All investment strategies have the potential for profit and loss, you or your clients’ capital may be at risk. Past performance is not a guide to future returns.
It would be hard to imagine modern life without plastics. Their low cost, versatility, durability and strength-to-weight ratio has made them a go-to material in packaging, construction, transportation, healthcare and electronics. Plastics are used in everything, even making up about 50 per cent of the weight of a Boeing Dreamliner plane and plastic’s share in packaging has increased from 17 per cent in 2000 to 25 per cent in 2015. Nor are we at peak plastic, global demand continues to grow, despite the 20-fold increase in plastic production between 1964 and 2018. In 2018, 360 million tonnes of plastic were produced, weighing more than the total mass of humans living on earth.
Global plastic production, 1917 to 2017
Plastics are not the problem, but plastic waste is. Plastics don’t break down on their own, incinerating them is inefficient and harmful for the environment, we lack the infrastructure to recycle them effectively and we are consuming them in ever-increasing quantities.
Where does all this plastic end up? Approximately 40 per cent accumulates in landfill and 32 per cent ‘leaks’ out of the collection system (meaning it is either not collected or is illegally dumped). Discarded plastics accumulate in our environment, as both bulk waste and omnipresent microplastic waste, causing harm to both human and animal health and the environment. The packaging recycling rate (14 per cent) is well below that for paper (58 per cent) and iron and steel (70-90 per cent). Ninety-five per cent of the material value of plastic packaging is lost to the economy, often after only one use. What is more, packaging plastics that do get recycled are mostly down-cycled into low-grade applications, such as toys and car-seat stuffing.
This is unsustainable. To prevent the ever-increasing accumulation of plastic waste, we need a ‘closed loop’ system or circular economy, where plastic remains within the economy, is re-usable in higher-grade applications infinitely and does not become waste.
The mismatch between the areas that get polluted by plastic waste – the big Asian rivers and the world’s oceans – and where the waste is generated, is likely to force a change in habits. After importing nearly half of the planet’s plastic recyclables for three decades, China barred the import of most residential recyclables in 2017 as part of its efforts to clean its environment and improve quality of life.
Total weight of scrap material imported by China, each year, in metric tonnes
Source: UN Statistical Division.
Initially, this led to a spike in waste flows being diverted to alternative export destinations, primarily in South East Asia. However, this can only be a temporary fix, given the aggressive recycling targets being set across the globe. Come 2025 – 2030, to meet these self-imposed targets, countries will be forced to recycle domestically. Here are some examples of the ambitious goals being set:
Kilograms of solid waste each person creates a year
Source: Bloomberg and World Bank.
While the will to do better is certainly there, in the three years since China stopped importing waste, there has been much talk but little action. Lacking firm guidelines on how to practically meet these targets, the key stakeholders – waste management companies, the producers of low-cost consumer goods and chemical giants, recycling start-ups – have failed to find a unified solution.
Until recently, the informal nature of the market has made it difficult for individual stakeholders to establish what the supply and demand is for the newly created waste (plastics recycling) streams, and therefore establish a fair price for these services. This will change as the direction of travel becomes clearer, which it will, because in addition to the governments’ commitments outlined above, the following developments since 2017 have coincided to provide the current inflection point:
From here, we can expect to see a circular plastics economy develop, where efforts will be concentrated on recycling a larger proportion of the plastics we use and extending their life cycle through re-use. We see three big growth areas emerging: the sorting of plastics, recycling them and developing sustainable materials to replace plastic use.
In order to recycle plastics effectively though, it not only needs to be separated from other materials, but then into specific polymers.
Currently most plastic waste is recycled mechanically: it is sorted, shredded, washed, melted, mixed with virgin materials and made into new plastic. Sorting must be meticulous by grade and by type (colours). A good analogy, borrowed from Ilhan Savout, is mixed colour playdough. If we imagine that different colours of playdough are different types of plastics, a recycler receives a giant ball of playdough with all the plastics squashed and mixed together, and the recycler must separate the playdough by different types of colours to turn this valueless waste stream into valuable feedstock.
The end goal of plastic recycling is to have high-grade plastic of one colour, i.e. high purity content. This is where new technologies such as chemical recycling come in.
A key principle of the circular economy is that products and materials are always circulated at their highest value. In the technical cycle, this implies that plastic packaging is reused when possible (circulating the packaging product), then recycled (circulating the packaging materials).
Within recycling, this principle results in a general order of preference:
|Mechanical Recycling||Chemical Recycling|
|Fairly mature and well-established process||Immature new process|
|Done at scale globally||Not proven in large scale commercial application|
|Preserves molecular structure||Splits polymer chains|
|Relatively environmentally-friendly process||For now, requires heat (energy) and emits CO2|
|Result in loss of mechanical properties over time||Requires high purity inputs but preserves quality|
|If part of a closed loop, it is the more ‘value-preserving’ option||Less value preserving due to need to de-polymerise|
The holy grail of chemical recycling is to be able to turn degraded plastic back into high-quality plastics in an infinite loop. Moving away from our current wasteful linear economy to a circular one.
The status quo is the traditional linear economy where only ~2% plastic is recycled:
Traditional Linear Economy
Broadly speaking, there are two types of chemical recycling:
Monomer Recycling – Depolymerisation
|Feedstock Recycling – Pyrolysis|
While monomer recycling still requires pre-sorting by plastic type (sorting the playdough by colour), the ‘glue and glitter’ can be left in.
|This involves heating up the plastic at high temperature in the absence of oxygen. It is used for lower-value plastics and the products are useful as raw materials (feedstock) for a variety of downstream industrial processes or as transportation fuels. Following the playdough analogy, feedstock recycling allows a recycler to have all the colours of the playdough still mixed and the result is a playdough that has no specific colour.|
Monomer recycling is not yet commercially viable, but it is an exciting area from both a circular economy and financial perspective. First, the feedstock is of low quality which would normally be incinerated or landfilled and therefore is very cheap and, second, producing virgin-quality materials allows for higher-end applications, thereby increasing the value of the recycled output. This is why the chemical giant, Indorama Ventures, has committed to investing $1.5bn into its PET recycling capacity, investing in chemical recycling start-ups Loop Industries and Dutch ioniqa. Others are experimenting in scaling up chemical recycling plants alongside waste and chemical plants.
One exemption here is nylon, which is one of the very few polymers for which a closed-loop chemical recycling process already exists at industrial scale – but for low-end applications, including carpet scrap being depolymerised into virgin-quality material.
Over time, microbes have evolved ways of breaking down natural materials by digesting them to create energy or useful chemicals. Recently, engineers at the French start-up Carbios developed a mutated bacterial enzyme that it claims can ‘almost completely digest old plastic bottles in just a few hours’, helping turn PET into chemical binding blocks to make new plastics. While this only happens very slowly in nature, Carbios introduced mutations that speed up the process, shredding 90 per cent of the plastic within 10 hours. The promise of the process is that it can turn a black plastic bottle into a white polyester t-shirt, or old shoelaces into shampoo packaging. A recent study published in Nature validates the process, and the company has early-stage commercial partnerships with L’Oreal, Nestle, Pepsico and Suntory Beverage. Once Carbios moves to industrial production, Novozymes (already an investment in Positive Change) will produce this enzyme at scale.
This is an incredibly exciting area, populated with lots of new companies and technologies.
There are several types of compostable packaging (also known as biodegradable packaging):
These materials improve what becomes of them when they are disposed of (they still need to be sorted, but not recycled in the traditional sense), with often similar performance as plastics during use. The two challenges faced by companies in this space has been scaling production to close the price gap with virgin plastics and feedstock availably. The status quo in bioplastics is the use of renewable biomass sources, such as vegetable fats and oils, corn starch, straw, woodchips and sawdust. Unfortunately, these use the same agricultural land that could be used for growing food, keeping costs – both in absolute and environmentally terms – high.
The development and biofabrication of novel materials mimicking the properties of plastics but with superior recyclability, chemical marking technologies and recycling would overcome some of the environmental and economic issues facing the current technologies. Being able to manufacture at scale would clearly help accelerate adoption of more sustainable alternatives to plastics, providing the ultimate step in reaching circular economy. With a long enough time-horizon, the question becomes when, rather than if this will be possible and we should continue to monitor scientific breakthrough in this area.
To date, the largest obstacle to creating a circular plastics economy has been the informal nature of the market, which has made it difficult for newly-created waste solutions to establish a fair price for their services. This is rapidly changing for the better. While mechanical recycling is the more circular option, there will always exist contaminated plastics that can no longer be mechanically recycled into valuable material once they’ve cascaded down the value chain. This is where chemical recycling’s opportunity lies. It can help enable ‘infinite’ loops, decreasing the need for virgin plastic production. We can be hopeful that we are coming ever closer to solving the problem of plastic waste through the biofabrication of novel materials that mimic plastics’ properties with superior recyclability, chemical marking technologies, and recycling that overcomes some of the environmental and economic issues facing current technologies.
The views expressed in this article are those of the Positive Change Team and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in September 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (‘FinIA’). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission. Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas Limited (‘BGO’) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 the Advice Law and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
49546 PRO AR 0120