Plastics Under Pressure
Negotiators are due to put the finishing touches to a legally binding agreement with serious consequences for users and producers.
A new accord on plastics aimed at curbing production and eliminating pollution is widely expected to focus the minds of companies that fail to make the transition towards more sustainable alternatives.
The United Nations Environmental Assembly adopted a resolution in 2022 pledging to “end plastic pollution” with an international agreement now known as the Global Plastics Treaty. The resolution set an ambition of finalising the treaty by the close of 2024, making next month’s final negotiations in the South Korean city Busan critical.
It noted rapidly increasing levels of plastic pollution, with specific concern for the marine environment. Further, it emphasised the importance of championing the sustainable design of products and materials in order to facilitate their recycling or reuse, and to minimise waste.
A major inflection point
At its current rate of growth, global plastic pollution could treble by 2040 without immediate action, according to statistics cited by the World Wide Fund for Nature (WWF).
The WWF argues that voluntary and nation-led initiatives are ineffective, pointing out that the number of such measures launched with the aim of tackling the problem has increased by 60% over the past five years. During the same window, plastic pollution has risen by 50%.
“Binding and specific design requirements for plastic products that lead to a decrease in plastic consumption” are required, the WWF claims.
There have been four rounds of negotiations since the treaty was first unveiled in Nairobi, Kenya. At the last meeting in April, measures were developed to eliminate problematic plastic products, but negotiators have yet to agree on rules to slash production and consumption.
Nevertheless, experts believe that the treaty is likely to have a profound impact on plastic producers, plastic-dependent companies, and their investors. “Industries both on the supply and demand side will need to reshape their business to comply with the outcomes of the treaty,” Jan Raes, Lead for Finance and Plastics at the UN Environment Programme Finance Initiative, tells ESG Investor.
“For industries traditionally reliant on plastics, the treaty represents a major inflection point,” says MainStreet Partners ESG Research Analyst Allegra Ianiri. “Companies must now pivot towards alternative materials, invest in innovative technologies, or diversify their operations to stay competitive.”
“For investors, this means closely examining how exposed their portfolios are to companies dependent on plastic production and usage, especially those facing limited decarbonisation options and increased vulnerability to volatile raw material costs.”
Fossil fuel giants face challenges
Ahead of November’s talks, a joint statement from the 66 nations that make up the High Ambition Coalition to End Plastic Pollution – which includes the European Union, the UK and Norway – reiterated their support for a legally binding agreement that tackles the full life cycle of plastics.
But while many countries and large companies have supported the treaty’s aims, the treaty has also encountered opposition from oil companies including ExxonMobil and countries including Saudi Arabia, China and Russia, which have objected to measures aimed at addressing plastics production. The US softened its stance this year and now backs limits on plastics production.
“Fossil fuel giants face significant challenges from the treaty,” Ianiri says.
“With the evolving energy landscape and the push for renewable sources, many have targeted petrochemicals and plastics as their next growth frontier, a strategy underscored by the presence of 196 fossil fuel lobbyists at the last UN negotiation round, [who were] there to put pressure on governments.”
Julie Gorte, Senior Vice President for Sustainable Investing at Impax Asset Management, advises asset owners to consider the upsides of this challenging and complex transition.
“There’s going to be a lot of wailing, moaning and outcry about how much it’s going to cost to find solutions or to phase out plastics,” she says.
“Every problem that you try to solve – that solution is going to create a possible revenue stream for investors. There’s a lot of money to be made in alternatives to plastic,” she adds.
Expensive alternatives
The cost of transitioning plastics away from fossil fuels poses a problem for businesses. Oil and gas-based plastics remain the cheapest options, according to recent ING research. Fossil-free bio-based plastics can cost as much as one and a half times conventional plastics, while plastics from green hydrogen can be up to four times more expensive.
“Regrettably, achieving cost competitiveness for fossil-free methanol-based plastics – derived from biomass or green hydrogen – with conventional fossil-based plastics is a challenging task,” ING said. However, the emissions of plastics from fossil-based methanol can be reduced by up to 65% by capturing and storing the carbon dioxide emissions, the report observes.
Increased circularity is often cited as a pathway to reduced plastics pollution via increased reuse or recycling, but today’s efforts don’t address the full product lifecycle.
“We often see companies releasing circular economy-related targets and goals,” says Amelia Gaston, Senior Responsible Investment Analyst at Edentree Investment Management, who adds that “these tend to be focused on the outputs of their business model rather than the inputs”.
Companies are setting targets to make all of their plastic products or packaging recyclable or reusable, she observes. “However, this doesn’t address the root cause of the problem and keeps demand for plastic high, and plastic products in circulation for longer.”
“What we’d really like to see is companies setting targets to reduce their plastic inputs,” Gaston continues, such as cutting the quantity of plastic within their products, committing to research and development (R&D) of alternatives.
“This is the only way we’ll really be able to turn the tide on plastic pollution, so it would be good to see the treaty encourage this type of action,” she says.
Many large companies have, however, gotten behind the aims of the treaty. The Business Coalition for a Global Plastics Treaty was set up in 2022 and now has over 240 members. In August, it called for the treaty to establish “a set of common obligations to address problematic and avoidable plastic products, chemicals of concern and product design”, as well as a reporting mechanism for evaluating the treaty’s effectiveness.
In a September interview with Reuters, Unilever Chief Executive Officer Hein Schumacher – whose company was a founding coalition member – called for an accord that “has some teeth”. Earlier this year, he wrote in a blog that “voluntary initiatives are not enough”, arguing they “distort the market, too often reducing the competitiveness of those taking action”.
The Global Plastics Treaty is being negotiated with the principles of a ‘just transition’ in mind, meaning impacts on employees, communities and supply chains will be considered, while the final round of discussions will also continue talks on how it will be financed.
“This is a shake-up of the method of production for many companies, and that inherently comes with increased costs,” says Nathan Cole, Head of Sustainable Business at environmental disclosure platform CDP.
Establishing how the treaty will be financed is vital “to make sure that this isn’t just another situation where the Global North is cascading action that has an outsized impact on the Global South”, he continues.
Risk of stranded assets
Many major asset owners and managers have vociferously supported the treaty. In April, 160 financial institutions signed a statement calling for an “ambitious” international treaty to end plastic pollution to coincide with the penultimate round of talks.
April’s talks disappointed some campaigners after negotiators opted to exclude primary plastic polymers from discussions following lobbying from petrochemical firms. In July, a coalition of 70 global investors urged the petrochemicals industry to stop hindering progress on the treaty.
Companies will need to update how they use plastics or face the prospect of being overlooked by some investors, while those that prioritise alternatives to conventional plastics may become more attractive.
“We expect companies to support an ambitious treaty,” says Mariët Druif, Responsible Investment Officer at Cardano, who wants to see businesses enact policies to reduce plastics use and increase reusable packaging, set plastic reduction and reusable packaging targets, and eliminate hazardous chemicals in plastics.
Earlier this year, the Institute for Energy Economics and Financial Analysis warned that fossil fuel producers could be hit by credit downgrades “due to their failure to prepare for market and policy changes”, highlighting various credit warnings issued by Standard and Poor’s, Fitch and Moody’s. “The market outlook for virgin plastics is turning negative,” IEEFA cautioned.
“Investors will want to see change from companies heavily reliant on virgin plastics, as they face the risk of stranded assets and higher compliance costs if they do not adapt,” ARK Invest Europe Associate Director Kate Naumova tells ESG Investor.
“Investors are increasingly focused on the long-term resilience of companies, and those that fail to innovate early could find themselves at a disadvantage in terms of capital access,” she continues. “Firms that invest in R&D now to develop alternatives and transition their production processes will be better positioned to retain investor confidence and mitigate future regulatory risks.”
Campaigners want investors to increase their efforts to encourage companies to move away from plastic.
“We expect investors to be sending signals to major companies that are completely plastic-dependent on what they expect in terms of a transition to new models,” says Graham Forbes, Global Plastics Project Leader at Greenpeace USA.
“It’s very difficult for any alternative models to get off the ground when you have government subsidising fracked oil and gas to make cheap plastics.”
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