As an important policy lever to reduce waste and pollution, extended producer responsibility is changing the economics of recycling and much more.
There have been complaints about ‘the throwaway society’ for as long as anyone can remember, with some blaming our disposable culture for social ills, as well as environmental ones, such as plastic pollution. Now, determined efforts are being made to turn the tide, with new obligations on producers that go well beyond the point of sale, as part of efforts to make the change from a linear to a circular economy. Such obligations go by the name of ‘extended producer responsibility’, or EPR. As well as reducing waste and pollution, they will change business models, not to mention risks and opportunities for investors.
What is extended producer responsibility?
The 38-nation club of rich countries, the Organisation for Economic Co-operation and Development (OECD), defines EPR in two ways: “the shifting of responsibility (physically and/or economically; fully or partially) upstream towards the producer and away from municipalities; and the provision of incentives to producers to take into account environmental considerations when designing their products”.
In the UK, EPR is becoming a hot topic for businesses large and small, with legal changes due to come into effect on 1 January. At present, the focus is on packaging waste, but around the world EPR has been applied to a wide range of widely used products and services, including car tyres in Ireland, electrical and electronic equipment in Canada, compact rechargeable batteries in Japan and televisions and computers in Australia.
“But there is a long way to go,” said Martin Conroy, Lead Portfolio Manager of the KBI Circular Economy Fund. “Sourcing, design and production – all need to be included.”
The UN-supported investor network, Principles of Responsible Investment (PRI), described legislative action on EPR in this way: “EPR legislation holds the producers of products responsible for any negative environmental externalities and associated costs. It incentivises manufacturers to design resource efficient and low-impact products, and to facilitate effective end-of-life collection and treatment of collected products for reuse and recycling.
“While plastic waste is primarily governed by regulations focused on packaging, EPR legislation also exists for electronic and electrical equipment, bringing some plastic items under these rules as well. There are EPR policies in the US, Canada and the EU. More EPR policies are likely to come into force as states in India and other jurisdictions begin to adopt them.”
The Ellen MacArthur Foundation, a charity campaigning against waste and pollution, said: “To solve the packaging waste and pollution crisis…We must eliminate the packaging we don’t need; innovate to ensure all the packaging we do need is re-usable, recyclable or compostable; and circulate all the packaging we use, keeping it in the economy and out of the environment. This circular economy approach would lead to significant economic, environmental and social benefits.”
How does EPR fit in with the circular economy?
In concept, the circular economy is the very opposite of the disposable society. As high a proportion of waste is recycled or otherwise re-used, but the circular economy goes far beyond simple re-use of materials. Conroy explains: “Pollution, just throwing stuff away, is the worst response to waste, while putting it in landfill is the second worst. Recycling is much better, and best of all is recycling the item close to what it was designed for in the first place.”
He added: “Businesses need incentives to find the highest value use of waste, rather than rely on, for example, the low-grade recycling of plastics.”
The Ellen MacArthur Foundation lists three principles of a circular economy: the elimination of waste and pollution, the circulation of products and materials at their highest value, and the regeneration of nature. It added: “A circular economy decouples economic activity from the consumption of finite resources. It is a resilient system that it good for business, people and the environment.”
Having taken a number of key steps over the previous four years, the European Commission adopted a new Circular Economy Action Plan in 2020 as part of its European Green Deal. According to the commission, “It targets how products are designed, promotes circular economy processes, encourages sustainable consumption, and aims to ensure that waste is prevented and the resources used are kept in the EU economy for as long as possible.”
The UN Conference on Trade and Development (UNCTAD) has worked with the Ellen MacArthur Foundation on these issues. It said: “A circular economy entails markets that give incentives to reusing products, rather than scrapping them and then extracting new resources. In such an economy, all forms of waste, such as clothes, scrap metal and obsolete electronics, are returned to the economy or used more efficiently.
“This can provide a way to not only protect the environment, but use natural resources more wisely, develop new sectors, create jobs and develop new capabilities.”
Does such an economy make price rises more likely?
Quite possibly, although this may be balanced out if product repair once more becomes part of the culture. Conroy said: “There has been a race to the bottom as companies have tried to source raw materials as cheaply as possible and to manufacture as cheaply as possible. There has been no incentive for people to have an appliance mended. Indeed, repair costs can be up to 50% of the ticket price.
“But there has been some progress. In Ireland and elsewhere in Europe, there are initiatives in place to oblige firms to take products away free of charge at the end of their useful life.” He added that product design should build in a ten-year lifespan, not one of three years.
The linear economy, he said, had been built on disposability and rock-bottom prices. A circular economy would not be.
According to the Ellen MacArthur Foundation, a circular economy would bring significant overall cost savings. It said: “Based on detailed product-level monitoring, it is estimated that, in the sector of complex medium-lived products (such as mobile phones and washing machines) in the EU, the annual net material cost savings opportunity amounts to up to US$630 billion.
“For fast moving consumer goods (such as household cleaning products), there is a material cost saving potential of up to US$700 billion globally.”
Furthermore, the foundation believes a circular economy will have a positive impact on employment, with spending fuelled by lower prices and higher-quality goods. New openings will appear, it said, in labour-intensive recycling and in higher-skilled re-manufacturing. It added: “New jobs will be created across industrial sectors, within small and medium enterprises, through increased innovation and entrepreneurship, and a new service-based economy.”
What does this all mean for investors?
If all goes to plan, EPR should mean investment virtue is rewarded while its opposite is not. As the PRI noted: “Many developed and developing countries are regulating – or in some cases banning – certain plastics. Companies that rely on plastics could also face higher taxation, extended producer responsibility fees and increased raw material costs.” The reverse is true: those companies that avoid waste of resources and excess packaging will experience more lightly the yoke of EPR regimes.
In the UK, accredited re-processors are responsible for recycling packaging waste and for issuing certificates stating that this has taken place. Canny investors may wish to explore opportunities in this sector, as it seems unlikely that business is going to dry up any time soon.
Repairing and reconditioning items, especially those in the fields of household goods and consumer electronics, will make much for financial sense, and could even see a revival in the sort of make-do-and-mend thrift seen in the post-war years. Conroy conceded that, in some ways, we could be going back to the future. Investors are likely to look for companies either with a large position in the general market or a niche position in specialist types of repair.
Given the centrality of packaging waste to the notion of EPR, then it would make sense to investigate alternatives to plastic and single-use film. One sustainable type of food packaging comes from corn starch, which can be moulded like plastic to a range of items.
Another is good old-fashioned cardboard, along with paper, and bio-degradable and compostable packaging; while use of aluminium is likely to increase due to its almost limitless recyclability.
Finally, if a portfolio simply can’t manage without the inclusion of one or more firms following unsustainable practices, try to make it a smaller rather than larger business. Under planned UK rules, the former are defined in two ways, and a business has only to fit one category: annual turnover is between £1 million or £2 million and the firm is responsible for supplying more than 25 tonnes or empty packaging or packaged goods a year in the UK; alternatively, the turnover is over £1 million and the company is responsible for supplying between 25 tonnes and 50 tonnes of empty packaging or packaged goods.
Large organisations, which face a rather more onerous regime, are defined as such if they fit both of the following criteria: an annual turnover of £2 million or more and responsibility for handling and supplying more than 50 tonnes of empty packaging or packaged goods in the UK.
EPR: what can go wrong?
Put simply, transition risk. The notion of a circular economy isn’t new. It was posited by the Austrian economist Joseph Schumpeter, who thought it a thoroughly bad thing. He meant something slightly different by it, but his critique, that such an economy would exhibit slow or no growth – as measured in traditional terms – should not be lightly dismissed, albeit some supporters of the circular might would see this as a recommendation.
As noted in a recent explainer, measures of growth are undergoing change, and economists such as Kate Raworth have encouraged us to think beyond growth in terms of designing economic systems. But any change from such an embedded growth-based mindset will be far from simple.
Of course, any new set of rules aimed at inducing change of behaviour comes with its own risks. There is the scope for the EPR rules to be gamed by the unscrupulous. Not to mention the danger of officials gold-plating the rules, loading more burdens on business.
But if all goes to plan, EPR can help give effect to UNCTAD’s statement: “The goods of today are the resources of tomorrow at yesterday’s resource prices.”