Why Investing in Waste Matters

Waste treatment and recycling is a major long-term opportunity for investors, according to Stefanie Mollin, Global Equities Portfolio Manager at GIB AM.

Waste management is a big – and growing – business, as the global scale of solid waste generation reaches vast proportions. Every year more than 2 billion tonnes of municipal solid waste (MSW) is produced across the planet, as shown in the UN Environment Programme’s (UNEP) Global Waste Management Outlook 2024.

Significantly, MSW – which is waste generated by householders, retailers and small businesses, public service providers, and other sources – is projected to increase by 80% by 2050, reaching 3.8 billion tonnes.

“According to the World Bank, daily per capita waste in developed markets is expected to increase by 19% by 2050,” Stefanie Mollin, Global Equities Portfolio Manager at GIB Asset Management (GIB AM), a UK-based boutique with US$6 billion in AUM, told ESG Investor. “However, the issue is even more problematic in emerging and frontier markets, where it could rise by 40% or more.”

Waste is responsible for 20% of the world’s human-related methane emissions, according to the UNEP, with these emissions likely to continue wreaking environmental havoc, making it challenging to achieve the UN Sustainable Development Goals (SDGs).

The economic cost is also substantial. In 2020, the direct cost of waste management to the global economy was an estimated US$252 billion. However, this rises to US$361 billion when the hidden costs of pollution, poor health and climate change from poor waste disposal practices are factored in, according to the waste management report.

“Responsible waste management and treatment is important because waste pollutes the air and releases methane, which warms the planet,” Mollin explained. “It can also introduce toxins into the soil and water, which gets into our food chain.”

According to the US Environmental Protection Agency, MSW landfills are the third-largest source (14.4%) of human-related methane emissions in the US, which is equivalent to CO2 emissions from more than 24 million passenger vehicles driven for one year.

Addressing the issue

To tackle the mounting volumes of waste, there is a pressing need to bolster waste management globally to provide adequate treatment and disposal services. The potential growth in the market also presents an opportunity for investors.

In 2022 the global waste-management market was valued at US$1.3 trillion, according to market data provider Statista. Mollin predicts that it will grow by 5.5-6% annually over the next decade.

“The waste management sector has a long runway for growth because these problems, unfortunately, are not going away,” she said. “Therefore, as an investment, it is an excellent area to be exposed to.”

The sector’s strong growth prospects and its role in addressing environmental and social challenges for creating a sustainable world are the main reasons for its inclusion in GIB AM’s Sustainable World Fund. Launched in 2021, it is a multi-thematic Article 9 fund, meaning it has distinct sustainability objectives.

GIB AM invests in the fund through deep thematic research to identify areas and industries that are addressing the world’s sustainability challenges. “It’s very much driven by UN SDGs and the UNEP priorities,” Mollin explained.

The Sustainable World Fund is divided into people and planet-related themes. As the GIB AM team researches different themes, it looks to identify sustainability challenges – such as waste treatment and recycling – and existing or emerging solutions. These can include improving responsible waste disposal, expanding recycling capabilities, or developing methods for methane capture, for example.

The team then identifies a company that is exposed to the specific theme, with 50% or more of its revenues linked to it. “The theme needs to be the main driver of the company’s growth and contribute to solving the global challenge,” Mollin said.

For example, Waste Connections, Waste Management (WM US) and Republic Services are the largest US operators focused on MSW disposal, which makes up close to 100% of their business.

WM US has earmarked C$3 billion (US$2.2 billion) of capital expenditure to expand its renewable energy and recycling operations. By 2026, the company expects its landfill gas-to-renewable energy natural gas and recycling projects to deliver additional EBITDA of C$510 million and C$290 million, respectively.

Good management

To be included in the Sustainable World Fund portfolio, a company must also operate in a sustainable way. “We believe that such companies will enjoy higher margins versus their peers and achieve a better return on invested capital,” Mollin explained.

In GIB AM’s definition, a company operating sustainably treats its employees and suppliers well, as well as the environment. This can translate into improved margins because the company will have lower staff turnover, for example, and will be at the front of the queue for supplies if something happens. In addition, by being mindful of its environmental impact, a company exposes itself to a lower risk of fines.

Focusing on the company’s management is essential because governance is key to strategy and operations, according to Mollin. She added: “When we say we’re embedding ESG and sustainability, we’re also looking at the governance practices and company culture. The latter is difficult to quantify but hugely important for earnings outlook and the returns for that business.”

Emerging technologies

Among the other themes included in GIB AM’s sustainable investment universe is frontier technology, including AI, coupled with the ability to increase compute power, which Mollin says enables the processes needed to improve research in fields, such as medical research.

She pointed to recent advancements in semiconductor chips, which have increased compute power while becoming more energy-efficient.

The Sustainable World Fund team identified the growth prospects: the outlook for graphics processing unit semiconductor chips is a 30% compound annual growth rate.

In the third step of its search for companies operating in a sustainable way in this field, the team zeroed in on Nvidia.

“One of our top holdings, Nvidia, is designing chips that are at the forefront of allowing AI, data centres and large language models to solve multiple challenges,” she said.

Market turmoil

Over the past 12 months – excluding the last few months of market volatility – AI-linked stocks have been outperforming other areas, according to Mollin.

In her view, the recent turbulence in the stock market was a macro issue for large-cap tech stocks that resulted from weak macro figures in the US at the beginning of August. In particular, the non-farms payroll (NFP) report from the US Bureau of Labor Statistics was a particular data point that shook the market, as it was much lower than expected.

“That raised concerns of a hard landing in the US economy, versus the baked-in assumption of a soft landing,” Mollin explained. “Thus, the higher valued companies were derated, as the market rotated out of growth and more into a defensive stance. But it was a top-down move, a market rotation, not a reflection of these companies’ fundamentals.”

While the large-cap tech stocks, such as Microsoft and Nvidia, underperformed early in August, they bounced back when stronger data points for the economy were published, dissipating concerns around a hard landing.

“It’s been a very volatile summer in equity markets,” said Mollin. “Life as a bottom-up fundamental investor is not usually so macro-driven, but these days it is. Everything needs to be top-down informed.”

She pointed to another weaker-than-expected NFP report on 30 August, which rattled the markets once again. However, these market-driven events don’t change the long-term growth drivers and fundamentals of the companies that GIB AM invests in, according to Mollin.

“Part of being a sustainable investor is finding themes that are addressing environmental and social challenges for creating a sustainable world. Those companies that build products and services that address these challenges will see a very long runway of growth,” she said. “As such, they can ride through short-term, volatile moments in the equity markets because it doesn’t change the underlying growth prospects of their industry.”

From its beginning, the objective of the Sustainable World Fund is to outperform the MSCI World Index by 2% per annum.

“We are identifying industries and companies that have very strong, resilient and stable long-term growth, as well as better-than-peers returns on invested capital and earnings growth due to operating in a sustainable way,” Mollin said. “You can achieve both – you can outperform the market and do good for the world.”

Demonstrating a strong economic return is the linchpin to attracting more investment in the sustainable space, she argued.

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