ESG focus: Australia Gets Serious About Recycling

ESG Focus | Jul 21 2020

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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The Federal government has launched a $190m recycling modernisation fund, aimed at kickstarting Australia's circular economy. But there's a long road to hoe and $1bn to flow.

ESG focus: Australia Gets Serious About Recycling

-Big infrastructure spend for vertically integrated, scale recyclers
-Commitments to governing funds flows welcomed
-Relationship between waste management sector and ESG investors might improve

By Sarah Mills

The Federal Government took the first major step in July towards establishing a national circular economy, launching the $190m Recycling Modernisation Fund (RMF) at Cleanaway Waste Management’s ((CWY)) Eastern Creek Container Sorting Facility.

The RMF is expected to drive $600m of recycling investment, create more than 10,000 jobs and divert more than 10m tonnes of waste from landfill.

Plastic recycling represents the low-hanging fruit, given the urgency of the situation and the positioning of companies in this space over the past 18 months.

The RMF funds are being ear-marked for national and vertically integrated scale operators, dealing mostly with municipal and commercial and industrial waste streams.  

No big surprise but greater surety

The government had been expected to announce a national recycling package as part of its National Waste Policy Action Plan in the May Budget.

The budget was postponed to October as a result of covid-19, and the government brought the RMF announcement forward to ensure recycling initiatives would not be further delayed.

The $190m figure is a kick-starter and the government is expected to divert more funds to the sector over the next three years, with $1bn earmarked for the industry.

The funding will be contingent on co-funding from industry, states and territories, so expect a slew of deals over the next 12 months.

Infrastructure, infrastructure, and more infrastructure

The RMF will invest in new infrastructure to sort, process and remanufacture materials such as mixed plastic, paper, tyres and glass, with commonwealth funding contingent on co-funding from industry states and territories.

Cleanaway’s CEO and Managing Director Vik Bansal said the fund would provide a boost to Australia’s resource recovery infrastructure.

This injection gives the waste management industry confidence when investing in infrastructure and innovation. With this fund, governments at all levels, together with industry can invest in building a domestic circular economy.”

Cleanaway, Licella, and several other companies have already embarked on plastic recycling projects, as outlined in our previous articles on plastic recycling. [https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/]

Cleanaway, Pact Group ((PGH)) and Coca-Cola Amatil ((CCL)) all gained a special mention at the launch.

Proof of the the pudding

The announcement is an example of the ways ESG investing is playing out in the waste management sector. Those companies with clear strategies around recycling, and plastic recycling in particular; and industry collaborations, are being favoured by the market.

Cleanaway, which has been positioning itself in the plastic sector for some time now, has recovered most of its pre-crash ground and held support after the announcement.

Bingo Industries ((BIN)) in contrast, has fallen, and remains near covid-19-crash lows and undervalued, according to Morningstar, reflecting a lack of clarity, announcements and specifics around the company’s five-year recycling strategy.

Bingo too stands to benefit from the RMF but needs to deliver a strong value-proposition in the recycling space, and provide evidence of progress on this front, particularly of industry and government collaborations. 

Strong execution on these fronts could change the company’s fortunes but for now, it is likely to be relying on sector tailwinds.

Sims Limited ((SGM)), with a waste-metals focus, also stands to benefit from the RMF, particularly if it can leverage its e-waste recycling expertise. Its share price has recovered half its pre-crash ground and held following the announcement.

Extra commitments to govern funds flows – an ESG tick

The government also committed $35m to implement Australia’s National Waste Policy Action Plan to 2030, which has been agreed by the respective State Environment Ministers.

Another $24m was allocated to improve national waste data to assist in measuring recycling outcomes and track progress, which will increase transparency for investors, and should pressure all industry players to lift their game.

The waste industry is notoriously shonky, as became apparent after SKM Recycling was placed into liquidation, representing ESG risk for investors, so this step is likely to be welcomed by the ESG institutional fraternity.

The Government is also introducing legislation to enact the waste export ban and encourage companies to take greater ownership of their waste.

This means the country must recycle 650,000 additional tonnes of waste plastic, paper, glass and tyres in Australia each year once the full ban comes into effect by 2024.

Long road to hoe

As discussed in previous articles, there is a long road to hoe because the economics of recycling are poor in Australia given the country lacks basic manufacturing infrastructure, let alone recycling infrastructure.

Lack of local, state and federal government harmonisation on waste streams adds to waste recycling costs; and kerb recycling practices lag world best practice by decades.

To gain economic scale, these problems need to be addressed as a matter of urgency or the road to sector profitability will be a slow one. 

As mentioned above, plastic recycling initiatives are relatively well-advanced given steps by the plastics industry, including consumer goods companies, plastics and packagers, and recyclers to collaborate on the problem, and is likely to be first cab off the rank.

The government is likely to adopt a user-pays model, which could mean higher council rates. State governments have also been increasing landfill levies over the past two years.

The market is expecting more government announces at the October budget.

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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