Mark Fattedad, Jarislowsky, Fraser
Plastic waste is on everyone’s mind. More than 60 countries have banned or taxed single-use packaging and items such as plastic drinking straws and stir sticks. The momentum continues; China, the largest producer of plastic waste, unveiled an ambitious plan in January 2020 to ban many single-use plastics. In Canada, the federal government is rolling out a ban on harmful single-use plastics by 2021. Companies like Coca-Cola and Pepsi have promised to fully implement recyclable packaging by 2025. And by 2030, the circular economy – a system based on moving to renewable resources and eliminating waste – is estimated to generate US$4.5 trillion of economic output globally.
To discuss the implications, Heather Sharpe, Specialist, Sustainable Investing, sat down with members of Jarislowsky Fraser Limited’s Global Investment Team: Jeremy Schaal, Managing Director & Portfolio Manager, U.S. and Global Equities; Drew Callander, Director & Senior Research Analyst; and Shey Ylonen, Equity Analyst covering the Materials sector.
Sharpe: Governments are taking action, and some companies are taking a leadership role and getting ahead of regulations. For example, Sobeys just gave out its last plastic grocery bag on January 31, making it the first Canadian national grocery chain to eliminate plastic bags. This action alone means 225 million fewer plastic bags per year. Why are plastics getting so much attention now?
Schaal: People are focused on plastics because it is such a visible issue. It’s also the substrate that has had the most remarkable growth. The use of paper and glass are in decline, whereas the use of plastics is growing.
Callander: Plastics have been growing at about 5% per annum since the 1980s, but global recycle rates for plastics remain low, at 14% to 18%. Compare that to recycling rates for paper and for industrial metals such as steel, aluminum and copper, which are above 50%, and you can see the reason plastic is getting all the attention. That said, we also have to consider the necessity of plastic. Of all substrates, it is the most versatile and it has a lower end-to-end carbon footprint. It’s the lightest weight and it’s extremely necessary in preventing the spread of disease in healthcare applications and in the use of medical devices such as IV bags. It’s also key to reducing food spoilage, and the environmental impact of spoilage is much greater than plastic packaging, but that argument is not well understood.
The real problem with plastic packaging isn’t the package itself. It’s the end-of-life processing – or a lack thereof.
Sharpe: Why aren’t recycling rates higher?
Callander: The proper collection and sortation of waste is key, and that’s what the North American infrastructure is lacking. Much of our post-consumer waste is contaminated because the collection systems don’t have dedicated streams. You can be the most conscientious consumer in the world who is putting every recyclable in the recycling bin – but if someone throws in a half-used glass container of pasta sauce and it smashes, it will ruin the entire bin. There are some emerging technologies that will help with improving recycling efficiency and we expect demand for post-consumer resins from consumer companies will help create more sustainable economics for recyclers.
Schaal: That’s the heart of the issue. In order to get this value chain going in North America, consumers have to be educated and motivated to reduce waste and recycle effectively. Businesses have to be willing to invest. And governments have to help with incentive systems – for example, deposit systems. It will take years to create this value chain domestically.
Sharpe: What are the economics around recycling?
Callander: The cost to process a mixed container of plastic may be US$100 to US$150 per tonne. And the current tipping rates in the U.S. – meaning the cost to just dump it in the landfill – is US$40. So, you have a substantial cost to process versus just throwing it out. That said, increased demand for post-consumer plastics will help, and some retailers are building in-store return programs for higher value flexible plastics. To process plastic waste in North America, we need approximately US$3 billion of investment. What’s more, consumer companies may need to accept taking lower margins to use recycled plastic. In Europe, the cost of post-consumer recycled plastic is 30% to 40% higher than virgin plastic. Companies are stepping up to change this – Nestle recently committed to sourcing up to two million metric tons of food-grade recycled plastics at a premium. With companies like Nestle deciding to absorb that cost in the short term, they will create a viable market for food-grade recycled plastics in the hope that, as the circular economy thrives, the cost of post-consumer plastic will go to parity.
Sharpe: What are the investment implications for packaging companies?
Ylonen: A leader in this area is Amcor, the largest plastics packaging company in the world and owner of the world’s largest consumer-focused plastics factory. Amcor was among the first of 400 organizations to sign the pledge organized by the Ellen MacArthur Foundation, which is rallying businesses to reduce plastic waste in the oceans and foster a circular economy in the industry. Amcor is also allocating capital to find more efficient ways to produce bottles for beverages, as well as flexible packaging for the food packaging we see at the grocery store. Rising capital investment could represent a headwind to returns over the near-to-medium term, but Amcor’s management believe they are uniquely positioned to lead the industry in part because they can leverage investment in these areas across its large global customer base.
Callander: A good Canadian example is TC Transcontinental. This packaging, printing and specialty media company was the first Canadian manufacturer to sign the Ellen MacArthur Foundation’s New Plastic Economy Global Commitment that Ylonen just mentioned. They are investing in innovation to help them meet their target of 100% recyclable, reusable or compostable products by 2025. They’re helping to foster a circular economy by working with government and industry to secure a supply of post-consumer plastics. Transcontinental also does a good job of disclosing their greenhouse gas emissions and targets. Their flexible packaging already means lower emissions from transportation and spoilage, and now they are working with other stakeholders on end-of-life management. They view all of this as not only the right thing to do, but also as a key source of their sustainable competitive advantage because it will help them to win and retain business in the future.
Schaal: Part of the solution will be standardization of materials used in plastic packaging. That will help a lot. The consumer packaged goods and packaging companies will no doubt lead the innovation in material science to create new plastic products that satisfy the needs of their customers, with post-consumer recycled material delivered on a cost-competitive basis. It’s just not clear who will pay for the incremental costs. There are suggestions, if you talk to packaging companies, that ultimately consumers who want these sustainability benefits in their products will pay more to have them. The Method brand of cleaning products is a good example. The company provides unique, value-added packaging technology and interesting substrates. Method then charges that cost to the consumer, who is willing to pay.
Sharpe: Right, so is this a risk or an opportunity? How should investors think about the role of large consumer product companies?
Callander: The consumer focus on this topic is so great that CPG companies can no longer ignore the issue. As a result, they are looking for more sustainable solutions. They’re going with plant-based or fully recycled containers for their most premium products – where it makes sense, they can take a certain brand, leverage it for a purpose and sell it at a premium. The issue is figuring out how to use recycled or recyclable packaging at parity with the virgin resins. We are seeing more focus on making this happen from the chief technology officers and in R&D departments across the value spectrum.
Ylonen: Up to a few years ago, the issue of plastic waste was being discussed tangentially, but now it’s central to the business of packaging and consumer goods, and therefore an important investment consideration. Progressive management teams view the development of sustainable packaging solutions as both necessary for the industry and a source of differentiated growth. This is driving new investments in sustainability initiatives and prompting explicit commitments by leading players to lower the environmental footprint of their products.
Callander: At the end of the day, this is an expandable consumption business and removing barriers to higher consumption, be they environmental or otherwise, is accretive to the long-term value of the business. Consider the case of Colgate. Toothpaste isn’t going in a container made of glass or cardboard and, right now, the tubes being used are not recyclable because the inside sleeve is aluminum and the outside is plastic. What Colgate has done is work with partners to come up with a solution to use rigid plastic as opposed to flexible plastic. The container will still have the high-barrier properties that are required, and it’s been tested in recycling systems to make sure that it can be recognized and sorted. And it can. The plan is to roll out the technology and then give it to competitors. This is a good example of doing the right thing – creating a sustainable business model and giving it to your competitors in the hope that they also transition to the sustainable substrate for the benefit of the entire industry.
Sharpe: That seems like a pretty good place to conclude on this topic. The growing global attention on plastic waste is reshaping the way consumers interact with products. This is an area where companies can really play a leading role but until we can get the cost of recycled plastics on par with virgin plastics, it probably means either higher prices or lower margins. Understanding how companies are managing this issue and protecting their brand is an important consideration for investors.
Mark Fattedad, CFA is Director and Portfolio Manager, Institutional Management, Jarislowsky, Fraser Limited.