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Solving the plastic pollution problem

Plastic and packaging pollution is one of the most pressing global environmental threats and has become a material issue for investors. Only 14% of estimated plastic packaging is recycled globally. Of the remainder, around 14% is incinerated, 40% is landfilled, and 32% is ‘leaked’ to the environment. On the 22nd April, as millions across the world commemorate the 50th anniversary of Earth Day, Aaron Hay, Lead Engager – Fixed Income and Lisa Lange, Engagement Professional for EOS, at the International Business of Federated Hermes, look at the key risks and opportunities for investors in global plastics in their latest paper, ‘Investor Expectations for Global Plastics Challenges’.

Why investors should care

The linear, take-make-waste model for plastics has become unacceptable from a social, environmental and regulatory perspective, and companies reliant on this model will face substantial new commercial risks in coming years. Companies and their shareholders need to grapple seriously with the challenges and opportunities ahead. Plastics contribute to the climate crisis, degradation of natural environments and companies that are heavily reliant on them risk losing their social license to operate on top of the increasing regulation they face. However, there is significant value on offer for companies investing in solutions.

All firms exposed to plastics value chains can take early steps to future-proof supply chains against unpredictable costs and disruptions from changing regulation and societal norms. It may be possible to stabilise long-term costs where companies have a significant plastic-exposed cost base; in fastmoving consumer goods, packaging has been found to account for as much as 14% of the cost of goods sold. Meeting consumer demand is not just about reputational damage control, given that an ever-broader base of customers is interested in attractive alternatives to unsustainable plastics and packaging. Finally, for many companies, plastic is a tangible part of the total carbon emissions footprint of their products, and so changing how plastics and packaging are used may reduce embedded emissions.

 Our engagement

In 2020 and beyond, we are amplifying our engagement in the chemicals, consumer goods and retail sectors by setting objectives for high-risk companies and targeting outcomes that address opportunities and risks:

  • Chemicals: As a supplier of key plastics inputs, the chemicals sector plays a crucial role finding suitable materials for customers. In engagement, we will focus on how companies are delivering solutions for prominent plastics challenges, the resources allocated to research and development (R&D), and the capital invested in recycled and circular production.
  • Consumer goods: The consumer goods sector is instrumental in product and packaging design, recyclability and handling. We will focus on engaging companies on their R&D and design strategies for sustainable plastics use and recovery, educating consumers, and showing greater leadership with value chains and regulators on scalable solutions.
  • Retail: In retail, we focus on how companies are making sustainable plastics choices easier for consumers, working with suppliers and value chains to offer products with sustainable materials use, and partnering with regional and national stakeholders on effective materials recycling infrastructures.

 We take a bespoke approach to each company exposed to plastics value chains, which takes the maturity of the company into account. Our approach considers all the elements relating to a sustainable plastics strategy, including the management, governance and disclosures.

Covid-19 will undoubtedly result in many businesses having to rethink their supply chain risk and they should use this opportunity to look at the wider risks to their long-term business, including the impact of their plastics and packaging use. We expect companies to move from treating plastic as an externalised risk, to developing strategies that consider it as a resource requiring responsible management and value preservation – in partnership with suppliers, customers processors and regulators. Without a cogent, disclosed journey on the sustainability of plastics and packaging, we believe many companies will face significant scrutiny from investors and stakeholders.

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