Every year, an estimated eight million tons of plastics leak out in the environment and almost 40 per cent of this is from packaging. Global plastic production has exploded from approximately 1.5 million tons in 1950 to more than 400 million tons in 2017.
Plastic pollution is a global problem and affects the entire value chain, from manufacturer to waste management. Since 1992, China has absorbed an estimated 45 per cent of the world’s plastic waste. However, it announced earlier this year it no longer wanted to serve as the world’s waste receptacle.
Last year, Europe shipped 85 per cent of its total waste to China. A whopping 110 million metric tons of waste will have to be diverted by 2030 as a result of China’s move, putting pressure on other nations to step up – especially in Asia.
This was also a wakeup call for the EU, stating its own target that all plastic packaging should be recyclable or reusable by 2030. As of 2016, the recycling rate of plastic packaging waste was 40.8 per cent in Europe.
The life cycle of different types of plastics vary greatly and there is an ongoing debate about the potential carbon dioxide impact of the re-cycling process. In this sense, the EU recycling mandate creates opportunities for companies with the technical expertise in decomposing complex sets of materials.
In our view, chemical companies may have this edge. Other beneficiaries are consumer goods companies via smart packaging design and cheaper recycled materials.
However, consumer preferences are an important part of this equation, and the recent trends toward smaller sized packaging have created a headwind. On the positive side are lower input costs through lower recycled plastic prices, which have been trending down since 2011.
Investors are taking notice
As governments are taking aim at reducing pollution, there is mounting pressure on the private sector to take action. Many investors are demanding companies improve recycling practices and disclose multi-year waste reduction goals.
There is also a need to understand how a company’s earnings potential is affected and how waste reduction is tied to key personnel KPIs (key performance indicators). This is particularly important for some consumer companies, which are among the world’s largest producers of plastic packaging materials.
For investors, there are two ways of reducing plastic pollution. First, investing in companies with clear recycling targets. Many high-profile companies within our Nordea strategies have plastic recycling programmes – such as Kimberly-Clark, Proctor & Gamble, Samsung Electronics, Mondelez and Novo Nordisk.
Second, investing in companies providing alternatives to plastics, such as renewable packaging firms. This is a much smaller category and currently we have BillerudKorsnaas and WestRock as representatives in our Nordea 1 – Global Climate and Environment Fund.
Recycling plastics is a megatrend which is likely to endure in many years to come. While companies grapple with investments, execution and transparency around recycling programs, regulations are likely to become more stringent.
To be sure, this megatrend will produce winners and losers, separating those companies that have a sustainable business strategy from those who do not. As active investors, it is our job to invest in companies that understand the difference.
Hilde Jenssen is a fundamental equities product manager at Nordea Asset Management. The views expressed above are her own and should not be taken as investment advice.