26 Jan 2022 3 min read

A plastic planet: time to implement change

By Matthew Courtnell

2022 represents a key year for the circular economy in light of upcoming regulation and tax covering plastics and waste. These catalysts, plus discussions on a consumer deposit scheme and recognition of the need for greater investment in the supply of recycled content, give us hope for more positive change as companies endeavour to hit 2025 goals, which today look increasingly ambitious.

Bottle on beach climate change GettyImages-467434285.jpg

We live in an age with the highest-ever level of plastic consumption, using resources unsustainably. Absolute consumption is still climbing, despite pledges from corporates and the best intentions of consumers. However, new regulation this year – including a broader focus on plastic waste management to cover all single-use plastics – gives reasons to be optimistic for change.

Countries recognise the need to build better waste infrastructure and deliver a system that is more circular. The success of consumer deposit schemes – whereby a small deposit is paid when consumers buy recyclable materials like plastic bottles, repayable if they are recycled – in countries such as Norway, Germany and Latvia reinforces what is possible through sustainable infrastructure management.

Regulation is also evolving, with a number of country-specific taxes being introduced to target plastic waste. The UK is a first mover, launching a polymer-agnostic approach in April 2022 that will force companies to meet a minimum percentage of recycled content in plastic packaging or pay a tax. This should help level the playing field from a cost perspective. There is a cost that comes with being more sustainable, but this should be manageable over time.

From tax to Taxonomy

Another consideration is the implications of the revised EU Taxonomy, which we believe should push plastic packaging up the sustainability agenda for more sectors. As the Taxonomy expands from primarily focusing on climate-change mitigation and adaption, the next wave of environmental objectives will begin to tackle biodiversity and the transition to a circular model – two areas where consumer companies are firmly in the crosshairs. Under the new proposal, we will see a much greater emphasis on the manufacturing and sourcing of products and ingredients, which should foster a more collaborative approach between corporates, government bodies and NGOs.

While a plastic tax is evidently on the minds of C-suite corporate management, one could argue it’s not costly enough today to warrant taking action. Plastic packaging accounts for 9-10% of the cost of goods sold for consumer food and staple companies (and double that number for beverage names), we estimate, but it is still fairly easy to offset that cost through the pricing of premium or healthier products.

More pertinent as an issue is finding recycled materials to meet new guidelines. There is a real need to scale infrastructure technology to capture and collect recycling supplies, which in its absence is clearly driving the price of recycled PET (rPET) skywards. Today, in the US alone, Barclays estimates we have a rPET deficit of one billion pounds in weight.

Given this, are corporate targets for plastic reduction remotely achievable? If not, we could see a disappointing regression on timelines for ESG goals. Many companies have set ambitious goals for a 25-50% improvement by 2025. With companies in Europe today around the 10% mark on that journey, by our calculations, 2025 commitments could be delayed. We are running out of time, so we need to see change through investment in 2022.

There are some positive examples. The early weeks of the new year have made clear the opportunity for positive impact across the value chain. We’ve had corporate news from Biffa* (waste collection), Eastman* (chemicals), Tomra* (industrials) and DS Smith* (paper packaging) regarding recycling solutions or infrastructure spend, highlighting the importance of these companies as industries look to transition to a more circular model. Encouragingly, we are also seeing more consumer companies like Coca-Cola HBC* and L’Oréal* commit capex to vertically integrate supply and recycling facilities, which augers well for positive change.

As we look to have an increasing influence on capital allocation and endorse a more circular economy, this will be a key focus of our engagement model in 2022.

 

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Matthew Courtnell

Responsible Investment Analyst - Active Strategies

As an responsible investment analyst, Matthew is focused on sustainability and is always looking for interesting thematic talking points alongside qualitative research to inform discussions with corporates and NGOs. Matthew joined LGIM in 2011 from boutique wealth management business Psigma Investments, where he worked as an equity analyst for four years. When not focused on equities, Matthew spends his time indulging in what he considers the finer things in life; as a man of contradiction, this sees him combine his love for Italian wine with a passion for listening to heavy metal music.

Matthew Courtnell