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ESG Focus: ASX200 Off And Running, Part 4

ESG Focus | Apr 11 2022

This story features SIMS LIMITED, and other companies. For more info SHARE ANALYSIS: SGM

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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ESG Focus: ASX200 off and running Part 4-Circular energy plays gaining traction

There was movement at the station on the circularity front during the February reporting season, suggesting circular investment and capital expenditure should accelerate sharply in 2023.

-Circular energy plays gaining traction
-Plastic recyclers jockeying for position ahead of 2025
-Closed-loop prospects remain the holy grail 

By Sarah Mills

Decarbonisation and the global shift to a closed loop economy is expected to gather pace in 2022 and should accelerate sharply in 2023.

The United Nation’s International Panel on Climate Change (IPCC) just published a report showing the world is warming faster than expected.

This suggests an agenda on behalf of big capital to accelerate decarbonisation, despite the Ukraine war and rising energy prices, and that the powers that be may be bringing forward decarbonisation timelines.

This could also signal a shift in big capital’s priorities and capital expenditures, and include energy recycling plays over the next few years.

Meanwhile, on the plastics front, in March the United Nations penned the world’s first global plastics treaty, due to be finalised in 2024, which means big capital will be shifting into gear ahead of time on that front as well. 

Touted as the most significant agreement since the Paris Accord, its implications should be far reaching, affecting businesses and economies globally.

Meanwhile, Australia’s National Packaging Target of 50% average recycled content by 2025 should spur a flurry of domestic activity within the next two years. 

Very little of Australia’s waste plastic is recycled due to a lack of end markets and Australia’s leading packaging companies and retailers have three years to change that if they are to meet government targets.

Companies from all sectors ranging from resources, to consumer packaging, recycling and waste management have made their opening moves on the circularity board in FY22, and analysts are waiting to see which way the wind blows.

Stocks with green and circular moats remain among the best defensive plays on the ASX and are likely to continue to gain favour as the economics of circularity improve with regulation and investment in circular infrastructure.

The highly fragmented recycling market is also a highly desirable Merger & Acquisition prospect.

Circularity M&A accelerated sharply in the December half (along with other ESG activity), which we discuss in a separate article on ESG M&A and Institutional Public Offerings.

February Reporting Season Reveals Strong Opening Gambits

Strategic clarity is critical in an ESG world and at this stage, there are few clear integrated ESG strategies within the Australian corporate sector.

But there was movement at the station on the circularity front during the February reporting season as major corporations made their opening circularity gambits. The shift was stark in comparison with previous years.

Sims Metal ((SGM)), Pact Group ((PGH)), Orora ((ORA)) and Cleanaway Waste Management ((CWY)), all cited growing demand for recycled products and made announcements of varying interest in the December half.  

Woolworths ((WOW)) and Coles ((COL)) continued to build recycling hubs and Woolworths secured a sustainability bond linked to reduction of plastic on its shelves and for decarbonisation projects.

But Boral ((BLD)) was one of the most interesting to report in the circularity space, announcing recycling as a new strategic plank in its REDEFINE strategy – one of the first strong strategic announcements to hit the ASX (keeping in mind the importance of ESG strategic integration).

The strategy aims to create a new revenue stream and support quarry rehabilitation.  

The company also reported stronger sales of its lower carbon concrete offering; and plans to use 100% renewable energy by 2025 and use alternative fuels in its Berrima cement chlorine bypass. 

Under the REDEFINE strategy, the building products company plans to compete with traditional waste operators in the building waste recycling market, to help with demolitions while also securing feedstock for recycled concrete production. 

That demand for recycled concrete will grow is undeniable. Zurich, for example, is now only building with 98% recycled concreted. Lend Lease has validated Boral’s products in construction projects, notes Credit Suisse.

This is bound to appeal to the ESG fraternity and compares favourably with rival Fletcher Building’s ((FBU)) circularity plans – at least on ambition. 

Fletcher Building’s focus was on decarbonisation, which has its own merits, the company announcing low-carbon binder and concrete products and that 45% of its products hold independent sustainability certificates. Fletcher's emissions intensity fell -10%.

The proof of Boral’s strategy will be not only in the execution, but also in the pudding. Analysts will be running a keen eye over the model to see whether it pays and how it will stack up against competitors for construction waste such as Cleanaway. 

At face value, Macquarie analysts believe Boral could be successful in positioning itself in the place of a traditional waste operator to help customers with demolition.

Pending the economics, the strategy appears to be a strong plus for Boral, shifting its prospects from a fairly sleepy stock, whose fortunes are tied to cyclical interest rate movements, inflation and construction spending, to one whose fortunes are also linked to the potentially stabilising circularity theme.

The strategy could attract investor support should interest rates rise, helping provide a floor for the share price as volatility increases.

Cleanaway Targets Demolitions For Recycling

Borals’ strategy puts it in direct competition with Cleanaway, which also announced its plans to expand its construction and demolition arm in the February reporting season. 

Analysts say the fastest way for Cleanaway to do this would be to make a material acquisition, again highlighting the high M&A prospects associated with the recycling sector.

But given the intense competition for ESG M&A, Cleanaway has struggled to find appropriately priced assets.

The Australian Financial Review reports the company has been contending with fierce competition from major infrastructure funds. 

The company had to settle for the $501m acquisition of selective Suez Australia assets (finalised in December), after Suez and Veolia merged in a $2.5bn deal, leaving Cleanaway with the scraps, excuse the pun. 

The Boral and Cleanaway announcements also point to the prospect of intensifying competition in the highly fragmented circularity market for resources, which poses challenges for waste management companies such as Cleanaway as it tries to carve out a future in a circular world.

Boral’s announcement suggests Cleanaway may have to fend off an ever-growing array of contenders for construction and demolition waste.

Already Boral plans to eat Cleanaway’s demolition lunch and more companies are likely to follow. 

Similarly, in the plastics markets, Cleanaway is competing directly with packaging companies for plastic resources, and in the scrap recycling market with the likes of Sims Metal.

But for now, Credit Suisse says growing demolition activity in markets should be supportive of both companies’ recycling ambitions in the short to medium term. 

Cleanaway’s Waste-To-Energy Bid

Cleanaway’s big announcement during the February reporting season was to commit heavily to the waste-to-energy market.

Biomass is more of a decarbonisation play (some would argue a carbon play) than a pure circularity play at this point in time.

But it does contain a re-use/recycling element and has the potential to become a fully closed-loop recycling prospect as technology evolves and nascent plastic recycling technologies are commercialised.

The company plans to increase its share of the energy-to-waste market to 100% from 48% (previously Macquarie’s Bingo Industries had the balance).  

That the company appears to have done a deal with Macquarie Group ((MQG)) to that effect is fascinating, and we will investigate this further in a separate article once we manage to secure a copy of the company’s Blueprint 2030 Strategy.

Critics Say Burning Biomass Is Bad For Climate

Controversy surrounds the future of biomass.

Critics of the process have decried the inclusion of biomass waste-to-energy projects in the EU taxonomy, claiming the union has ignored conclusive scientific studies showing that burning biomass may be worse for the climate than burning fossil fuels, and are launching a legal challenge.

The inclusion in the taxonomy was hard won. The EU had publicly withdrawn support for trash burning facilities in its European taxonomy because of the carbon-burning implications and was cutting funding for new incinerators. But political pressure, lobbying, the Ukraine war and rising energy prices have taken their toll.

Even Denmark — one of Europe’s biggest incinerators, imports millions of tons of trash to generate 5% of the country’s electricity and nearly a quarter of the heat in local networks known as district heating systems — has decided to shrink incineration capacity by 30% in a decade, which seems a good indication of the future of energy to waste. 

Wales has put a moratorium on large new waste to energy plants and is considering an incineration tax. 

Major European financial institutions have also excluded biomass from financial support.

Supporters say energy-to-waste is a viable option if used solely for non-recyclable waste, which comprises about one third of landfill mass, although the critics beg to differ.

All this suggests that from a very long-term perspective, waste-to-energy, after a sharp acceleration over the next decade, will become a diminishing proposition as cleaner fuels evolve and carbon sinks for waste are developed.

In the short term, however, the ESG powers that be appear to be favouring energy to waste over grey energy; and its inclusion in the taxonomy for now may simply be an expediency (both political and economic), akin to including gas and nuclear energy as potential transition fuels. 

Cleanaway’s Strategy Poorly Articulated

Moving back to Cleanaway, recent global events suggest the company has perhaps a decade to benefit from the waste-to-energy play.

That seems a short time frame, given Cleanaway’s strategy to deploy the biomass energy in end markets appears poorly articulated at this stage. 

Investors will want to know exactly what types of energy Cleanaway plans to produce: i.e. methanol, oil from plastic, or gas, and to whom it intends to sell it and for how much, and when, particularly given the clock is ticking.

Greater clarity will also be required about the economics of methanol and ethanol in Australia given the Australian government has come out in support of a rival hydrogen economy. 

It is telling that Macquarie has chosen to sell its energy-to-waste arm to Cleanaway. 

If the opportunity were sufficiently compelling, it is hard to imagine Macquarie exiting the space after securing infrastructure jewel Bingo Industries, through its subsidiary Macquarie Infrastructure and Real Assets.

This suggests that Macquarie may be pivoting more strongly to the closed-loop economy and likely strong clip-revenue models.

Plastic and Glass Recycling Gathers Pace As Packaging Companies Up their game

Packaging companies also announced progress on the recycling front in the December half, albeit slow progress.

Pact Group has been forging ahead on plastic recycling, planning to recycle 50% of milk bottles and 100% of recycled PET beverage bottles and upgrade its mobile garbage bin manufacturing capability to prepare for better waste collection.

While the plastic theme has taken a backseat to decarbonisation in the past few years, this may be about to change, given the looming government target deadline for 2025 for 50% recycled packaging.

Meanwhile, Pact Group also has a deal with Cleanaway and Asahi for a recycling plant in Laverton.

Credit Suisse says waste conversion gives Pact Group an edge in supplying consumer goods companies with packaging from recycled content, giving it a potential premium due to sustaining market share.

Pact Group, Asahi Beverages, Cleanaway and Coca-Cola Europacific Partners (CCEP) also announced in the December half plans to build Australia’s largest advanced plastic recycling plant, using Licella’s CAT-HTR technology, in Altona, Victoria.

Advanced Plastic Recycling Could Close The Loop

Cleanaway’s partnership with Australian CatHTr start-up Licella could also shift the focus from waste-to-energy to closed-loop recycling but to date, little has been published as to the commercial success of Licella, despite considerable investment in the technology globally.

Packaging companies such as Nestle, Amcor ((AMC)) and Asahi are also eyeing this technology. 

This is why a clear strategy for securing resources and end markets, and financial forecasts for securing income streams on Cleanaway’s behalf is required.

Licella also recently signed a deal for a fully funded commercial plant with LGChem, Korea’s largest chemical company and world’s 7th largest chemical company with turnover in 2020 of US$25.5bn. It is the fourth such facility in South Korea.

Given the process can supposedly produce carbon-neutral oil, it is also a strong contender as a competitor for methanol and other biomass fuels – and if successful could also be a wildcard in the Cleanaway waste-to-energy bid.

Glass Recycling Remains A Strong Defensive Prospect

Orora has increased its recycled glass content and is on track to hit its 2025 goal for 60% recycled glass, having completed the Gawler glass beneficiation plant construction. It has also allocated $25m for sustainable glass investment.

Orora collects glass with a container deposit scheme. Glass is 100% recyclable, which is fortunate because it has been evident for some time now that the world is running out of sand suitable for glass production and consumption far outpaces the rate at which sand is naturally replenished through erosion. 

The sand shortage (also due to cement and road construction) has spawned “sand mafias”. Virgin glass production is also emissions intensive.

Cleanaway is also in the glass recycling business.

Retailers Making All the Right Noises

Woolworths and Coles, meanwhile, have been converting stores into recycling hubs for batteries and soft plastics.

For now, this is more a public relations exercise given the lack of end markets for recycled products, but over time, the retailers aim to use the bins to increase the amount of recycled content in their packaging.

As markets develop, they may also be able to convert the collections to green revenue streams but at the moment this appears an unlikely prospect.

In September, Woolworths invested in Australian plastic recycling start-up Samsara, which aims to use enzymes to break plastic down into its basic building blocks to create an infinite recycling loop.

Woolworths plans to turn the first 5,000 tonnes of recycled Samsara products into plastic packaging for its own products – the recycling equivalent to the weight of almost nine A380 aircraft.

These products are expected to hit the shelves in the next two years. 

The news follows Woolworths’ battery recycling initiative announced in April 2021, a deal with Terra Cycling to recycle coffee capsules, and a deal with Detpak to use brown paper bags with 70% recycled paper bag content

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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CHARTS

AMC BLD COL CWY FBU MQG ORA PGH SGM WOW

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

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For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED

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For more info SHARE ANALYSIS: SGM - SIMS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED