Are You Underestimating Plastics Risk?

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    Stockholm (NordSIP) – With the United Nations-convened Intergovernmental Negotiating Committee (INC) having recently begun work on the draft of a global plastics treaty to be implemented in 2024, there are concerns that investors are not adequately pricing in the potential risks.  Non-profit financial think tank Planet Tracker analysed the equity risk premia of 150 companies across the plastics value chain and found that they were unexpectedly low.  The new research paper, titled Plastic Risk – Measuring risk in the plastic sector, focuses on three main segments of the plastics value chain: upstream single-use plastics (SUP) producers, midstream container and packaging producers and the downstream consumer staples companies.

    Multinational blue chips throughout the value chain

    The SUP producer segment is dominated by large fossil fuel companies like Saudi Aramco, ExxonMobil and Chevron.  Aramco accounts for just over half of the sector market capitalisation, so Planet Tracker removed the company from its analysis to avoid distortion of the results.  The midstream segment of packaging producers represents a smaller overall market cap and includes specialist companies employing various materials including aluminium.  The large downstream consumer staples segment includes familiar brand names like Coca-Cola, PepsiCo, Nestlé and Unilever, four of the Top 5 worst plastic polluters of the past five years.

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    Complex risk profile of the plastic industry

    What risks should investors consider when looking at exposure to plastics within their portfolio?  According to Planet Tracker, there are multiple physical, legal, reputational, and transitional risks.  Plastic accounts for 3.4% of global greenhouse gas (GHG) emissions, a proportion that is expected to rise as overall production triples by 2060.  Plastics-related litigation is forecast to grow as the harmful effects of the chemicals used in plastic production are better understood and detected.  Companies in the sector are also increasingly the subject of greenwashing allegations, carrying reputational and financial risk from potential lawsuits and regulatory penalties.  Finally, Planet Tracker highlights the transitions risks faced by companies failing to adapt to the rapidly growing number of waste and packaging related national regulations being introduced each year, often under the banner of Extended Producer Responsibility (EPR).  More than 700 such policies have been introduced in the decade up to 2022.

    Investors missing the full picture

    Planet Tracker’s analysis of the equity risk premia associated with companies in the 3 segments of the plastic value chain revealed that investors are anticipating either stable or declining risks for the industry.  This contrasts with their apparently heightened concerns over other materials-based sectors such as chemicals and paper production.  Planet Tracker therefore believes that many investors have an incomplete understanding of the full risk profile of the plastics industry.  While the connections with petrochemical-related GHG emissions and environmental pollution are relatively clear, other factors such as the effects of plastics-related “forever” chemicals and adverse societal effects in the Global South are not being sufficiently priced in by investors.

    The implementation of a global plastic treaty in 2024 is expected to bring far greater scrutiny upon the plastics industry, along with additional reporting requirements for institutional investors.  Planet Tracker’s report provides a good starting point for evaluating plastics-related risks in institutional portfolios and engaging with external managers on the topic.  Plastic pollution was the main focus of the UN-sponsored World Environment Day on June 5th and it will most likely continue to rise up the sustainable investing agenda for the foreseeable future.

    Image courtesy of FlitsArt from Pixabay
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