ESG Focus: Prepare For The Plastic Revolution (Part 2)

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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 is the final part in a series of two. Part One was published on October 17.

By Sarah Mills

Renewable (Natural) Substitutes

A circular economy is favoured but until it can be established, the market for natural cradle-to-grave and renewable/recyclable products should benefit.

Natural renewable or compostable products that replace single-use plastic are already finding their way into distribution channels to meet growing consumer demand.

They include plant substitutes such as bamboo and hemp (for clothes, bags and cutlery), hemp, mushroom and wood (for paper, packaging and building materials), metals (for films and components) and glass (mainly for bowls, bottles, jars and storage). 

Consumers in the natural substitutes market are generally happy to pay a reasonable premium for a natural product.

Merger & Acquisition activity is underway in this space as well. Orora ((ORA))  just sold its Australasian Fibre business to Nippon Paper Industries Co for $1.7bn, a premium to the company’s trading multiples.

Analysts had noted that Orora was best positioned in the packaging sector against the plastic threat because of its exposure to natural plastic substitutes.

It still owns other plastic substitute businesses: glass and aluminium in Australia and North America. Orora has also entered a five-year supply agreement with Nippon to continue supplying paper products from the B9 Paper Mill on arm’s length terms.

Packaging

At present, alternative packaging constitutes just 1% of the $1trn global packaging market, but this is expected to rise tenfold to $142bn in coming years.

Mushroom-based packaging is likely to experience reasonable demand as a substitute for polystyrene, which is unrecyclable. IKEA, for example, started using fungi packaging last year throughout its global network of stores.

Mycelium packaging can be moulded to any shape and it decomposes in weeks.

It is just one of many natural plastic packaging alternatives being experimented with. Amazon, for example, is engaging in a massive redesign of its packaging.

The paper packaging market alone was valued at US$69.91bn in 2019 and is expected to experience a compound average growth rate of 4.1% out to 2024. This could be higher depending on the rate of regulation.

Corrugated paper and cardboard packaging design is already becoming more visible and further product design in this field is expected.

The corrugated e-commerce market is growing at 14% per year to 2023 notes packaging specialist Neil Farmer of Neil Farmer Associates.

Aldi has introduced 100% recyclable cardboard discs in place of polystyrene for its pizza products.

In the United Kingdom, a company called Coveris is suppling supermarket Morrisons with an easy-peel open skinboard format pack for its premium cooked meats. These use FSC or PEFC cardboard bases replacing hard-to-recycle black plastics. It is interesting to note that technology is already available to isolate black plastics, showing how quickly the landscape can change.

In an article on Packaging Insights Rick Gross of R.A. Gross Design says: “Look for new closure developments which continue to address sustainability issues through design and materials in 2019. In addition to the past developments of environmentally-friendly materials for use on standard CT closures, look for the expansion of these into dispensing closures such as hinged lid closures.”

This is just a fraction of the action in the natural packaging substitutes market, which is expected to heat up over the next five years.

Hemp

Hemp – where do we start? Conspiracy theories aside, hemp was made illegal in the 1930s, just as carbon-hungry polymers were hitting the market. Now, just as the world confronts a plasticide of its own making, hemp has been legalised.

Hemp is plastic’s most powerful competitor. Anything that can be made of plastic can be made of hemp.

Hemp is an excellent bio-plastic source, but we will save that for another story. Hemp-crete is also a competitor for concrete (which presently uses coking coal) – but again that’s another story.  In this article, we are focusing on hemp’s strength in the natural plastic substitutes market.

Critics point out that relative to plastic, growing and harvesting hemp is labour intensive, and more expensive. But as the hemp industry grows and gains economies of scale, prices are expected to fall.

Critics also say hemp production will compete for arable land for food. This is not true. Hemp can be grown in deserts, through caliche, and in caves, and in buildings if necessary, with solar-powered lamps.

Critics also say that growing hemp would incur transport costs but hemp can be grown vertically in massive warehouses, hydroponically, on separate levels near sources of processing if necessary – think cubed acres.

Hemp also has a powerful environmental profile. It requires half the amount of water as cotton, one acre of hemp produces the same amount of paper as 4.1 acres of trees, and one acre of hemp produces more oxygen than 25 acres of forest and absorbs more carbon dioxide per hectare than any forest or commercial crop, making it the ideal carbon sink.

In addition, the carbon dioxide is permanently bonded in the hemp-fibre, making it the perfect building material and bio-plastic. It is totally circular, renewable and carbon neutral.

The industrial hemp market is forecast to hit US$13.03bn by 2026 according to Reports and Data. Of that, the global hemp packaging market is expected to hit US$5.2bn, and experience a compound average growth rate of 26.4%.

Depending on regulation, the market value could be higher (or lower if the plastic lobby wins the regulation war, which is likely unless they fail to deliver a solution).

Much of any additional growth would comprise bio-plastic packaging and it is likely that the lion’s share of industrial hemp will, over time, be diverted to bio-plastic. If that fails, then the natural substitutes market would be the market depository.

This small-cap market is fledgling and a lot of money is likely to be lost before it is made. Investors will be looking to pick the winners in this space before the market matures into its three dominant players.

The Re-usable Economy – Reducing Plastic Usage

The re-usable economy is the most revolutionary of all plastic solutions. Consumer goods companies and retailers, not to mention consumers, are experimenting in this space. As models develop, it has the capacity to transform the global retail economy.

At its most basic level, converting 20% of the global disposable plastic packaging into re-use models is a $10bn business opportunity according to the World Economic Forum.  

It also has a powerful carbon profile. Supplying refills for reusable containers in highly concentrated forms reduces transport costs by up to 90%.

Re-use – Rethinking Packaging, published by the Ellen MacArthur Foundation, showcases various re-use models: refill at home; return from home; refill on the go; and return on the go.

At another level, it offers opportunities in product design: such as converting liquids to tablet forms; or standardising product design to gain economies of scale in distribution and logistics; or the introduction of the universal re-usable bottle across all brands. Amazon is undertaking a complete review of its packaging from a sustainability viewpoint as we speak.

At the other end, it presages the next stage in the evolution of retail portals, in which brands could theoretically compete with retailers and develop their own portals, or undertake mergers and acquisitions with retailers; not to mention a proliferation of e-commerce sharing platforms. In this market, supermarkets and platforms such as Amazon, Facebook and Google, have the advantage, and also offer M&A opportunities.

In between are as many business opportunities as can be imagined. This is a market for design services and product innovation.

In the United States, for example, a Swedish global leader in water purification technologies and solutions has teamed up with Colorado-based Sustainable Drinking Water Solutions FloWater to provide oxygenised alkalised and revitalised water refill stations and filtering systems to large companies such as Google.

It has eliminated 100m plastic water bottles since its launch in 2022 and plans to eliminate one billion plastic bottles by 2022. It recently received $15m from Bluewater to accelerate growth. In a world where water is becoming increasingly polluted, this type of play exists beyond the plastic.

Zero-waste shops and restaurants are popping up all over the world that require customers bring their own containers. The market for refillable cups and bottles is already on the rise, with consumers purchasing everything from water canteens to lidded coffee mugs. At a smaller level, milkman services have been resurrected: the old model in which bottles are collected and re-used. Clothes-sharing and recycling is also on the rise.

Meanwhile, retailers are experimenting with less packaging. Dutch supermarket Ekoplaza recently introduced the world’s first plastic-free aisle. Coles recently introduced a zero waste to landfill supermarket. Amazon is redesigning all of its packaging to make it sustainable.

One of the most fascinating developments is a waste-management company called Loop that turns the concept of waste management on its head. It starts at the beginning of the product life cycle, rather than the end, by developing reusable packaging.

Loop offers a variety of household products from, and in partnership with, global giants such as Procter & Gamble, Unilever, Nestlé, Danone and Coca-Cola – in reusable packaging.

The items are available online or through exclusive retailers. Customers pay a small deposit, and the used containers are eventually collected by a courier or dropped off in store (Walgreens in the US, Tesco in the United Kingdom), washed, and sent back to the producer to be refilled. It is also experimenting with models that replicate home recycling models in which products are left outside in bins and collected.

Most interestingly, this industry would be served by online platforms (see retail revolution above). It is, at its heart, an e-commerce play, and a play in which manufacturers may increasingly sidestep traditional retailers. The implications are profound. Within a decade, depending on the success of initiatives, big M&A in this area could feature.

It is unlikely that this market will make its way to a public offering given it would require the buy-in of major retailers and consumer-goods companies, who are more likely to want to carve out their own opportunities, given it is an area which could prove disruptive, help build competitive moats in a period of disruption and attract the ESG dollar. Although they would be likely buyers for technology.

Again, it is a market for design. Product ideas include toothpaste tablets that dissolve in water; Hagen Daz ice cream in steel tubs, washing pods instead of liquids, deodorants with stainless steel bases and insertable refills, the same with toothbrushes and razors.

A minimum of five recycles are required for the model to outperform single-use plastics from an environmental standpoint.

Professional Services

Meanwhile, there will be huge opportunity in the professional services sphere, from design engineers, to software providers managing disclosure tools, to regulators.

For example, product design, frustration-free packaging, and packaging in e-commerce ready formats. Amcor ((AMC)) is investing in two international safe transit association testing laboratories – one in the US and one in Belgium. Amcor’s packaging experts will test and certify packaging for customers from around the world.

Significant work will need to be put into developing standardized systems for waste and data collection. Tests will need to be developed to ascertain if a package is designed to protect against damage, reduce waste, be recyclable and ship in its own container.

Then there is the investment and disclosure market.  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.”

Software and human expertise will be required to manage this data collection.

Think near-field communication, QR barcode scans and augmented reality.

Connected technologies packaging opens a wealth of opportunities, including smart packaging.

Sourcing of products will also be an area of disruption as supply chains rumble.

ESG Investing

ESG investing in and around the plastics sector will comprise hundreds of billions of dollars and natural substitutes should claim a small but respectable share.

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.

Impact investing will typically feature in the high-growth, IPO market, whereas best-in-class investing will be used to nudge major players in the right direction.

Impact investing is likely to feature heavily in the bio-plastics and natural substitutes markets, while best-in-class investing is likely to feature in the plastics and waste-management sector.

Recycling is likely to attract both impact investors and best-in-class investors.

The green bond issuance market for plastics is already active, and in many ways appears to be an adjunct, if not replacement, to traditional government environmental management functions.

Green bond issuance is expected to hit US$250bn globally this year, up 20% on 2018, and the Climate Bonds Initiative’s state goal is $US1trn.

This month, PepsiCo Inc priced its first green bond – a US$1bn offering, the proceeds of which are designated to cutting virgin-plastic use and replenishing the water it consumes. Interestingly, the bonds are pari passu with all unsecured and unsubordinated debt of PepsiCo in terms of pricing and risk.

The company is planning to cut virgin plastic content by -35% across its beverages by 2025.

This year, the World Bank launched a Sustainable Development Bond to draw attention to the challenge of plastic waste pollution in oceans – a relatively tiny US$20m within the context of its US40bn-$US50bn war chest to support the United Nations Sustainable Development Goals.

The mechanical recycling business is likely to receive solid support for developing products from recycled plastic. Researchers are working on turning recycled plastic into prosthetics for example.

Green issuance in the plastics market in the United States has drawn some approbation, particularly in the municipal green bond market for investing in technology that had already proven a failure. Investors will need to closely investigate the technology’s history, credentials and beneficiaries.

As with all investments, impact investing is a matter of buyer beware.

Meanwhile, a very specific blue bond market kicked off in 2018 with the Seychelles Blue Bond, and is aimed at financing resilience of coastal ecosystems, and a large percentage of this is likely to be allocated towards cleaning plastic pollution.

The World Bank provided a repayment guarantee for one third of the principal and the UN’s Global Environment Facility offered a concession loan to cover payments. The loans help de-risk the investment for impact investors (see the roll of taxes and subsidies above).

This year, the Nordic Investment Bank issued a US$220m blue bond to protect and rehabilitate the Baltic Sea, although plastic was not its main aim.

The focus of blue bonds will also be on fertiliser run-off, treatment, water pollution and waste-water management, and investments in plastic-waste would fit the brief.

All up, the taxes, subsidies, waste collection and sorting, natural substitutes, and re-usable markets are busier than a palm tree in a hurricane.

But, outside of taxes and subsidies, they are just a drop in the ocean. Our next articles will tackle the virgin chemical plastics, bio-plastics and recycling industries. Eyes open.

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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