Mounting hostility towards single-use plastics will create clear winners and losers.
Plastic is the environmental issue of the moment. Campaigners have long argued against the use of single-use plastics and sought to highlight the scourge they create for the natural world.
But it was a BBC documentary, Blue Planet II, that produced a literal sea change in how the US, Europe and the UK view plastics. The documentary graphically highlighted the extent to which plastics have infected food chains, and the immense suffering they inflict on sea creatures.
The response from consumers has been stark, with many people moving swiftly to reduce their usage of plastic. Companies have been equally quick to put in place policies that cut down reliance on plastic. Governments too are reacting, with the UK and Europe both announcing strategies to regulate plastics.
By contrast, the investment community has been slow to react. Many investment managers have talked up the need for action. However, that rhetoric has not necessarily been reflected in portfolios. This is surprising. There are likely to be some clear winners and losers among plastics manufacturers. Simply put, companies with the capital to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper. Conversely, less well-capitalised companies dependent on single-use plastic will struggle to adapt.
Companies able to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper.
The US high-yield debt universe includes many companies producing singleuse plastics. For instance, almost all of the production of Sealed Air Corporation is single-use plastic, and a number of their products are market-leading. The company’s bonds are supported by strong free cashflow, a solid balance sheet and healthy debt levels.
Most crucially, Sealed Air Corporation is investing to adapt to a world intent on using plastic more sustainably. The company has combined product innovation with its work on sustainability. It is also undertaking various initiatives aimed at increasing usage of recyclable materials. Additionally, it is developing bio-materials that are recyclable or that degrade much faster than petroleumbased products.
Not all companies are quite so forward thinking. Some firms in the US high-yield market are heavily indebted, with as much as two-thirds of production dedicated to single-use plastics. Their lack of financial resource leaves them in a precarious position. Such firms will face stark choices about the direction that they want – and are able – to take in the future.
What applies to the US highyield market does not apply to all jurisdictions. Asian consumers have been almost silent on the issue of single-use plastics. Consequently, there is little impetus for change in companies in the region.
The very raw outrage of many western consumers about plastic might fade over time. But companies and governments are moving in a direction that means that some of the changes being sought are likely to prove durable.
As our love affair with plastic sours, the investment community must hasten to catch up with the shift of mood.
A version of this article was first published by Barrons on 5th March 2019.
For professional Investors only. Not for public distribution The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. This document should not be considered as an offer, investment recommendation, or solicitation, to deal in any investments or funds mentioned herein and does not constitute investment research.
Aberdeen Asset Managers Limited and Standard Life Investments Limited (together ‘Aberdeen Standard Investments’) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Any research or analysis used in the preparation of this document has been procured by Aberdeen Standard Investments for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy.
All information, opinions and estimates in this document are those of Aberdeen Standard Investments, and constitute our best judgement as of the date indicated and may be superseded by subsequent market events or other reasons. Aberdeen Standard Investments reserves the right to make changes and corrections to any information in this document at any time, without notice. The reader must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessment. This material serves to provide general information and is not meant to be investment, legal or tax advice for any particular investor. No warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
This material is not to be reproduced in whole or in part without the prior written consent of Aberdeen Standard Investments. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority.
Head of Fixed Income ESG – Aberdeen