The fight to end plastic pollution gained momentum this week as the deadline for a UN-led international treaty nears, but will everything fall in place for true change?
On Monday, April 29, the fourth of five sessions of the United Nations Environment Program (UNEP) to develop a legally binding treaty ended in Ottawa, Canada. Such a treaty, first mandated by resolution of the UN Environment Assembly requiring finalization by the end of 2024, is to focus on limiting the growth of plastic pollution. The convening of the committee in Ottawa, the so-called “INC-4”, was preceded by sessions in Punta del Este, Uruguay; Paris, France and Nairobi, Kenya. Progress was made, but there is still work to do. These sessions are to culminate in Busan, South Korea for the final drafting of the treaty.
It is fitting that the theme for Earth Day 2024 was “Planet versus Plastics.” Earth Day preceded the INC-4 session and sought to bring heightened attention to the plastic pollution issue, and rightfully so. Plastic pollution has taken a major toll on the planet’s biodiversity and the health of its inhabitants. Per the Plastic Soup Foundation, a non-profit focused on plastic pollution, the explosion of the production and usage of plastics since 1950 has generated roughly five billion tons of plastic waste. Five billion tons could be added by 2050 as more plastic is used and produced. Roughly 190 million tons of plastics produced each year are for single-use, meaning their useful life is typically less than an hour versus their environmental impact across centuries. Furthermore, microplastics and nanoplastics impact the health of humans and animals in all living habitats. Microplastics are tiny plastic particles measuring less than 5 millimeters in diameter and nanoplastics are less than one micrometer in diameter. Plastics contain known carcinogens, have been linked to cardiovascular diseases and digestive tract diseases.
Unfortunately, at least in the United States, media attention for INC-4 seemed light, as these google search results of major US cable news outlets show. Not surprisingly, the United States has been criticized for hesitancy to align with aggressive cuts, potentially due to reliance on petrochemical revenue by the oil and gas industry. The Biden Administration is receiving pressure from within its own party to be more aggressive, but has been relatively muted compared to delegations from other nations.
Perhaps the investor community sees it the same way. My colleague Amy Nguyen highlighted research done last year to investigate risk premia of publicly-traded players in the plastics industry. She noted that research from the non-profit Planet Tracker revealed the risk premia for plastics companies had declined from a high of 9.1% in September 2021 to 5.8% in March 2023. This drop occurred while the public became more aware of the health and environmental calamities to the point the international community agreed to draft a binding treaty to curb plastic usage and control its disposal.
So what was the reason for this disconnect and will it continue?
As Nguyen points out, there is the anticipated growth in the plastics industry due to demand. The Plastic Soup Foundation reveals usage and production of plastics is projected to quadruple between 2019’s rate of 370 million tons to 1.48 billion tons per year in 2050. So while we have regulatory risks, we also have a growing market despite those risks. But do investors truly have a view of how such risks impact their investments?
Last November, the Climate Disclosure Project (CDP) facilitated the first-ever large-scale disclosure of plastic-related risks. This was simultaneous to the previous round of negotiations for the international plastic treaty (INC-3). Companies representing over $31 trillion in market capitalization utilized the CDP platform, developed similarly to CDP’s platform for disclosing carbon-related risks. Additionally, financial institutions with over $3.5 trillion in assets under management (AUM) signed an open letter to governments participating in the plastic treaty negotiations to include mandatory corporate disclosure in the treaty.
Be reminded that the disclosures were, obviously, voluntary, as mandatory disclosures are not directly required in any jurisdiction. As Pietro Bertazzi, Global Director for Policy Engagement and External Affairs at CDP, states: “Mandatory disclosure can prevent loopholes and ensure policymakers have access to the insight they need to develop impactful, evidence-based policies that drive private sector action.” When we consider the risk premium disconnect, disclosure requirements with teeth could help investors understand the risk of regulation on this industry.
But disclosures alone are not enough. Regulatory pressure would be necessary to introduce regulatory risk. Additionally, the question of materiality would play a big role. Consider the recent SEC Climate Disclosure rule, which only requires single materiality or the disclosure of how risks impact the investment. The EU’s Corporate Sustainability Reporting Directive requires the disclosure of the impact of a company’s operations on climate change, which is in line with double materiality.
Mandatory, double-materiality disclosure protocols in conjunction with a binding treaty could change the trajectory of investment into the plastics industry and future demand. But time will tell if those things will come to fruition.
