Plastic pollution has quickly ascended the list of global priorities in recent years, driven by support from figures such as David Attenborough and what has come to be called the Blue Planet Effect. But while dealing with this worsening situation is vital, and areas like single-use plastics are ripe for overhaul, we believe a more nuanced look at the broader materials sector can reap additional rewards for investors.
The challenge lies not just in changing how materials are produced but fundamentally altering collective thinking on how we use them.
Ultimately, we need to acknowledge the fact plastic is a very useful material, so much so that we currently produce 400m tons of it each year. Some of this, particularly single-use, can be replaced but a far broader goal is to change industrial and manufacturing models, switching from the current linear, extractive economy where we take, make and dispose, towards a more circular system where products can be made to be made again and again.
From an investment perspective, we are looking for companies that help promote this shift and have done substantial research into how using materials more efficiently would affect different industries. If we start from the assumption that materials improve our quality of life, the key focus is on is how we could use them better to help manage the negative impacts of currently unsustainable consumption habits. We see opportunities in the following areas:
1. Increased use of recycled materials
Recycling materials is the obvious starting point and makes the most sense as they have much lower negative impacts than taking primary ores and refining them into materials. Using plastic waste to make nylon-based fabrics for example reduces emissions from manufacturing to about 20% compared to oil-derived primary nylon. We also see similar (or better) reductions in carbon dioxide emissions when we recycle metals such as aluminium and steel relative to mining their ores and processing them into metals.
Our Increasing recycling and waste management investment theme includes companies we believe are set to benefit from secular growth in demand, as they increase recycling, reduce pressure on the natural environment, and cut pollution by delivering waste management services.
We have found companies occupying interesting niches in the emerging trend of recycled textiles, especially in clothing. Aquafil is an Italian company making Econyl (a recycled nylon) from industrial plastic waste, carpets and fishing nets, which we believe can capture interest in sustainable fabrics for sports and recreational clothing.
We also continue to observe falling demand for single-use plastics, mostly concentrated around consumer packaging. There are opportunities to encourage leadership from our retailers on this subject, which could create competitive advantages and drive loyalty from super-aware consumers. We feel this shift away from single-use plastic packaging could be a positive driver for companies able to provide substitutes such as Smurfit Kappa, which is working to produce alternatives such as card.
2. Lightweighting transport
In addition to the overall move to use more recycled materials, we also find opportunities to reduce emissions within the transport sector by making vehicles lighter. This is because the total energy output (embodied energy plus energy in use) is currently heavily skewed towards the usage phase rather than the manufacture (see the data below). Embodied energy is the amount consumed by all of the processes associated with production, from the mining and processing of natural resources to manufacturing, transport and delivery.
By having lighter vehicles, it reduces the power needed for use and therefore cuts down emissions. Of the available options for lightweighting, we see aluminium (for use in making vehicles lighter and more fuel efficient) as the area with most investment potential.
Proportion of embodied and energy in use for buildings and transport
Source: Sustainable materials without the hot air: Making buildings vehicles and products efficiently and with less new material (Cullen & Allwood, 2015), page 236. Charts show kgCO2/m2for buildings, gCO2/p-km for passenger vehicles (car, plane, bus and train) and gCO2/tkm for freight vehicles (truck, ship and train).
Again, our Improving the efficiency of energy use theme includes companies we believe can benefit from demand growth as lightweighting becomes an increasingly important way to reduce energy use and cut emissions in a cost-effective way.
Within the aluminium supply chain, we are looking for businesses with significant recycled content (to reduce the energy intensity of the metal), as well as an industry-leading position on carbon intensity. Norsk Hydro is a Norwegian-listed integrated aluminium company that meets these criteria, benefitting from the lightweighting trend as its product continues to replace heavier metals. Demand growth for aluminium is currently around 10% per annum in Europe and 5-7% in North America.
Another company exposed to this theme is Befesa, a Spanish industrial services business specialising in the recycling of steel dust, dust slags and aluminium residues. The stock is clearly exposed to the steel and aluminium secondary smelting industry as it treats and recycles the by-products arising from recycling these metals.
3. Material shift: how do we halve emissions and still meet projected demand for materials by 2050?
More generally, manufacturing faces a major challenge to meet demand while drastically reducing emissions and we see opportunities in two areas relating to this: within industry itself, primarily through technological innovation, and on the behavioural side, how we design and use materials.
Process and technology within industry can get us some, but not all, of the way towards the goal of reducing emissions by 50% and still meeting growing demand. Energy is one of the highest cost inputs into processing and much of the work to improve efficiency in this area has already been done: there is still room for improvement, of course, but not much.
Technology on the other hand can continue to have a significant impact on efficiency within the materials industry and falls into two categories:
► Yield loss reduction: improving the transformation process.
► Scrap diversion: this increases the amount of material being recycled and is a major lever to reduce emissions given the fact many recycled materials only require around a fifth of the energy needed to make primary materials.
As for behavioural-led change, we need to push for the following shifts in how companies run the materials life cycle:
► More intense use: From a basic starting point, using products more intensely means less materials needed for fewer products. Examples include car-pooling or hiring a fridge designed to last longer (instead of buying a cheap one that breaks) that can have the simple components (such as the compressor) easily replaced.
► Less material by design: This is where using less material is given priority in the design process without compromising the end product. Honeycomb structures may be sufficiently strong but use much less material than solid ones for example.
► Life extension: Again, this simple concept is about using materials for longer. The part of a rail track that wears out is the top layer in friction with the train wheels and simply re-plating this section means not having to replace the whole track (which makes up the bulk of the volume).
► Re-use of components: This is self-explanatory but tweaks are often needed in the design phase to be able to easily and cost effectively re-use components.
The conclusion from all this is that simply improving our processes will not get us far enough in terms of sustainable productivity: we all need to use materials more intelligently as well as just producing them in a more efficient way.
By analysing major positive trends, we believe we can gain an information advantage over more myopic investors, which helps us make interesting investments that deliver competitive returns. We continue to look for ways to invest in companies set to benefit from profitable growth driven by demand for products and services that make our society cleaner, healthier and safer.
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