T. Rowe Price: Innovation is reshaping the future of plastics
The chemical composition, the use of resources and the inherent durability of plastics are major problems for sustainability and health that need to be resolved quickly. Understanding the scale of the problem is key, but solutions must also take into account the usefulness of the material: as investors, we believe the debate should focus on the reorganization of the sector.
An overview of the plastic problem
Most plastics are very short-lived, often less than a year; after the first use, the economy loses up to 95% of the packaging material (Ellen MacArthur Foundation). 13 million tonnes of plastic waste ends up in the oceans every year, and due to the complex nature of the material and the low margins associated with recycling, most single-use plastic waste is incinerated or buried in a landfill. If we think that it takes up to 450 years for plastic to decompose, we understand that the environmental impact is significant.
Catalysts of Change: Governments and consumers require a rethinking of models
Many governments around the world are implementing new regulations and are committed to reducing the impact of single-use plastics in an affordable time.
Consumers are also a powerful driver for change. According to a survey by Kantar[1], consumers around the world place plastic waste second as a concern after climate change (survey of over 80,000 people in 19 countries).
The industry’s response: how innovation is reshaping the future of plastics
Focusing only on eliminating plastic is unrealistic. In the home and personal care sector, which historically shows an important rate of production and use of single-use plastics (especially for packaging), we have identified three key industry responses, with innovations focused on disposal, reuse and better circulation of plastic.
Many leading companies in this sector plan to complete the radical overhaul of packaging between 2025 and 2030. Companies are switching to alternative materials such as aluminum or paper.
Efforts to eliminate plastic generally lead to the removal of non-essential packaging parts. Some companies are finding innovative solutions by removing components such as plastic spouts, labels and seals. Another common trend is that of weight reduction: over 50% of companies in the home and personal care sector within the MSCI All Countries World index significantly decreased their consumption of plastic by reducing weight and volume of products.
However, for some industries it is not possible to think about eliminating or reducing plastic: in the food sector, for example, the only solution is to improve the packaging cycle through some innovations, such as making packaging reusable, recyclable or compostable, incorporating recycled material in packaging or reduce virgin plastic[2] and fiber.
Of the three areas of innovation, we believe that most of the progress is in improving the lifecycle of materials. A high percentage of companies in the home and personal care sector are committed to making packaging more reusable, recyclable or compostable, with the aim of achieving a 100% circular economy as an industry standard by 2025. Recycling more plastics can reduce the cost of manufacturing materials, and environmentally conscious consumers are more likely to support companies that undertake this change.
Suppliers offering sustainable alternatives to virgin plastic packaging, such as paper / fiber or aluminum, are also likely to experience increased demand. Meanwhile, continued consumer pressure and tight regulations to decrease the use of plastics should bring several business opportunities associated with plastics collection, sorting and recycling.
In the most difficult areas, the challenges remain
Despite efforts to improve the management of the plastics problem, companies may be less willing to disclose information on some “more difficult to achieve” goals, such as recycled content and targets to reduce virgin materials in packaging. Including recycled plastic in packaging is more difficult than making packaging simply reusable or compostable. Today, there is a shortage of resources and collection infrastructure needed to recycle plastics more efficiently, while low oil prices make recycled plastics less attractive economically.
These obstacles can also lead companies to so-called “greenwashing”. For this reason we include in our analysis through our proprietary tool – Responsible Investing Indicator Model (RIIM) – the key data on the production of raw materials and a specific focus on the use of recycled material.
[1] Lantar “Who Cares, Who Does” survey, data as of September 2020
[2] New plastic material produced directly from petrochemical raw materials, such as crude oil or natural gas, never used or processed before
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