Are companies doing enough to curtail the plastic pandemic?

Personal protective equipment gave us an acronym that no one predicted would become so widely used in 2020. PPE hit the headlines this spring as the production and importation of face masks, gloves and gowns was ramped up.

But it’s not just the plastics directly associated with the Covid-19 outbreak that we need to worry about.

Our Sustainable Investment team wrote in May about how the over-riding priorities of the Covid-19 crisis had constrained efforts to tackle plastic pollution.

As well as increased demand for health and safety reasons, especially in packaging, the team observed there had even been lobbying for governments to ease or delay regulations on plastics. The war on plastics was threatened further by the surge in home deliveries and lower oil prices making their production cheaper.

Market intelligence firm Wood Mackenzie had already predicted a 5% increase in demand for consumer “flexible packaging” in Europe this year. That’s despite demand falling to under 1.5% last year. Our Sustainable Investment team concluded: “It is time for businesses to renew their vows.”

Meanwhile the 2020 United Nations Oceans Conference, which was due to take place this June, was postponed as the world grappled with the virus. One of the targets for Sustainable Development Goal 17 is to prevent and significantly reduce marine pollution of all kinds, in particular from land-based activities, by 2025. However, the scale of plastic pollution means a much longer-term view is required.

What does the plastics problem mean for investments?

Cutting plastics pollution by engaging with portfolio companies on solutions to the problem is a key objective of Schroders’ Sustainable Investing team. The plastics problem is just one area where active investors can influence corporate behaviour.

Throughout 2018 and 2019 the team engaged with more than 100 companies through questionnaires, calls and meetings to understand the risks and opportunities they face from the plastics issue. It is not afraid to challenge business leaders if that’s what it takes for them to act on risks to the future of their business (and in turn, potentially investors’ returns).

Over a period of 18 months we saw the introduction of 60 new regulations globally designed to support the transition from avoidable plastics. Regulators implemented measures from bans and quotas to taxes and schemes that make the producer, rather than the consumer, responsible for waste from their products.

Increasing regulation will have consequences for companies across the chain. Particularly in fast-moving consumer goods, the transition could present a threat due to increased costs. There are, on the other hand, opportunities for firms to develop innovative solutions.

What is the benefit to companies?

Not only are consumer preferences driving shifts in consumption but regulators have implemented measures from bans and quotas, to taxes and schemes that make the producer rather than the consumer responsible for the waste generated by their products.

We expect increasing regulation to restrict plastic consumption and encourage recycling, with consequences for companies across the value chain. Facilitating this transition will present varying threats and opportunities across the value chain.

For example, the fast-moving consumer goods (FMCG) industry, such as supermarket retailers and food and beverage producers, has been on the frontlines of the battle against single-use plastics. Following our engagement with more than one hundred companies, we found that many businesses are anticipating unprecedented downside risks from growing regulation.

Interestingly, companies based in Asia cited “converging public opinion” as their main concern. In aggregate, the sector faces increased costs from the need to implement new production regimes and realign supply chains to reduce single-use plastics and accelerate recycling. This is no small feat given that single-use consumer packaging globally accounts for 59% of all plastic waste – the largest single category of plastic production. Inability to comply with regulation or published targets could impact their profitability and reputation.

On the flipside, there’s the growing opportunity for cost reduction and for brand differentiation by switching to more sustainable formats.

Are companies doing enough?

The United Nations has said the world is not on track to achieve the Sustainable Development Goals. There has been a strong focus on certain goals but it is important the war on plastics in our oceans does not get left behind. Promises of action were made before Covid-19 hit, however, now more than ever, companies must ramp up disclosure, ambition and action. There are fears the industry and governments are at risk of reversing progress which has been made. There is no time to be complacent.

Major investments, innovations, and transformation programmes must start now in order to address plastic waste and pollution at source — and at the very least have an impact by 2025 and meet government targets. This is particularly important as we believe the regulatory spotlight reflects a growing focus on producer responsibility, and that this is extending across the lifecycle of a product.

As active owners we need to continue to engage with companies to encourage them to strengthen their practices.