Investment team incentivised to reduce emissions and waste from fund focused on “better materials, new models and better systems”.
Lombard Odier Investment Managers’ (LOIM) Plastics Circularity Fund, which announced its first close this week, has two very different reasons for taking a broad approach to its potential investment targets.
“The fund aims to have a highly diversified portfolio across a variety of solutions,” said Victoire Carous, Portfolio Manager, Private Assets at LOIM. “This benefits the investors, by lowering the risk, but also the transformation of the value chain.”
As a private equity strategy that aims to reduce plastic waste and greenhouse gas (GHG) emissions in the plastic value chain while delivering market returns, the LOIM Plastic Circularity Fund will focus on three themes which will give it considerable latitude.
These are innovative materials, with better end-of-life usage outcomes and less reliance on fossil fuel; new usage models to reuse, repair and refill plastics to extend their life; and systems for efficient collection, sorting and recycling of plastic waste. Or, as Carous succinctly puts it, “better materials, new models and better systems”.
In practice, Carous expects the fund to invest in firms which bring new materials to market, from bio-based and low carbon feedstocks, or by utilising waste streams. The fund will also invest in new business models which extend product lifecycles and as as-a-service models which enable brands to develop new customer propositions and engagement.
The fund’s better systems theme encompasses digitalisation of the waste management and the recycling sectors, including use of robotics, sensors and software, either rolled out into existing facilities or deployed at the large greenfield projects expected to come on stream soon.
“Confronted with the rising carbon emission and waste created by the plastic value chain, there is not one silver bullet solution,” Carous told ESG Investor.
Initial investors to the fund, classified Article 8 under the EU’s Sustainable Finance Disclosure Regulation, include global chemicals and plastics conglomerates Dow and LyondellBasell, as well as “leading, sustainably-minded institutional and private financial investors”, according to LOIM.
The fund follows a technical, impact and financial screening process to identify potential investments, and leverages the technical and industrial expertise of the Alliance to End Plastic Waste (AEPW). Its advisory committee will include Dow Senior Global Business Director for Polyethylene Stephanie Kalil.
“Consumer demand, science and innovation are converging at this point in time to pave the path for a circular future,” said Kalil. Last year, Dow committed to deliver three million metric tons of circular and renewable solutions annually by 2030, and to enable all its products used for packaging to be reusable or recyclable by 2035.
Reduction not elimination
The scourge of plastic waste, which has caused widespread damage to our oceans and wildlife, and increasingly to human health, has seen a rise in calls for its severe reduction or even elimination from modern life.
While some investors have increasingly engaged with investee firms on measures to reduce plastics pollution, both individually and collaboratively, research suggests they have not yet fully factored in the risk to their returns that could arise from policy and regulatory developments impacting the plastics value chain.
Europe has led the way, with its proposal for a revision of legislation on packaging and packaging waste, while in the US the Biden administration’s goal is to replace 90% of fossil-fuel based plastics with bio-based alternatives. Many stakeholders will be focused on the next round of talks on the UN Plastics Treaty, which aims to end plastic waste, following the recent release of a ‘zero draft’.
LOIM points out that plastics remain deeply embedded in many sectors, including construction, medical, transportation and food safety, claiming there are “limited substitutes” in more than half of current applications. There are even indications that plastic production could rise overall, partly driven by the efforts of oil and gas majors to develop new markets as traditional ones tail-off due to the shift to renewable alternatives.
By minimising waste and maximising reuse and replacement with alternatives, the intent of LOIM’s Plastics Circularity Fund is to drive plastics from the places where they cause harm, while allowing their continued use where they add value.
According to Carous, extension of product life is key to reduce plastic waste, pointing out that much of today’s waste comes from packaging and most often single-use applications.
“Refill models and, to some extent, return models are emerging although they tend to be more early-stage and VC type of deals. Beyond packaging, reuse, refurbishment and resale is really accelerating across fashion and electronic goods,” she added.
“We know that the ‘upstream’ circular economy strategies of prevention, reducing and reusing are key to increase plastics circularity, and while many opportunities are still early stage, we see a lot of dynamics in this space and are following it closely.”
Incentives and expertise
To achieve its objectives, the fund is relying on internal and external expertise, using innovative approaches in both cases.
Given its focus on reducing GHG emissions and unrecycled plastic waste, the fund will report on reduced or avoided metric tons of unrecycled plastics or emissions equivalent, depending on the investment and business model.
“The measure of progress will also be key as a mechanism to incentivise the investment team as 20% of the carried interest will be linked to achieving impact metrics set at investment company level,” said Carous.
In addition to these core metrics, LOIM expects to track other environmental or governance themes on an ad hoc basis, if the investment due diligence identifies specific areas of improvement.
In-house research will be supplemented by inputs from the fund’s technical advisor, AEPW. In practice, this means five industry experts with a cumulated experience in the plastics value chain exceeding 130 years from AEPW’s Technical Solutions Center will assist in deal sourcing and due diligence, also providing strategic advice to portfolio companies.
Collaboration between emerging technologies and business models and the established players will scale new solutions faster, said Carous.
“The expertise and network of the AEPW will be of tremendous value throughout all the investment stages including at exit and is perceived as a value-added differentiator by target companies,” she added.
“As regulators, consumers and corporates address the plastic challenge, LOIM’s plastic circularity strategy aims to capture investment opportunities arising from innovative solution-providers, while also enabling investors to generate measurable impact both on plastic waste and on greenhouse gas emissions,” said Jean-Pascal Porcherot, Co-head of LOIM.
LOIM manages assets worth US$70.5 billion, of which around US$8 billion is invested in private equity, infrastructure and private debt via primary and secondary fund investments and co-investments, as well as direct investments.