Perspective

Podcast: The plastic problem facing investors


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Part one: The weight of plastic worth all the fish in the sea

Ashleigh Cowie (AC): In doing research for this podcast I came across this astonishing fact. Are you ready for it?

David Brett (DB): Go on then. Hit me with it.

AC: Right now, there are more than 5 trillion pieces of plastic debris floating in our oceans.

DB: Wow. That sounds a lot.

AC: But that’s not the astonishing part. If we keep travelling on our current path, then by 2050, there will be so much plastic in the ocean, it will outweigh the fish it shares the water with.

DB: That’s grim. I mean, that cannot be good.

AC: It’s not. An abundant ocean can feed a billion people a healthy meal every day for life. But we are dumping the equivalent of one garbage truck full of plastic into the ocean every minute, and it’s killing our ecosystems.

Holly Turner (HT) : So, there's nearly 700 species that are known to be affected by plastics. Most of these occur in marine ecosystems. Largely, it's due to the decomposition of plastics, so they release into soil or water toxic substances.

AC: That’s Holly Turner. Holly’s a sustainable investment analyst at Schroders. Plastic waste is not good for our environment, for our society or for our economy. We will end up paying the bill and we as investors can play a part in helping to tackle the issue.

But to help set the scene as to why it’s an issue and the problems we might encounter solving it, let’s get back to the problem with plastic in our oceans.

HT : If we're looking at it within soil, this is largely when plastics are built up in landfill or incinerated and this causes the release of, say CO2 and methane. When we're looking at it in water, this is also then sort of broken down with direct sunlight and it causes sort of carcinogenic compounds to be released into the waters.

AC: For those wondering, carcinogens are compounds which can cause cancer.

DB: So it’s not just a waste and environmental issue that’s caused by plastics, there’s consequences for our health too as the chemicals leak into the water we drink?

AC: That’s right. And unless we change our habits, the problem will only get worse.

HT: And also, there's been half of the plastics have been produced in the last 15 years. So, there's really been this escalation of a plastic issue within the last decade or so.

HT: So, research estimates that a loss of between one and 5% of marine ecosystems are due to plastic pollution, and this reduction equals a loss of about $500 million to $2.5 trillion each year.

DB: The global economy generates about $900 trillion a year. So, plastic pollution is potentially costing us three cents on every dollar we make. That seems like a massive oversight, not just from a health and environmental perspective but from an economic perspective too.

AC: It is. It’s essentially a tax on bad practice but we as consumers, business owners and investors seem to be happy to pay it.

DB: Which begs the question, why? Why are we happy to pay that tax and why are we still producing and using so much plastic?

Katherine Davidson (KD): They're light, they're flexible, they're a bit of a wonder material, really.

AC: That’s Katherine Davidson, a fund manager at Schroders.

KD: It's kind of unsurprising that they became completely ubiquitous before we were aware that they were an environmental problem.

HT: I think they've become so accessible, and single use plastics account for about 40% of all plastics produced each year that we've built up this sort of throwaway culture.

AC: So there’s this huge plastics problem, in particular single-use plastics. It’s costing us environmentally and economically, while it’s also damaging eco systems and our health.

DB: I’m David Brett

AC: And I’m Ashleigh Cowie

DB: So in this show, we’re going to look at some of the businesses, among many, that are trying to help tackle the plastics issue and what it’s costing them do it.

AC: We’re also going to look at it from an investment perspective. Is it possible to invest in companies that are linked with plastic use and still invest sustainably?

Part two: It's not just a case of stop using plastic

AC: It’s worth emphasising that this isn’t as simple as saying plastics are a problem. Not all plastics are bad and not all single-use plastics are bad either.

KD : I think it's all about trade-offs, isn't it really? That plastics are used because they have so many advantages, and a lot of other materials just can't produce the same effects. And when you think about things like medical uses, in particular, and the amount of stuff we've seen this year. I mean, things like you're not going to have a paper catheter I'm afraid, or a colostomy bag. And so, while there's a huge amount of technological development going on, on alternative materials, we're still quite a long way for some applications.

DB: Yes. Where would we have been without single-use plastics during the pandemic? Plastic gloves, facemasks, syringes. And outside of the medical world, that broad push for reusable coffee cups ground, no pun intended, to a halt for fear of further spreading the virus.

KD: So, I was feeling very smug about all my reusable shopping bags until I started doing my research for this podcast, and found out that I need to use them a couple of thousand times per some studies before they are more environmentally friendly than a plastic bag. If you want to use more paper stuff, then you've got to chop down more trees. If you want to use corn based plastics, then you're diverting agriculture from food. So, there's no easy wins.

DB: Ashleigh, this feels like a minefield. It looks like until the scientists develop a miraculous new material, we will never achieve a plastic-free society.

AC: It is a minefield- everything from our sofas and clothes to our shampoos and detergents is made with various kinds of plastics. If you think about it for too long you’ll end up with a migraine, especially if you’re an investor trying to act sustainably. Luckily, not all businesses are equal when it comes to plastics and packaging.

KD: I think it depends a lot on the nature of the individual business, and whether or not it's material, pun slightly intended. So for an asset manager like us, or a software company, it's not going to be a deciding factor in your investment decision, their use of plastics. But for companies where it's a huge part of their business, like consumer goods, and that's a big part of their overall environmental footprint and something that we need to spend a lot of time considering in our analysis.

AC: So those companies where plastics are playing such a huge role, they’re adopting a three-pronged strategy.

KD: It's eliminate, innovate and circulate. So, companies are trying to minimize packaging. They're using new materials, as we've already mentioned with higher compostable or recycled content. And, I think they're probably the most promising line of attack in my view, is this sort of move to more circular economy and trying to reuse things more often. The challenge is as we've said, that the life cycle impact of different materials is not known in all cases. And just because something's recyclable doesn't necessarily mean it's going to get recycled. But if we look at some of the company examples, so some of the big consumer goods companies have really made some bold claims in this space. So, Danone says, "Its going to go to a 100% recyclable or compostable plastics by 2025." They've got a big bottled waters business. Nestle also targeting a 100% recyclable or reusable. Unilever's going for a slightly lower number of 50% recycled.

KD: So, you'll notice that there is slightly different terminology in all of these, which makes them a little bit harder to compare. But interestingly, Unilever also have an absolute target of a hundred kilo tonnes of reduction. And, they're the only company I've seen with an absolute volume. Because the best outcome is really that we just use less packaging, rather than we use different types of recyclable, etc.

AC: And a special shout out for Greggs, the baker. I know you’re a huge fan Dave.

DB: Oh yes, love the sausage rolls. And don’t get me started on the bacon butties. What a bakery. Other bakeries are available of course.

AC: Yes. Anyway, Gregg’s is switching from plastic to things like paper packaging, and wooden cutlery. And they're the largest UK participant in the Refill UK scheme, where you can take your own water bottle to any high street location and fill it up for free.

KD: And, I thought that the CEO made quite an interesting statement, they said, "Not all of the alternatives perform as well as the plastic version, but we're asking our customers to tolerate some inconvenience for the sake of the environment." Which I think bottom line, that's kind of what we're all going to have to do.

HT: So, with alternatives, I think it's really about what are you trying to alternate. So, it's how are we assessing the green credentials of other plastic or other packaging types? If we're looking to directly substitute plastics for, say glass or aluminum, then when we're looking across the life cycle, we need to understand how easy these other materials are to recycle or keep within the sort of closed loop system.

HT: So if we're looking at the circularity, plastics actually are a really nice example in some forms of being easy to recycle. PET is a good example where we can sort of directly recycle it.

AC: PET is polyethylene terephthalate.

DB: Easy for you to say.

AC: It is.

DB: But what does it do?

AC: It’s an important material, particularly recyclable PET - or rPET as it’s known. rPET is making a major impact. Unlike glass, PET is extremely lightweight, easy to transport, shatterproof and completely recyclable.

HT: It is within local or government management systems already, but it's really about that sort of waste collection part of it, and closing the loop to make sure that they're circular.

DB: That waste collection and the circular system seems almost as difficult to solve as creating alternatives to plastic itself. I know myself that even though I recycle I can’t be sure that everything that I put in my recycling bin is recyclable.

AC: Yes, I’m sure there’s a lot of Greggs wrappers in that bin.

DB: Shamefully there is.

AC: It is a challenge though. But there are companies working with their customers to help secure that closed loop system. Take Bunzl for instance. Bunzl support businesses all over the world with a variety of products that are essential for their operations.

James Pitcher (JP): So, we supply an awful lot of personal protective equipment, gloves, hardhats, high visibility jackets to the construction industry.

AC: That’s James Pitcher, Group Head of Sustainability at Bunzl.

JP: We deliver products into healthcare. So, increasingly face masks, hand sanitizer, gowns, other medical equipment. As well as some of the food packaging that goes into supermarkets and food service environments and takeaway food packaging.

DB: So this is a business whose customers' operations rely heavily on plastics or at least goods made with plastic. That must put Bunzl in a bind when it comes to facing the problems of solving plastic pollution. After all, we know that one of the attractions of plastic is that it is cheap, so alternatives are likely to cost more.

AC: I wouldn’t say it puts them in a bind. Like most businesses, even Greggs Dave, they’re aware of their social responsibility as well as the loyalty of their customers. All they can do is offer the best advice to provide solutions that meet the needs of the customer and society.

JP: I think one thing to remember is that when it comes to the anti-plastic movement, there's been a lot of misinformation going around. So, what we try to do is use our independent position in the supply chain, where we're not wedded to any particular materials, to focus on the science.

JP: And a key challenge to that is the daily running of our customers' operations depends on products where, in many cases, no viable alternative to plastic exists today. Especially when it comes to the healthcare sector and healthcare consumables like gloves and gowns, and certain types of food packaging for the grocery supermarket sectors. So, what we've been doing is we've been innovating the way that the packaging products we supply are designed and produced, and bringing more sustainable alternatives to the market. And one thing I think that's happened recently is, the movement has also made businesses more aware of alternative solutions to plastics, and actually sustainability as a subject in general.

JP: But we can still improve any material that is in use, whether it's plastic or not, by making sure that we stimulate that more circular system by using recycled content, and ensuring all materials in use can be widely recycled in communities.

AC: One of the best examples of that is their work with one of the major supermarkets in the UK.

JP: One of our customers wanted to explore whether they could introduce a compostable carrier bag in their shops, and do that in a very specific way. So, offer that bag only in council areas that offered a food waste collection from local residents homes, because that bag was dual purpose. It allowed you to carry your shopping home, but then could be reused in your food waste bin at home, to collect food waste and would then compost along with that food waste, where UK council areas have the ability to do that.

DB: That sounds so obvious now James says it. The amount of plastic bags I’ve got stacked up in the utility room because I can’t really use them for anything is outrageous.

JP: So, we worked with our customers policy team to understand different types of materials, the relevant European legislation, the process of composting through both industrial and home composting routes, and reviewed a wide range of potential suppliers and performance tested all of the samples we received. So, putting heavy things in bags and seeing whether they stand up to that. And ultimately we managed to source a product that met all of the criteria, and that's now in over 1000 food stores across the UK, and replaced around 60 million single use plastic bags in the first year.

AC: As you can see from that one example with Bunzl, rising to the anti-plastic challenge is huge. And while in some cases reducing or removing plastics is the right solution, we have to follow the science.

JP: So, unmitigated careless substitution of plastic could lead to significant negative unintended consequences, like higher carbon emissions, water use and food waste. And as I've explained earlier, that's why we feel we need to take a system wide approach and look at the life cycle of a new product. From sourcing to manufacture to when it's used, and the end of its life. And I think it's really important that we don't vilify plastic. We need to remember its usefulness. We need to remember its purpose and its benefits.

DB: And there is this big dilemma for investors. On the one hand there’s this product that is cheap and versatile and has so many uses, which helps keep companies more profitable.

AC: Yes. But on the other hand plastic produces this huge debit on the global current account. And it seems it will eventually hit all our bottom lines whether that’s financially, environmentally and health-wise.

DB: So, what do we do as investors?

AC: Well, that’s what we’ll talk about in the final part of the show.

Part three: How investors will play their part

DB: I guess my first question would be the obvious one, which areas are most at risk from the anti-plastic movement.

AC: Surely there are risks around in plenty of industries?

KD: I think I see the biggest risk to bottled beverages, especially water, where in most of the world, we just don't need to buy a bottled water. And, we're all beginning to learn that. Though, I think it's easy to forget that in emerging markets, you can't drink from the tap in a lot of places still.

The risk manifests itself and partly in the cost, as Holly said, the cost of rPET. But then, if you carry it on using non-recycled plastic, it's not unforeseeable that the cost of that will also rise, our view is to get proper carbon pricing, than the price of plastic would rise, because it's made from fossil fuels. And as we've alluded to the consumer impact, so the impact on your customer perception, their preferences. So, you could lose market share if you're seen to be dragging your feet. And then, on the regulatory front, there's several countries that are talking about taxes on plastic, bans on single use plastic in the EU from 2021, mandatory recycled content, etc. So, you're exposing yourself to fines.

AC: That’s not to mention all the intangible costs. And that can’t just be an issue for the beverage industry. Anyone who’s ordered a takeaway or if you’re like me and you order far too much online, you’ll have been drowning in packaging over the last 18 months.

KD: From an investment point of view, you have to kind of weigh up the use of plastics against other factors in your decision. So, we were looking at a company that produces colostomy bags, for example, unpleasant topic, but life-changing for many people. And, would you want to reject that company because of their use of plastics? It seems a little disproportionate. And then, there's other things like food waste is one that particularly keeps me awake at night, that if you were to completely abandon plastics, then you probably have much higher spoilage and food waste. So, I think there is a danger that the sort of public perception in the media oversimplifies this debate, and we don't want to have a complete anti-plastic backlash.

KD: That's where we benefit from having the in-house sustainability team, who can help us draw a distinction between companies that are just putting out very grand standing targets, and those that perhaps doing less dramatic things that actually might be more useful, like just making their packaging out of one type of plastic to make it easily recycled. So, it's not as simple as just having an exclusion in your portfolio. It really is about weighing it up on a case by case basis. And, the companies are all on a learning curve, the same as us.

DB: So there is a revolution in plastics as we speak but there’s still a long way to go. The equivalent of one garbage truck of plastic every minute is still being dumped in our oceans. The argument for having bigger profits at the expense of a poorer environment and society seems to be getting weaker by the day. And companies now appear to acknowledge it.

AC: That’s right. But when it comes to the plastic problem it’s not as simple as finding alternatives or ridding the world of single-use plastics altogether. It’s about the circular economy. Finding a way or changing our consumption habits, reducing the amount of packaging and recycling as much as we can. And investors like us need to understand that those businesses that fail to engage or live up to their promises could find themselves losing market share.

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