The Future of Plastic is Shaded Green

By Jo Trahms and Brian Flynn, William Blair .

With increasing frequency over the last decade, packaging companies have come under pressure for the synthetic polymers they use to make packaged goods. This pressure is mounting from several angles, including environmentalists, consumers, and regulators. For example, there are currently 25 countries and over 100 cities in the US and the EU with regulations in place banning single-use plastic.[1] Recently, an additional and perhaps equally powerful force is at work, as pressure is emanating from ESG investors, who have amassed enough power to foment change. In the US, about one-third of assets under management — roughly $17 trillion — are held in sustainability funds, up about 40% from 2018 to 2020.

With so much money on the line as well as so much pressure for sustainable solutions from consumers, companies fall afoul of ESG at their own risk.

Who’s to blame for plastics?

To set the record straight, criticism of the packaging industry is partly justified and partly misplaced. We have all seen the images of plastic packaging clogging our waterways and heard about the large percentage of landfill waste that is represented by plastics. Recently, there are rising societal concerns about microplastics, which are created as plastic breaks down and are potentially harmful to humans and the environment.

However, because companies that produce plastic packaging have been under pressure for a long time, they have invested a lot of time and money into more sustainable solutions and formats. Examples include single-monomer solutions which are fully recyclable, products with recycled or bio-based content, and product designs utilizing less resin content (e.g., lightweighting). Despite success in the creation of these more sustainable solutions, packaging companies have more often than not been hobbled by macro factors. These include a lack of willingness among CPG companies and consumers to pay a premium for sustainable alternatives as well as recycling infrastructure that is woefully behind what is required to meet the actual demand for recycled resin.

Consider the sad saga of the Sun Chips bag. Usually, chip bags are made from multiple plastics and feature an aluminum lining. Because they have several synthetic layers, they cannot be recycled or composted. About a decade ago, however, PepsiCo introduced a compostable bag utilizing a promising biodegradable plant material, PLA, which it used for its Sun Chips line. The bags looked great, but consumers said they were “too noisy.” People made fun of them on Facebook, claiming they prevented conversations. The company persisted, tweaking the design to make the bag quieter, but eventually abandoned the biodegradable packaging due to flagging sales. Since then, there has been scant progress in developing eco-friendly chip bags.

In this case, who deserves the opprobrium, the company that strived for sustainability or the consumers who abandoned it due to a minor inconvenience?

On a more upbeat note, as an example of change being seen today, soft drink companies have begun making real commitments to using recycled inputs in their packaging. Last year, Coca-Cola in some states launched its first-ever bottle made from 100% recycled PET plastic. The initiative will reduce the company’s new plastic consumption by 20% in North America, putting Coke well on its way to reaching a corporate goal of 50% recycled content for all bottles by 2030. By the same year, Coke has pledged to collect and recycle a bottle or can for every one the company sells. Other companies, such as Nestle, are also seeking to cut their use of virgin (new/never recycled) plastic inputs.

Considering the size of these companies, this trend promises to significantly impact the PET industry’s supply chain, operations, and value proposition. This is especially true because meeting these goals will require about four-to-five times as much post-consumer PET as is currently recovered in the US, according to the Association of Plastics Recyclers. This imbalance provides an opportunity for investors to utilize M&A to create scaled suppliers of recycled resins, which traditionally has been a privately-held, regionalized industry.  

A bum rap for plastic?

Despite plastic’s unfavorable reputation and the attention focused on it by sustainability advocates, its profile is more favorable than one would assume when compared to alternative packaging formats. For instance, when comparing the manufacturing process of a flexible, packaging pouch to a comparable paper package, the paper structure would need to be recycled three times more than the plastic pouch to offset the harsher environmental impact from paper manufacturing. In addition, plastic flexible pouches are much more effective at preserving food, because plastic prevents oxygen penetration — a chief cause of spoilage. In comparison, paper structures would require ~25% more paper volume to achieve a similar barrier to the plastic equivalent. That difference is significant from the perspective of climate change, because food waste is a major source of carbon emissions; if food waste was a country, it would be the third largest carbon emitter behind China and the United States.

There are other points to keep in mind when thinking about plastics and sustainability. Plastics play a critical role in reducing contamination in healthcare settings. Packaging and transporting in paper are often not practical, and in glass would be much heavier, which adds to climate emissions. The bottom line: plastics are essential, evolving, and here to stay.

Plastics come under criticism mainly because of the way society and governments handle them. In principle, nearly all plastic can be recycled, and packaging made from plastic can be recycled twice as many times as paper before the materials break down. Yet only about 9% makes it through the nation’s material recovery facilities, up just 1 percentage point since 2010. The fact that more than 90% of plastic ends up in a landfill is a problem. Plastics release toxic chemicals during production, landfilling, and incineration, and they subsequently break down into microplastics, which have become ubiquitous worldwide.

Not all plastic packaging has been engineered to be recyclable, but much has. Unfortunately those efforts are hampered by inconsistent recycling rules across jurisdictions, a lack of recycling infrastructure, and a lack of stable demand for recycled inputs from brands and consumers.

The United Nations steps in

Intractable planetary challenges benefit from transnational solutions. With that in mind, in early March the United Nations Environment Assembly agreed to prepare a detailed treaty on plastic waste. The treaty, which is slated to be completed by the end of 2024, could prompt a breakthrough in plastics recycling. Backers are planning a broad and legally binding deal, and they recognize the urgent need to address the barriers impeding progress. The March UN agreement states that the treaty must improve recycling, address microplastics, and tackle the full life cycle of plastics. Observers are optimistic that the treaty would fix unrealistic expectations imposed on waste managers and recyclers.

What does this mean for the future of the packaging and waste management industries? That’s a question that executives are currently studying and acting upon. In brief, we can all brace for meaningful change. In addition to the UN treaty and pressure from ESG investors, landfills are filling up fast and there is little appetite for opening new ones. Moreover, impact investors looking to allocate money toward building a better world see synthetic plastics as an attractive target.

An industry overhaul

In addition to the already vigorous consolidation in the waste management industry, the plastic packaging issue is beginning to drive significant merger and acquisition (M&A) activity.

Plastic producers are buying recycling facilities to vertically integrate and shore up their evolving supply chains. For instance, Altium, a rigid bottle manufacturer, bought sister companies Envision Plastics and Ecoplast, HDPE recyclers. Rather than looking to the oil and gas industry for raw materials, manufacturers will increasingly depend on the waste stream to generate recycled materials. Packaging producers will have to secure access to the right types of recycled plastic, and owning a recycling facility will help them lock in supply. The need is pressing given that corporate recycling pledges on polymers such as PET are leading to a widening supply and demand imbalance .

In other cases, environmental service companies are seeking ways to ensure a second life for polymers where demand is low. Sources admit privately that a significant quantity of plastic that is technically recyclable ends up in landfills because it is unmarketable. This is particularly true when oil prices are low and plastics can be produced more cheaply from raw materials. But dumping recyclable plastic is environmentally harmful and raises ESG risks. To boost demand, a Waste Management Inc. subsidiary, along with Tailwater Capital LLC, recently inked a joint venture to help scale Continuus Materials, a company that transforms discarded plastics into quality building materials. We expect a large increase in such circular-economy deals in the coming years.

In addition to M&A activity, both industry and financial players are increasingly taking minority, growth-equity positions in companies providing sustainable solutions and recycling infrastructure. Examples include Printpack’s investment in Nexus Circular, a recycling technology company, and Goldman Sach’s equity financing for TemperPack, a provider of sustainable protective packaging. The fact these investments are coming from pockets of capital that traditionally fell outside the impact investing universe highlights the real interest from individuals to invest in supporting a more sustainable future.

The waste and packaging industries are investing, and given the global effort, there is greater hope for improved plastic stewardship. The road ahead will likely be bumpy and present unanticipated obstacles. But given the global consensus, the commitments of business, and the better understanding of how to proceed, we are optimistic about the future of plastics 2.0 and a cleaner planet.

[1] Source: Cleantech Group