How engagement and stock selection can lead the war on waste

How engagement and stock selection can lead the war on waste

Esmé van Herwijnen, responsible investment analyst at EdenTree Investment Management, explains how investors can make sure their portfolios have a positive impact on the environment.

Post By Esmé van Herwijnen

By Esmé van Herwijnen,
EdenTree Investment Management

Everyone is well aware we have a problem: the world produces too much waste. 3.5 million tonnes of solid refuse every day to be precise. This contributes annually to 1.3 billion tonnes of food waste, one billion items of clothing sent to landfill, 13 million tonnes of plastic leaking into the world’s oceans.

At the heart of the problem lies an economic model which is linear in nature. A linear economy is one where we use materials to make disposable products, thereby creating vast amounts of waste, which usually end up in landfill. Conversely, in a circular economy, businesses are adopting a closed loop approach, whereby materials and products are maintained, repaired, reused, recovered and recycled. As a result, what was previously considered waste becomes a resource and an opportunity.

The ever-increasing volume of waste is generated by a rising global population, higher levels of consumption and more frequent product replacement cycles. Greater adoption of disposable products and packaging has become one of the defining environmental problems facing modern society. It is a challenge requiring the engagement of governments, policymakers, industry and consumers, but also investors.

The solutions, we believe, lie in a two-pronged approach. On the one hand, investors can choose to invest in ‘sustainable’ companies set to benefit from a transition to a more circular economy. On the other hand, investors can use their voice to influence businesses to become more responsible and adopt circular economy approaches.


Selecting agents of change

Stock picking is the first weapon of the responsible investor. Investment choices can either reinforce a damaging linear model or seek out more circular investment opportunities. A responsible and sustainable investment approach seeks to invest in companies managing their own environmental impact and waste footprint responsibly or those providing innovative solutions to the waste problem.

There are stock examples in many different sectors where traditional sourcing of materials and manufacturing products have been transformed. In the flooring sector, American carpet manufacturer, Mohawk Industries recycled more than 5.5 billion single-use plastic bottles in 2017 to turn them into fibres for carpets. In the food industry, Tesco has made eliminating food waste a key priority and now redirects all organic waste not fit for consumption away from landfill into animal feed or energy recovery. In the Netherlands, waste contractor Renewi is using a circular economy model via anaerobic digestion to turn 120,000 tonnes of liquefied organic waste into heat, bio-gas and nutrient compost that can power 10,000 homes.


Active engagement is key

The second weapon is stewardship. Investors have a role to play in influencing companies through active engagement. As a starting point, investors should question how much waste a company generates through its own operations and how it aims to reduce this via target-setting. In addition, investors should ask about the impact of a company’s products, their recyclability and how product end of life is managed.

The good news is investors are asking companies difficult questions. One new investor coalition was recently launched to address plastic waste. Led by US-based shareholder advocacy non-governmental organisation ‘As You Sow’, the Plastic Solutions Investor Alliance will engage listed consumer goods companies on their responsibility with regards to the threat posed by plastic waste and pollution. In particular, the coalition will focus its dialogues on transitioning plastic packaging to be recyclable, reusable, or compostable, setting plastic reduction goals and developing alternatives to plastic for packaging purposes. We intend to be a vocal advocate as part of this coalition, as we see packaging innovation to be at the heart of achieving a circular economy in waste reduction.

Exercising stewardship in this way can be profoundly powerful. As evidence, companies are increasingly accepting this extended responsibility. In the UK, over 40 companies and organisations have come together to form the UK Plastic Pact. Led by the Ellen MacArthur Foundation and the Waste and Resources Action Programme (WRAP), the parties, which include supermarkets and consumer goods companies, have agreed ambitious targets to ensure that by 2025, 100 per cent of plastic packaging is reusable, recyclable or compostable. In addition, by 2025, 70 per cent of plastic packaging will be effectively recycled or composted and all plastic packaging will contain 30 per cent average recycled content. Investors have a clear role to play in holding these companies accountable and pushing them to achieve stretching targets.

As global challenges mount, we embrace an investment future where we invest in companies managing their own impacts and setting a vision in which a circular economy model increasingly becomes the norm.

Esmé van Herwijnen is a responsible investment analyst at EdenTree Investment Management. The views expressed above are her own and should not be taken as investment advice.

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