A Case for Redesigning Single-Use-Plastic
Climate-Tech Investing In The Time of COVID-19 — Article 6
In April 2016, I emailed Jeff Bezos a six-page-memo regarding Amazon’s single-use plastic footprint. My aim was to convince Bezos or his Global Head of Sustainability, Kara Hurst, to hire me to help fix Amazon’s single-use-plastic problem. I wanted to combine my operational and investment skillset with a desire to clean up the oceans — an intergenerational asset that is rapidly getting destroyed by plastic litter. You are no doubt familiar with the plastic dunnage that comes inside every Amazon package in the form of sealed air cushions, bubble wrap, et al. As you may also know, those plastic sealed air cushions will still be here, in virtually the exact same form, in thousands of years, either in a landfill or worse, in the world’s oceans and rivers. My theory was that if Amazon led in this arena, every e-commerce retailer would have to follow and the spigot of plastic entering the world’s oceans might start to decline. Bezos. Didn’t. Get. Back. To. Me. :(
Friends who knew my background and interests introduced me to Inherent Group, a permanent capital fund focused on investing in sustainability which I joined in late 2016. One of my first assignments was to analyze how we might invest in companies working on solutions to the single-use-plastic scourge. I learned a lot. In the proceeding article I will outline the problem with our current usage of single-use plastic, investment opportunities to redesign and improve the single-use-plastic value chain, and important industry-specific investment lessons.
To read previous entries in this series, Climate-Tech Investing in the Time of Covid-19, see links here:
Article 1 — Whither Climate Investors’ Opportunity Set?
Article 2 — There Is No Climate Change Deus Ex Machina
Article 3 — Earth’s Climate Budget — A Primer
Article 4 — A Case for Rapidly Scaling Carbon Capture, Utilization, and Storage
Article 5 — Is Natural Gas a Bridge to Renewables? It’s Complicated.
Background on single-use-plastic
Light-weight and inexpensive to manufacture, single-use-plastic provides consumers a one-time-use carrier or barrier for all things fast, cheap, and disposable. Plastic is a miracle of science except for a single catch: plastic does not biodegrade. The half-life of plastic is so long that it is not actually known. It can only be guessed. As polymer chemist Dr. Andrady of NC State University states in his book Plastics and Environment Sustainability, “The biodegradation of plastics in most environments are far too slow to play any meaningful role in removing plastic litter from the environment.” Said another way, Dr. Andrady continues: “the process is slow enough to suggest that all common plastics ever produced (and not incinerated) still survive somewhere in the environment.”
Plastic is made by mixing refined products of oil and natural gas with a variety of chemicals to form long-chained polymers. The resultant polymers fit into the following plastic resin ID codes, which you can see labeled on most articles of plastic:
· PET — #1- polyethylene terephthalate (plastic water bottles)
· HDPE — #2 — high-density polyethylene (milk jugs, laundry detergent, AIRplus packaging)
· PVC — #3 — polyvinyl chloride (food trays, cling wrap, irrigation pipes)
· LDPE — #4 — low-density polyethylene (grocery bags, bin liners)
· PP — #5 — polypropylene (plastic plates, food packaging)
· PS — #6 — polystyrene (styrofoam cups, to-go boxes)
· Other — #7 — (all others like specialty composites, Kevlar, building materials, et al.)
Plastic polymers have duration unlike most molecules on Earth. Even oft-maligned oil molecules decompose in the natural environment. As tragic as the Deepwater Horizon oil spill was in 2010, scientists were surprised by how fast the oil disappeared, consumed by significant levels of oil-eating microbes. This makes evolutionary sense because microbes have had millions of years to evolve a taste for oil. Not so with plastic which was invented within the last century, a blink of an evolutionary-eye ago.
If plastic is forever, where is it?
According to the US EPA’s website, plastics make up roughly 13% of municipal solid waste (MSW) by weight dumped into US landfills, a reasonable proxy +/- 5% for the plastic percentage in global MSW. Additionally, much of the used plastic enters the oceans via mismanaged waste and offshore dumping. According to a paper called Plastic Waste Inputs from Land Into the Ocean, published in Science Magazine in February 2015, “275 million metric tons (MT) of plastic waste was generated in 192 coastal countries in 2010, with 4.8 to 12.7 million MT entering the ocean.”
Most people have heard about the Great Pacific Garbage Patch, which is a colossal floating plastic garbage dump located in a gyre twice the size of Texas between Hawaii and Seattle, but perhaps it’s not as well-known that there are 4 additional plastic garbage gyres in the major oceans just like it. While plastic never decomposes, it does become brittle and break apart into tiny pieces that sea life from tiny lantern fish to sperm whales to albatross mistake for food. The plastic can sometimes pass through the animal’s digestive system but often gets lodged inside, slowly starving the animal to death. Plastic also leaches significant amounts of chemicals like bisphenol A (BPA) and phthalates into whatever environment it happens to be in (including your refrigerator). Plastic is not only poisoning and killing a massive amount of sea life that the human race depends on for food, but it’s also entering the food chain in ways we do not fully understand (early signs are bad).
Map of the 5 Major Plastic Gyres (red is the densest concentration of plastic)
Plastic production has grown at a long-term 5% growth rate and shows no sign of abating.
Under a business as usual case, plastic is set to grow from 311 million tons per year in 2014 to 1,124 million tons by 2050.
What about recycling?
In practice, only about 5% of plastic is recycled. Plastic is difficult and expensive to recycle as it must be sorted by resin type, shredded, cleaned, melted, and reprocessed to form new plastic products which is often a more expensive process than producing virgin resin and almost always of lesser quality. More often than not, recovered plastic will be “down-cycled” into another product such as fleece or carpet. According to the Ellen MacArthur Foundation’s report The New Plastics Economy:
“More than 40 years after the launch of the well-known recycling symbol, only 14% of plastic packaging is collected for recycling. When additional value losses in sorting and reprocessing are factored in, only 5% of material value is retained for subsequent use. Plastics that do get recycled are mostly recycled into lower-value applications that are not again recyclable after use. The recycling rate for plastics, in general, is even lower than for plastic packaging, and both are far below the global recycling rates for paper (58%) and iron and steel (70–90%).”
Investment Opportunities to Redesign and Improve the Single-Use-Plastic Value Chain
To make substantial progress on reducing the harmful externalities of single-use-plastic, we need to attack the problem in three key areas: i) redesigning the polymers, ii) redesigning the product life cycle, and iii) improving recycling.
1. Redesigning the polymer(s)
Plastic polymers are long-chain combinations of atoms, usually carbon and hydrogen, that are durable, pliable, and very long-lasting. Using hydrocarbons to manufacture plastic polymers is currently the cheapest and most efficient method. Revisiting the circular economy authors I have mentioned in previous articles, McDonough and Braungart, in their most recent book, Upcycle, succinctly describe how to redesign a product: “There are two ways to create a safe, healthy product: either deconstruct the existing one and replace the dangerous materials in it with good ones, or start with a known list of positive materials and construct the product.”
With single-use-plastic, removing toxins makes the product “less bad” but only marginally. A complete redesign is in order. The goal would be to redesign plastic to make the product either easily recyclable or biodegradable (and without toxins). It’s possible to make plastic from renewable feedstock such as sugar, cellulose, and other bio-renewable feedstock. It is also possible to manufacture plastics that biodegrade either in industrial combust bins (high heat) or even in ambient temperature compost bins (back yard). Note the key three-letter distinction bio in biodegrade. It’s possible for plastic to degrade into smaller plastic particles. Biodegradable means a material can be digested by animals, insects, and/or microorganisms and turned into water, carbon, and other basic earthly elements.
There is indeed much effort that has been expended on producing bio-based, biodegradable plastic. The four most common, in small-scale production today are starch-based plastics, polyhydroxyalkanoates (PHAs), polylactic acid (PLA), and polybutylene succinate (PBS).
Starch-based plastics. These are the most widely used bio-plastics today especially in disposable food utensils and other single-use items like to-go containers. A good example is Novamont’s Mater-Bi plastic which is made from starches, cellulose, and vegetable oils. To date, these products have had limitations on their total addressable markets (TAMs) due to brittleness, discoloration, and moisture sensitivity, though the products are constantly improving. To address product shortcomings, the starch-based plastics can be blended with other biodegradable plastics (such as PHA).
PLA. The second-most common bio-plastic in production, PLA is a thermoplastic polyester obtained by converting primarily corn starch to polylactic acid through a fermentation process. PLA is used for a variety of products that need to biodegrade over time like medical implants. It’s also commonly used for 3D-printing. Like starch-based plastics, PLA has had limitations on its TAM due to its brittleness. NatureWorks’ Ingeo product is the most scaled production of PLA though it is unclear if NatureWorks has found a way to produce Ingeo profitably as the Company has demonstrated limited growth beyond its first plant.
PHAs. This family of polymers are polyesters that can be produced using bacterial fermentation of sugars, starches, lipids, and even methane. PHAs are biodegradable under most conditions and can be combined with other polymers to enhance certain properties, such as pliability. The issue with PHAs to date is they are expensive to make. At $2–3/lb, PHAs are >5x as expensive as their hydrocarbon-based competitors. Metabolix, founded in 1992, tried for decades to commercialize the use of PHA, however, the company ultimately went bankrupt and was sold for parts in 2016. If costs can be brought down, PHAs have a promising TAM. Numerous studies are underway to find a cheaper path to commercial production. Mango Materials is one of the latest companies taking up the challenge of commercializing PHAs.
PBS. Known to the chemical world for over a century, PBS is a biodegradable aliphatic polyester with properties similar to polypropylene (PP #5). In small scale production today by Showa and Mitsubishi Chemicals, PBS has a promising TAM if production costs can be brought down. PBS can be made into a film (bags), injection-molded, and extruded into different shapes. PBS is biodegradable, including in the natural environment, but can take over a year depending on ambient conditions.
2. Redesigning the product life cycle
Another approach to reducing single-use-plastic is to either replace or remove the utilization of single-use-plastic. This involves rethinking consumer habits. A simple example would be banning all single-use-plastic to-go food containers. As drastic as that sounds, consumers would not need to alter their behavior that much (think about how fast we all got used to wearing masks…thanks Covid-19). Consumers could purchase reusable clamshells to purchase food at delis and restaurants might develop a reusable to-go container that was standardized across a city, similar to Fresh Direct bags. Actual examples of these types of consumer changes in practice are plastic bag bans at supermarkets and plastic straw bans.
Changing consumer behavior does often require a nudge as a recent study in Chicago demonstrates (link here). In that study, a 7 cent per disposable bag tax (plastic or paper) caused, “the average number of disposable bags used per shopping trip to decrease by roughly one bag per trip — over a 40 percent decrease. Additionally, less than 50 percent of customers in Chicago used any disposable bags after the tax was implemented — a decrease of more than 30 percentage points.”
An innovative company targeting this market segment is Notpla, which has developed a biodegradable, and in some cases, edible packaging made from seaweed. This type of packaging could displace the numerous difficult to replace usages for single-use plastic such as single-serve ketchup sachets.
3. Improve recycling
Currently, the efforts to recycle single-use-plastic are abysmal with only 5% currently recycled (cited above). Solutions range from packaging redesigns to better recycling technology.
Packaging redesigns. One method would be to design packaging to be made out of a single type of plastic. Take the Gatorade plastic bottle for example. The plastic bottle is made of polyethylene terephthalate (PET #1) and the plastic cap is made of polypropylene (PP #5). Often plastic bottles will have a plastic label that may be a third type of plastic or even a multi-layered material that could combine plastic, paper, and metals. Separating all of these plastics into separate recycling streams is almost impossible from a cost perspective so the mixed plastic bottles end up in a landfill. Redesigning the Gatorade bottle to be made out of one type of plastic would make it significantly easier to recycle.
Recycling technology. Municipalities can play an increasing role in requiring consumers to recycle and using state of the art sorting technology at the materials recovery facilities (MRF or MURF). A company pursuing this market segment is AMP Robotics, a robotic system that utilizes a “combination of computer vision and machine learning with robots that can identify and rapidly pick recyclable materials off a conveyor belt for market and recovery.” With near perfect sorting, it could greatly reduce the plastic entering landfills.
Another company pursuing the “downstream” market segment from AMP Robotics is PureCycle Technologies, a technology developed by Procter & Gamble that aims to be the first company with the ability to commercially recycle waste plastic into virgin-like pure polypropylene (PP #5). If proven to work cost-effectively at scale, this technology would enable polypropylene to re-used endlessly.
Single-Use-Plastic Industry Investment Lessons
1. Bio-plastic excitement typically peaks and troughs with the oil price but that is changing
Over the past several decades, when oil prices have been sustainably high, there has been a push to find alternative ways to make single-use-plastic. But every oil crash inevitably takes the industry down with it. The crash in oil in 2014 on through to today is no exception.
However, due in part to excellent books like Plastic Ocean published in 2011 by Captain Charles Moore and Garbology published in 2012 by Edward Humes, as well as excellent analyses published by the Ellen MacArthur Foundation (cited above), the world has awakened to the negative externalities that single-use-plastic has wrought on the natural environment.
With increasing regulations and consumer awareness, many new companies have become emboldened to commit time and resources to attack one of the three potential solution areas to the single-use-plastic epidemic, as outlined above. And there are several exciting technologies that could solve some portion of the problem, some of them detailed above. But a word of caution…the industry is mired in landmines (described in bullets 2–4 below).
2. Buyers have the bargaining power
This is not an “if you build it, they will come” industry. Unless you have significant and long-term focused capital, you must have firm take-or-pay contracts before committing capital (and receiving financing) to build a plastic plant. And that is a tall order because the bargaining power resides with the buyers of the plastic. Most single-use-plastic is used as packaging for fast-moving consumer goods (FMCG) companies like Nestle, Procter & Gamble, Unilever, Coca Cola, Pepsico, L’OREAL, et al. A company like Coca-Cola is not taking any chances with its plastic bottle supply. In order to get your new bio-degradable or recycled polymer into Coca Cola bottles, it either needs to be drop-in (discussed in more detail in #3 below) or the novel plastic will need to pass years of rigorous testing, have multiple plants that have proven they can operate at capacity for years, be located near Coca Cola bottle making locations, and have a bullet-proof balance sheet. Other than that, it’s easy to disrupt the industry.
3. Drop-in products must be lower cost to compete, a formidable barrier to entry
There are often many routes to manufacturing plastic products including several different types of intermediate products. An intermediate product is a chemical compound that is upgraded in some way to make the final plastic product. Often intermediate and final products markets are large and any producer of a specific compound can sell into those markets if the products is deemed to be “drop-in”. Drop-in means the product is chemically indistinguishable from the desired intermediate or final product, regardless of how it was made. Breaking into these markets with a bio-based solution is nearly impossible unless it also involves a much lower cost production route. Problematically for newcomers, significant scale is typically required in order to achieve low-cost production which creates a capital intensive pathway to success. The market is littered with bankrupt companies that have faltered on the path to scale for lack of resources or lack of translating breakthroughs in the laboratory to scaled-up plant size production.
4. Beware of miracle products with limited research budgets
Within the bio-plastic industry, there is a lot of fuzzy chemistry. Many of the bio-degradability claims have later been proven to be unsubstantiated, many of the cost claims are based on “theoretical conversion yields” which are impossible to obtain in practice, and frequently bio-based and recycled plastics have major product defects such as brittleness and discoloration. There is excellent scientific progress happening in this field and the best companies will yield enormous investment returns and reduce the negative externalities of single-use-plastic. But beware of any product that sounds too good to be true, especially if it’s been derived from a minimal amount of research and development capital. Similar to developing a vaccine, innovation within the commodity chemical and plastic industry requires a significant up-front investment of time and capital.
Final Note of Optimism
If implemented successfully, the spigot of plastic filling up our landfills and oceans could eventually be turned down to a small trickle. And I am happy to point out, there are numerous groups working on solutions to recovering plastic in the environment including from our oceans and rivers as well as landfills. Two specific groups come to mind. One is Circulate Capital, an investment firm founded by Robert Kaplan and based in Singapore. Circulate recently raised over $100mm to invest in companies in Southeast Asia that will prevent the flow of plastic waste into the world’s oceans, where 82% of the plastic is entering the oceans, per Ellen MacArthur Foundation report, Rethinking the Future of Plastics (2017):
The other is The Ocean Cleanup, a company developing a creative technology that acts as a beach in the middle of the great plastic gyres trapping plastic while allowing sea life to pass through harmlessly. While the project has gone through starts and stops and has its share of critics, my challenge to those critics would be to jump into the morass and help improve the technology or invent something better, as the oceans badly need all the clean-up they can get.
About the Author:
Benjamin M. Hogan, CFA
At Inherent Group, Ben led investments into companies enabling the transition to a lower-carbon economy, with a particular focus on the energy sector. In addition, Ben engaged with management teams to improve their ESG practices. Prior to Inherent Group, Ben led energy investing at Orange Capital, a $1.5B AUM special situations and activist hedge fund. Prior to Orange Capital, Ben worked in private equity at AMF, a subsidiary of Credit Suisse, which successfully invested $1B into 21 asset managers. Ben started as an M&A Analyst at Berkshire Global Advisors, a boutique M&A advisory firm focused on the asset management industry. Ben holds a B.Sc. in Economics from Duke University as well as the Chartered Financial Analyst (CFA) designation. In addition, Ben is pursuing a part-time M.Sc. in Sustainability Science at Columbia University with a focus on climate science.