ESG Club
PI Partnership – Legal & General Investment Management
Matthew Courtnell is a responsible investment analyst for active strategies at Legal & General Investment Management (LGIM)
A PLASTIC PLANET: TIME TO IMPLEMENT CHANGE
2022 represents a key year for the circular economy in light of upcoming regulation and tax covering plastics and waste. These catalysts, plus discussions on a consumer deposit scheme and recogni- tion of the need for greater investment in the supply of recycled content, give us hope for more positive change as compa- nies endeavour to hit 2025 goals, which today look increasingly ambitious. We live in an age with the highest-ever level of plastic consumption, using resources unsustainably. Absolute con- sumption is still climbing, despite pledg- es from corporates and the best inten- tions
of consumers. However, new
regulation this year – including a broader focus on plastic waste management to cover all single-use plastics – gives rea- sons to be optimistic for change. Countries recognise the need to build bet- ter waste infrastructure and deliver a sys- tem that is more circular. The success of consumer deposit schemes – whereby a small deposit is paid when consumers buy recyclable materials like plastic bot- tles, repayable if they are recycled – in countries such as Norway, Germany and Latvia reinforce what is possible through
sustainable infrastructure management. Regulation is also evolving, with a num- ber of country-specific taxes being intro- duced to target plastic waste. The UK is a first mover, having launched a polymer- agnostic approach in April that will force companies to meet a minimum percent- age of recycled content in plastic packag- ing or pay a tax. This should help level the playing field from a cost perspective. There is a cost that comes with being more sustainable, but this should be man- ageable over time.
From tax to taxonomy
Another consideration is the implications of the revised EU Taxonomy, which we believe should push plastic packaging up the sustainability agenda for more sec- tors. As the Taxonomy expands from pri- marily focusing on climate-change miti- gation and adaption, the next wave of environmental objectives will begin to tackle biodiversity and the transition to a circular model – two areas where con- sumer companies are firmly in the cross- hairs. Under the new proposal, we will see a much greater emphasis on the man- ufacturing and sourcing of products and ingredients, which should foster a more collaborative approach between corpo- rates, government bodies and NGOs. While a plastic tax is evidently on the minds of C-suite corporate management, one could argue it’s not costly enough today to warrant taking action. Plastic packaging accounts for 9% to 10% of the cost of goods sold for consumer food and staple compa- nies (and double that number for beverage names), we estimate, but it is still fairly easy to offset that cost through the pricing of premium or healthier products. More pertinent as an issue is finding recy- cled materials to meet new guidelines.
There is a real need to scale infrastructure technology to capture and collect recy- cling supplies, which in its absence is clearly driving the price of recycled PET (rPET) skywards. Today, in the US alone, Barclays estimates we have a rPET deficit of one billion pounds in weight. Given this, are corporate targets for plas- tic reduction remotely achievable? If not, we could see a disappointing regression on timelines for ESG goals. Many compa- nies have set ambitious goals for a 25% to 50% improvement by 2025. With compa- nies in Europe today around the 10% mark on that journey, by our calculations, 2025 commitments could be delayed. We are running out of time, so we need to see change through investment in 2022. There are some positive examples. The early weeks of the new year made clear the opportunity for positive impact across the value chain. We have had corporate news from Biffa* (waste collection), East- man* (chemicals), Tomra* (industrials) and DS Smith* (paper packaging) regard- ing recycling solutions or infrastructure spend, highlighting the importance of these companies as industries look to transition to a more circular model. Encouragingly, we are also seeing more consumer companies like Coca-Cola HBC* and L’Oréal* commit capex to ver- tically integrate supply and recycling facil- ities, which augers well for positive change. As we look to have an increasing influence on capital allocation and endorse a more circular economy, this will be a key focus of our engagement model in 2022.
* Key risks: For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of LGIM as at 26 January 2022. The Information in this article (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272
32 | portfolio institutional | May 2022 | issue 113
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