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The war against plastic could be a boon for investors

By Charlotte Ricca
October 28, 2019, 2:23 PM GMT
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    Plastic waste is on the agenda of most governments and major corporations – which is good news for savvy investors

    When synthetic plastic was first invented in 1907 it was revolutionary. Cheap to produce, lightweight, hard-wearing, versatile and water resistant, it became an essential part of our daily lives.

    Plastic is used by almost every industry, from food packaging to space exploration. But its durability has also been its downfall. According to Plastic Ocean, 300 million tons of plastic is produced every year – half of which is for single-use items. As a result, more than eight million tons of plastic is dumped in our oceans every year.

    Public awareness of this environmental disaster has steadily increased over the past decade, and the war against plastic is no longer a fringe concern. It has entered the mainstream – and is on the agenda of most governments and major corporations.

    Plastic investment opportunities

    But how does this affect you as an investor?

    Aside from the reusable coffee mug that gets you a daily discount in Starbucks, the plastic problem offers exciting investment opportunities. There are a number of innovative business models emerging, aiming to deliver solutions. One growth area is bioplastics, which Grand View Research predicts will be worth $6.73 billion by 2025.

    However, plastic waste also poses a “significant” risk to returns, says Niall Smith, senior environmental analyst at Verisk Maplecroft, a leading research firm and consultancy specialising in global risk data.

    “Norway’s $1 trillion sovereign wealth fund has around $25 billion invested in plastics producers alone. Seven of the world’s 10 largest plastic producers are oil and gas companies.”

    “The sector is accustomed to shareholder divestment campaigns relating to its contribution to climate change, but consumer concern around plastic pollution could start to add more fuel to those fires in 2019 – and give investors food for thought.”

    Political agenda on plastics

    Consumer demand is just one pressure on business. The war against plastic is high on the agenda of policy makers, with governments around the globe introducing strict legislation to reduce pollution.

    “With the world’s attention firmly fixed on the problem of waste, we expect governments to act, with businesses footing the bill,” states Smith.

    Verisk Maplecroft has identified the UK, US and the Netherlands as the countries most likely to pass new regulations on plastic materials, which could hit companies in the pocket as a result. France, Canada, Australia and Belgium are also flagged as areas to watch.

    “Beyond the potential financial impacts, the reputation risks for business are high if they ignore intensifying interest in the issue from consumers and investors,” Smith adds.

    There are also private sector initiatives, such as the New Plastics Economy Global Commitment, led by the Ellen MacArthur Foundation. Signatories include companies responsible for over 20 per cent of plastic packaging, as well as governments, NGOs, industry associations and investors.

    Its first annual report has just been published, providing unprecedented levels of transparency on the plastic usage of 176 packaged goods companies and retailers. The likes ofUnilever, Mars and PepsiCo have announced significant reductions in virgin plastic use by 2025, but they have a long way to go to reach their targets.

    Circular economy business model

    Tackling plastic pollution is an intrinsic part of creating a circular economy, which is an alternative, more sustainable model to the traditional linear economy.

    The linear model uses natural resources to make a single-use item, which eventually becomes landfill. In contrast, a circular economy keeps resources in use for as long as possible, extracts the maximum value, then recovers and regenerates products and materials at the end of their life. The emphasis is on the user, rather than the consumer.

    However, the circular model is not just about environmental issues; thanks to new technologies and consumer mind-set, it also makes good business sense. Recent research from management consultants Accenture found that the potential economic benefits of a circular economy could be as high as $4.5 trillion by 2030.

    “Finding alternatives to plastic will help accelerate the transition to a circular economy,” states Michiel De Smet, head of the finance programme at the Ellen MacArthur Foundation. “We are already seeing it happening, with recycling targets, and the ban on single-use plastics – and this is just the beginning.

    “These are exciting times for the circular economy and from an investor’s point of view, plastics is the perfect place to start.”

    According to De Smet, there are three reasons why plastics offer great investment potential: government regulation, consumer demand and new business models, with emerging technologies driving innovation and increasing competition.

    As a result, it’s now the linear model that now poses a financial risk.

    “There are many risks associated with the negative impact of a linear economy – whether that’s climate change, public awareness, or regulations,” says De Smet.

    “Companies that are well adapted to circular economy business models will be among the winners and those that are disrupted by it, become a serious risk. Investors need to anticipate this and identify companies that have a sustainable business strategy.”

    Long-term value

    In addition, smart investment will help scale the transition to a circular economy. Earlier this month BlackRock announced a partnership with the Ellen MacArthur Foundation, with the launch of the BGF Circular Economy Fund.

    Rachel Lord, head of EMEA at BlackRock, said awareness of the need to create a more sustainable future has reached a “pivotal point”.

    “To be well-positioned for the future, businesses are acknowledging that their long-term value is increasingly linked to their principles, practices and impact on society. Our partnership with the Ellen MacArthur Foundation allows us to potentially benefit from their knowledge and expertise to help create a thriving economy.”

    The Fund invests in stocks of circular economy companies that contribute and benefit from this model’s advancement. These include:

    • Adopters: companies that adopt the principles of the circular economy in their business operations
    • Enablers: companies that provide innovative solutions, enabling others to become circular. 

    • Beneficiaries: companies that benefit from the transition to a circular economy (eg companies that see increased demand for their products as a result of moving away from non-recyclable plastics).

    Investing in businesses that support the circular economy, by finding alternatives to plastic, will mitigate risk and open up new markets and increase financial return.

    As Dame Ellen MacArthur
 explains: “The circular economy presents new opportunities to create value for investors, while addressing major global issues including climate change, biodiversity loss and pollution. Businesses around the world are already gearing up to capture these new areas of value, reinforced by changing consumer preferences and enabled by policy measures.”

    Tokenised securities are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how tokenised securities and leverage work and whether you can afford to take the high risk of losing your money. Nothing in the above article should be regarded as a recommendation to trade generally, to trade on a particular platform or to trade in a particular asset. Asset prices can go down as well as up and past performance is not a guide to future performance. Investors and traders should thoroughly research an asset or strategy before making any trading or investment decision and if necessary seek professional advice.

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