Demand for plastic is still growing, says Velislava Dimitrova and Cornelia Furse, Portfolio Managers on the Fidelity Sustainable Water & Waste fund, but solutions are emerging to minimise its environmental impact.
Since the invention of the first synthetic polymer in 1869, plastics have infiltrated our world and become an indispensable part of our lives. Consumption has surged since World War II. In 1950, only around 2 million tonnes per annum of plastic were consumed globally,i increasing 200-fold to 406 million tonnes per annum in 2019. ii In 2018, 45% or 174 million tonnes of all plastic produced was used for packaging.iii
Plastics are the ideal material for packaging because they are low-cost, versatile, durable, lightweight, and also bring environmental benefits when compared to the alternatives. To illustrate, plastic reduces food waste by keeping food fresher for longer, and its low weight helps to reduce fuel consumption and emissions when transporting goods. Plastics are therefore increasingly replacing other packaging materials. Between 2000 - 2015, plastics increased their share of global packaging volumes from 17% to 25%.iv
Due to these benefits, plastic packaging volumes are on a strong growth trajectory of 4% per annum. By 2030, this should result in c.281 million tonnes of plastic packaging being demanded globally, up today’s c.180 million.v
Impact of environment
Despite its benefits, plastic packaging is problematic because the way we currently use it, in a linear ‘take-make-dispose’ model, is unsustainable. We take oil and gas from the earth to make plastic packaging that is often only used once, and then we dispose of it. This is in stark contrast to a circular ‘reduce-reuse-recycle’ model; an economic model aimed at eliminating waste, facilitating the continual use of resources and contributing to decarbonisation. For perspective, only 9% of all plastic waste ever produced has been recycled. vi
Plastic packaging disposal poses significant environmental issues. At current levels, only 24% of all global packaging is being recycled. For the remaining waste, only 70% is collected for disposal and managed, however two thirds of this ends up in landfill and releases high levels of methane gas and CO2, contributing to global warming. The remaining 30% of ‘leaked’ waste is degrading natural systems such as forests and oceans. Without action, it’s expected there will be more plastic in the ocean than fish by 2050.vii
With the projected demand expansion, these environmental issues are set to become even more serious. Change is needed and we require new recycling solutions and reduced volumes of plastic packaging used.
Rising demand for recycling and sustainable solutions
Public awareness around plastic issues has increased considerably. In 2019, 42% of UK and US consumers said that products that use sustainable materials are important when it comes to their day-to-day purchases.viii
Across all continents, governments are responding to public outcry regarding plastic packaging waste, with Europe being the most advanced sustainability region. Globally, aggressive recycling targets are being implemented, significant taxes for non-recyclable packaging will be apparent, and additional legislation is being proposed to only use recycled packaging.
The most significant change to plastic waste regulations since 1997, will be the Extended Producer Responsibility reforms which come into force in the UK in 2023. The proposed changes will shift the full cost of collecting household waste from the taxpayer to businesses that place plastic packaged products into the market.
Due to public pressure and increasing regulation, companies are responding with aggressive plastic recycling targets. Many companies have also made huge efforts to reduce plastic packaging volumes used.
Combining all three driving forces of demand together (consumer, regulation and corporate), it’s predicted that circular packaging solutions will grow at CAGR of 24% between 2019 - 2050, increasing from eight to 84 million tonnes.v
New technologies
As a society, we need to reduce plastic packaging volumes used and invest in new technologies to move plastic packaging to a circular model with high recycle rates and minimal wastage. Fidelity research has highlighted two possible solutions that need to be adopted to win the war on plastic packaging recycling: post-consumer recycled plastic (PCR), which is itself recyclable, or bio-based plastic packaging, which is compostable.
Firms prefer PCR plastic packaging over bio-based plastic packaging because it’s cheaper. However, not all demand for circular plastic packaging will be able to be fulfilled by PCR plastic packaging because of supply constraints. PCR plastic packaging can be split into two segments: mechanical (where plastic is processed back into resin pellets, but the chemical structure remains unchanged) and chemical (plastic polymers are broken down into building blocks, which can be rebuilt). For mechanical, there are multiple shortcomings. This method can only handle specific types of waste (i.e. plastics must be uncontaminated and homogenous), and it ‘downcycles’ plastics (which drastically reduces the quality of the material). The process is inefficient, and 28% of plastic packaging sent for mechanical recycling is lost to the process.ii
With chemical recycling, the above issues aren’t as problematic. In theory it’s an infinite recycling process that keeps plastic packaging in a closed packaging loop. However, chemical recycling is still in its infancy and the volumes of plastic packaging waste it can process are currently limited.
These shortcomings limit the supply of PCR plastic packaging that is available, and therefore, the bio-based plastic will be required to make up the shortfall in supply. This creates interesting investment opportunities into both PCR and bio-based plastic packaging markets. For perspective, to meet the surge in demand, by 2030, it is predicted that the PCR market will grow at CAGR of 23% (with a ninefold expansion), whilst bio-based plastic packaging is predicted to grow faster, at CAGR 33% (with a 21-fold expansion).v
Finding winnners
It’s important for investors to be able to identify the key technologies and companies that will gain first-mover advantage and be able to profitably scale the technology. The dominant players of plastic recycling will likely be in the chemical recycling PCR markets and bio-based plastic packaging markets, and it’ll be the companies with the leading, lowest-cost technologies, that can operate at scale.
Furthermore, recycled plastic has a 30% lower carbon footprint than virgin plastics.x These recycling efforts are vital to contribute to decarbonisation and to achieve global carbon neutrality by 2050.
Driving change
We’re at the very beginning of the ‘boom’ in the plastic solutions market. Through our global research platform and close relationship with companies, we’re able to understand the market opportunity that the plastic packaging crisis represents and can identify the winners of the plastic solutions market’s direction of travel.
As long-term investors, it’s our duty to influence positive environmental change. By using fundamental, bottom-up stock selection, we’ll be able to identify the key leaders that can drive change in the ‘plastic planet’ crisis. Furthermore, by supplying capital to fund innovative technologies, increase scale and reduce the cost of capital, we can facilitate these leaders to save our oceans and planet.
“At current levels, only 24% of all global packaging is being recycled. For the remaining waste, only 70% is collected for disposal and managed, however two thirds of this ends up in landfill and releases high levels of methane gas and CO2, contributing to global warming.”
Article taken from Hub News Summer Issue 48
Sources:
i Geyer et al ii Plastics Europe iii Conversio Market & Strategy GmbH iv Euromonitor v Fidelity analysis vi UN Environment Programme, 2020 vii Ellen MacArthur Foundation viii GlobalWebIndex ix Ellen MacArthur Foundation x C Balance, Recycle Guru: Carbon Savings Achieved by Recycling, 2013
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