Breaking the plastic circulatiry with 2 Treds of Investment

It’s natural to reflect as 2023 approaches. This is a time to review the challenges and milestones that have been achieved. We started our company more than five year ago, with the crazy, improbable goal of investing into solutions to fight back the plastics waste crisis. The enormity of the issue felt like a David-versus-Goliath scenario. Since then, many more soldiers have joined in the fight, eager to find new ways to raise capital for financing new solutions. Investors, corporations, philanthropists and incubators all play a role in solving the plastic waste crisis. Even big names, like Michael Bloomberg, have taken part in the initiative and brought much needed attention to this crisis.

This article, in the spirit of the holiday season, explores two key trends that are shaping the fate and future of plastic circularity. These trends include the explosion of recycling capacity as well as the transformational impact of regulatory reforms. We see that these trends not only bring promise, but also present new challenges. Our collective attention and resolve are needed to address them.

I’ve outlined my thoughts about why these two trends could be so important for the industry, as well as what investors, asset management, entrepreneurs, policymakers and other stakeholders can do to make this a reality.

Trend 1: Recycling Gap Filling

The problems were obvious when we started our work over five years ago. South and Southeast Asia had too much waste that was mismanaged. Recycling supply chains were in need of strengthening to get this material to the market. The idea was to increase both the quantity and quality of material available in the supply chain. It was really about boosting recycled materials to close the recycling gap.

We are experiencing a exponential growth of recycling capacity in our industry. Extrapolating, we can say that we are on a positive trajectory in terms of establishing circularity for plastic. The number of investors and operators bringing in new facilities has also increased. We are not alone in this fight. We need to bring all of our firepower.

With this increase in recycling capacity and evolution, new risks are emerging (or perhaps old risks have become more obvious). The question is still “can we increase quality and quantity?” but now, it’s about whether or not we can do so at a sustainable price. The answer isn’t as clear-cut.

Costs are rising. The increased recycling capacity means that there is more competition for the feedstock. This puts more pressure on supply chain stages such as collection, sorting and aggregation, driving up prices. Local collection networks become increasingly important to the supply chain. While costs are rising, prices are extremely volatile. In a tighter environment, we’re experiencing boom-bust cycles. While last year was a great year for recycling, this year has been the opposite. In the first three-quarters of the year, we’ve seen prices drop up to 20 percent.

We’re optimistic for the medium-term. We’re seeing orders for recycling companies within our portfolio that will be delivered in 2024. Oil prices have also begun to rise. The majority of economists believe that we will hit $100 per barrel in the next few months. This will also push up recycled plastic prices.

Breaking the Boom-Bust cycle

Recycling companies are experiencing a boom and bust cycle, which is creating doubts and delays. It is difficult to continue investing when purchase orders don’t come through as planned or fail to materialize. We invest a lot of time in building relationships and trust with potential investors to convince them that there will be demand, but for now, many are still taking a big leap of faith. It’s important to break the cycle of boom and bust to strengthen the supply chain.

We believe that decoupling virgin plastic from recycled plastic in a number of supply chains may be part of the solution. We encourage brands and plastic recyclers to consider new ways of partnering and offtake. For too long the industry has relied on spot markets, meaning that sometimes it is up and sometimes it is down. It’s unsustainable. Consider contracts that have floors, ceilings, and ratchets linked to indexes. We must move from a mindset of risk shifting to one of risk sharing.

Trend 3: The policy environment is a major factor in enabling circular supply chains

The second trend is that policy has become a major tailwind in the recycling value chain. In five years, I would never have thought I could say that today. We continue to see policy changes that enhance the recycling value chain. The efforts of 175 countries have culminated at the global level in the ongoing negotiations of the Global Plastics Treaty. This is the organizing framework of recycling supply chains and policy discussions around the world.

India, at the national level in the SSEA Region, has adopted new plastic waste management regulations that require 25% recycled plastic packaging by 2025. Just last year, the first Extended Producer Responsibility schemes (EPRs) were implemented in Vietnam and the Philippines. We expect that these schemes will continue to expand aggressively over the next few years, and be replicated across the entire region. All of these policies create a supportive and exciting environment for our portfolio companies as well as our new investments.

The progress here also creates new risks, which have a direct effect on the people and social implications of supply chains. The collection system is under more pressure as more recycling capacity becomes available. Regulators are creating mandatory reporting and disclosures which affect the entire supply chains from brands, investors, recyclers etc. We’re also seeing EU regulations, which are removing products from the shelves (like clothing, for example) due to non-compliance. We’re seeing regulations that require a deep level of due diligence in all supply chains, which has never been required in the recycling supply chain.

Urgent action is needed to improve the social impact of recycling supply chains

This regulation will likely be a net benefit, and responsible sourcing should not just be a nice-to-have, but a necessity. Compliance requires the use of the informal sector. This creates tensions between these mandates and compliance.

It’s important to set expectations and get ahead of the game. Recently, I discussed how important it is to build socially responsible supply chain. And why responsible sourcing lies at the core of a modern circular economy. Portfolio companies can create better material, lower costs and more stable livelihoods by investing in responsible sourcing. I am proud of the industry-leading work that our team has done in this area, but more people like us are needed to help create solutions and scale.

What lies ahead? These two trends are certainly positive for the future development of the recycling industry and the ability to catalyze the sector. The challenges we face in creating a circular economy are enormous. McKinsey released a report that looked at the factors needed to change the global recycling supply chains. To reach a minimum of 20-30% recycled material and packaging it is estimated that another 100 billion dollars will be needed over the next 7 years.

It is an uphill battle, and I believe that our efforts to involve corporates and institutional investors as part of the solution must be our North Star – for not only us but also for the entire industry. We need to work together to increase our impact and partnership as a team and with others who are not yet present. Yes, I am incredibly thrilled and excited by the progress that we are making with creating plastic circularity. But each new opportunity will present new types of risk, which will require more innovation, collaboration and tenacity in order to win this battle and win this war; we must.