As 2019 kicks off, what themes around environment, social and governance factors should investors be watching? According to a new MSCI Inc. report, plastic waste is one issue to keep an eye on.
Plastic, one of the most produced manmade products in the world, is accumulating in landfills or other natural environments, the report noted, highlighting that countries that couldn’t handle their waste sent it to places like China in the past.
However, beginning Jan. 1, 2018, China stopped accepting 24 kinds of solid waste, including the prevalent kinds of exported plastic waste. In response, the plastic waste flowed to other countries like Indonesia, Thailand and Vietnam. This flow of plastic waste to other countries have prompted some to introduce their own waste import bans, noted the report, citing Thailand and Malaysia as examples.
“We’ve talked about waste in general, including plastic, for years at this point,” says Matt Moscardi, head of sector research and head of the financial sector for MSCI ESG Research. “But it wasn’t until really this past year that the significance changed, and a lot of that had to do with it going from a maybe arguably less material, or non-material, issue for companies to becoming very quickly economically material given China’s change in the way they designate the waste that they’re willing to take.”
When looking at this issue of plastic waste, it affects companies too, says Moscardi. “While we were doing our research for the trend, we noted the rise in instances when companies were talking about this. And we noticed it first anecdotally and then did natural language processing analytics on transcripts and 10-Ks . . . to confirm our suspicion that this is something that companies are worried about.”
In 2018, the number of earnings calls that mentioned plastic waste increased by 340 per cent compared to 2017, according to the report.
“We’re finding that there are companies that are more exposed than others,” says Moscardi. “We’re really at the beginning of being able to map it, to understand the full extent of this.”
And this exposure to plastic waste isn’t just in industries in which a lot of plastic waste is expected. Using natural language processing to analyze the regulatory filings of MSCI USA IMI constituents, the report found as many as 12 industries potentially exposed to plastic and plastic-related regulation, including obvious industries such as soft drinks, diversified chemicals and commodity chemicals, but also office services and supplies, health-care supplies and even paper products.
“Creating the waste is one thing, but it becomes material when either there’s no infrastructure to deal with the waste and that cost gets passed back to companies or it gets regulated,” says Moscardi.
Along with this risk, however, comes opportunities for companies to set themselves apart. Packaging innovation, such as biodegradable or fiber-based renewable packaging, is likely to see further development due to demand from companies that have found themselves at risk, said the report.
This is a focus in 2019, says Moscardi, because MSCI anticipates this year will be the beginning of a shift to plastic waste becoming a business challenge. “I would emphasize this isn’t going to happen just in 2019. This is the tip of the spear of what is likely to be.”