The more product waste-management companies can isolate for recycling, the less landfill tax they will pay, but plastic is light.
The more likely option is for stronger sorting protocols and fines in council garbage-collection. More bins would definitely be a requirement on this front, and a welcome repository for those shale plastic pellets. A market for home sorting and storage could also develop.
[To be continued in Part Two]
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