Physical, legal, reputational and transitional risks from plastic value chain loom large for investors, Planet Tracker report warns.
Research by Planet Tracker has found that investors’ perception of risks from the plastic value chain has fallen to its lowest level for over a decade, particularly failing to account for policy developments with potentially significant impacts.
A report by the non-profit financial think tank analysed the equity risk premia of the plastic industry’s top 150 corporates, comprised of 50 firms from each of the three main segments of the value chain – upstream producers, midstream packaging converters, and downstream brands and retailers. It concluded that investors view investments in plastic as less risky than other sectors.
Equity risk premium (ERP) is the excess return that investors receive versus a risk-free rate. It is calculated as the difference between the estimated real return on stocks and the estimated real return on safe bonds by subtracting the risk-free return from the expected asset return. A higher ERP signals that the investor needs a greater level of compensation for taking the perceived risk.
According to Planet Tracker’s analysis, the failure of investors to forecast risk profile changes means that corporate liabilities and litigation costs in plastics-related issues could rise above US$20 billion by end of this decade for the US alone. It also projected that maximum liabilities for investors could exceed as much as US$100 billion.
The report also said that investors are “ignoring critical environmental, legal, reputational and transition risks to the sector”, despite the 731 plastic pollution policies that have been introduced worldwide in the last 10 years.
This potential “landslide of regulation” includes the global plastics treaty, with negotiations last week in Paris concluding with an agreement to create a zero draft ahead of the third Intergovernmental Negotiating Committee meeting set to take place in Kenya in November.
“It would appear that investors are viewing these policies and regulations as too marginal to impact the finances of these plastic companies,” Thalia Bofiliou, Senior Investment Analyst for Plastics at Planet Tracker, told ESG Investor.
“As policies are introduced, investors could have an eye on the horizon, but are assessing the impact on investor returns over a short time period,” she added. “Financial investors and lenders need to understand the risk related to the plastic value chain”.
High risk, questionable reward
The report breaks down plastic risks into four categories: physical, legal, reputational and transitional.
It highlighted that frequent toxic emissions are known to impact human health and the environment, with some of the chemical additives used in plastics linked to harmful impacts in humans, including infertility, developmental issues and metabolic disorders.
The non-profit cautioned that plastic pollution-linked liability cases are expected to grow, with estimates that the social costs associated with the chemical additives triggered between 2022 and 2030 will surpass US$100 billion per year globally.
Planet Tracker predicts association with plastics producers could turn into a reputational liability for investors as plastic pollution awareness continues to increase, with potential greenwashing risks accompanied by risks arising from transacting with, and investing in, businesses perceived as high plastic polluters.
The report concluded on the “surprising” implication that investors “view this value chain as one operating in a declining risk environment”.
According to the non-profit’s analysis, ERP had remained “fairly stable” for plastic value chain firms since 2012, with it starting to decline – or being perceived as less risky by investors – in 2022.
Planet Tracker’s Bofiliou said the organisation does not definitively know what the cause of this trend is, but suggested that investors may “regard the regulations as largely irrelevant to the finances of these companies”.
“Investors and lenders are probably focused on the upside – that plastic demand will keep growing – especially if there is an economic recovery when chemical companies generally perform well, she added. “Investors are seeing these corporates as less risky.”
Plastics is a sector with a “significant risk register”, warned Planet Tracker, adding that “hoping none of these will be significantly material to corporates in this value chain appears a bold decision”.
“Significant harm to human health”
The report said that investors see plastic as “less risky than other comparable materials”, including metals and mining, construction materials, chemicals, and paper and forest products.
This is despite there being risks associated with plastics which the non-profit describes as “well-known”, including high CO2 emissions – with chemicals and petrochemicals categorised as hard-to-abate sectors – terrestrial and marine plastic pollution, and microplastic ingestion.
In its blog, Planet Tracker described the plastic industry as having “one of the largest risk registers of any sector”.
There are up to 171 trillion microplastic particles floating on the surface of the ocean, according to a recent estimate, with the average human consuming up to 50,000 microplastic particles annually – and inhaling roughly the same – due to food chain, potable water, and air contamination.
Ravindra Khaiwal, Professor of Environment Health at the Postgraduate Institute of Medical Education and Research, underlined that microplastics’ presence in marine species and seafood consumed by humans, such as fish and shellfish, “raises concerns about the potential health impacts of microplastics”. He also flagged microplastics’ association with morbidity and mortality in various marine and aquatic organisms.
Planet Tracker also noted less widely recognised plastic-associated risks, including toxic emissions, as well as harmful additives within plastic that mean it cannot be recycled.
“Plastic production, use and disposal can be linked to significant harms to human health and the environment and causes societal injustices,” the report said.
However, despite the variety of associated risks, the use of plastics has increase by more than 30 times since 1964 and is anticipated to more than triple by 2060.
Bofiliou suggested that an agreement on a global plastic pollution treaty could “trigger a landslide of regulation and change governments’ views on the impact of plastics on society”.
“We would like to see an agreement of an instrument that involves the whole plastic value chain,” she added. “If that happens, investors will reassess the ERP.”