The concept of a circular economy has gained prominence in recent years, embracing a regenerative system where products and materials are reduced, reused, and recycled, minimising waste and environmental impact.
World leaders have gathered in Ottawa this week to review the headway made in drafting a global treaty addressing challenges presented by soaring plastic pollution. A treaty would represent the most meaningful breakthrough relating to climate-warming emissions and environmental protection since the 2015 Paris Agreement.
The concept of a ‘circular economy’ has gained prominence in recent years as a comprehensive and sustainable approach to resource management. It seeks to move away from the traditional linear model, where we ‘take, make, and dispose’, embracing instead a regenerative system where products and materials are ‘reduced, reused, and recycled’, thereby minimising waste and environmental impact.
Sustainable packaging plays a pivotal role within the framework of a circular economy, contributes to the more efficient use of resources, and directly addresses the issue of excessive packaging and waste generation. In choosing materials that are renewable, recyclable, or biodegradable – moving away from single-use plastics in particular – and through innovative design, we can reduce our environmental footprint and create an economic system which is both sustainable and more resilient.
Today’s emphasis on recyclability ensures more packaging materials can be efficiently collected, processed, and reintroduced into the production cycle. Recycling not only helps mitigate the environmental impact of packaging by reducing the demand for new raw materials but lowers energy consumption and reduces the volume of waste destined for landfills or incineration.
The adoption of sustainable packaging within a circular economy creates economic opportunities and fosters innovation, with businesses that embrace sustainable practices better positioned to meet the growing consumer demand for environmentally responsible products. The production and disposal of traditional packaging materials contribute to greenhouse gas emissions, exacerbating climate change. Sustainable packaging addresses this challenge by promoting materials and processes that have a lower carbon footprint. As consumers become more conscious of their environmental footprint, it is the companies that prioritise sustainable packaging which are most likely to enhance their brand reputation and appeal.
Fibre-based packaging, such as boxboard, emerges as a prominent facet of sustainable packaging. Crafted from sustainable virgin fibre mixed with recycled corrugated cardboard, paper-based packaging finds applications in diverse markets, ranging from consumer-packaged goods to commercial and industrial products.
Aluminium, meanwhile, stands out as one of the most recycled materials globally, with a staggering 75 per cent of the material ever produced still in use. Its property allows beverage cans to be recycled and returned to store shelves within a mere 60 days.
Sustainable packaging
Demand for sustainable packaging has surged over the past decade, propelled by shifting consumer behaviours, corporate preferences, and regulatory interventions. Regulators, particularly in Europe, are pushing for circular products, as evidenced by bans on single-use packaging and proposals to make all packaging recyclable by 2030. These policies have already spurred visible changes in various industries, such as replacement of plastic straws with paper-based alternatives in the fast-food sector.
Consumer awareness of the environmental impact of plastic packaging, with an estimated 170tn pieces of plastic afloat in the world's oceans, has been a driving force behind the demand for sustainable packaging options and has been a catalyst for this week’s Ottawa summit, the fourth session of the Intergovernmental Negotiating Committee on Plastic Pollution (INC-4).
The medium-term outlook for sustainable packaging companies is promising. These companies predominantly serve consumer goods end markets, ensuring stability through economic cycles. The transition towards sustainable packaging is viewed as a secular trend still in its infancy, providing an important runway for future growth.
The defensive cyclical nature of this end market adds another layer of resilience. In economic upswings, these companies benefit, while in downturns, their exposure to needs-based consumer packaged goods or the trend of consumers ‘trading down’ provides protection. Consumers may for instance shift from consuming food and alcohol at on-premise locations to off -premise, favouring packaging companies.
Interestingly, the sustainable packaging end market is characterised by value stocks – most of them trading at less than 12x forward 12-month price-to-earnings valuation. This is in stark contrast to the MSCI All Country World Index, currently trading at a 17x forward 12-month P/E.
Strong rebound
As investors in the circular economy, we anticipate a strong rebound over the next 12 months, particularly in paper markets. Two years of solid volume growth are expected, with 2024 volume trends returning to normal historical growth rates. This forecast suggests double-digit earnings growth for aluminium can producers, and robust growth for paper-based packaging companies.
The sustainability journey, however, has its challenges. The alarming presence of 170tn pieces of plastic in the world's oceans serves a stark reminder of the urgent need for eco-friendly alternatives.
The strategic focus on sustainable packaging reflects a comprehensive approach to financial success, intertwined with environmental and social responsibility. Not only is investing in companies committed to advancing the circular economy to be aligned with global sustainability goals, it positions us for a successful outcome over the longer term in a sector poised for substantial growth and transformation.
Let’s all hope it’s hurrah Ottawa come the end of the week.
Martin Conroy is portfolio manager of the KBI Global Investors Circular Economy Fund
