This week we explored the topic of “Circular Economy” as it had the largest increase across sectors over a 365-day period compared to the previous 365 days. Specifically, ESG topics of “Waste,” “Recycling,” and “Circular Economy” in our Pollution Management Event Type have seen large increases across news, earnings calls, and filings.
As we recapped 2022 we outlined our themes to watch for in 2023. One area where we anticipate increased focus was around resource and materials use. The ESG topics of “Waste,” “Recycling,” and “Circular Economy” in our Pollution Management Event Type have seen large increases across news, earnings calls, and filings. In particular, the topic of “Circular Economy” had the largest increase across sectors. Topic increases were even larger for extractions that include what we define as Materiality language, for inclusion of details around ESG goals and initiatives. This suggests that companies are becoming more specific with ESG targets and goals, as well as adding refinement and focus to certain areas within their ESG strategies.
Our Materiality model highlights more specific company behaviors and initiatives. The model is trained to look for language around ESG action at companies when they outline goals (Commitments), undertake projects or deploy capital around ESG topics (Investments), discuss ESG risks or opportunities (Exposure), or when they achieve ESG targets they have set (Milestones). Adding this Materiality entity tag in our data brings another dimension into ESG analysis by gaining insight into company strategy and behavior. Below is an example of two extractions our model finds to show the difference between extractions as we define Materiality language.
“Kudos to the Coca-Cola company for its effort in protecting the planet by reducing waste on a global scale.”—Newsbreak, 1/10/23
Here Coca-Cola (KO:US) gets positive press on their overall efforts, but it is not referencing a specific initiative or action in this instance, so we do not tag it for the additional materiality language we look for.
“Instead of rebuilding, Aqua Metals decided to use the $30.25 million insurance payments to pivot its technology to lithium-ion battery recycling.”—Seeking Alpha, 1/19/23
We can see above Aqua Metals (AQMS:US) is not only interested in recycling, but also has specific action items and spend toward the goal around furthering lithium recycling. These sentences are also indicative of what kinds of sectors we are seeing this discussion and action take place—the Consumer sectors as well as the Materials and Industrials sectors.
The Consumer Discretionary and Staples sectors have sought to tackle a variety of issues as it pertains to waste and recycling. These sectors focus on plastic packaging as a primary area of concern with popular beverage companies returning the most headlines. What is interesting is the relative drop in language around “Recycling” as a term and an increase in the topic of “Circular Economy” in these sectors for mentions with and without materiality factors.
Plastic waste in particular is a tricky subject, mostly because plastics are not of uniform composition and are still not fully recyclable. Pyrolysis as it is known is a method of melting down plastic at high temperatures in an attempt to reuse or process into fuels. This process can be incredibly dangerous, releasing chemicals into the surrounding air and water from different kinds of plastics. This is just one kind of recycling for plastic, but has been increasingly used as a buzzword and part of the greenwashing arsenal for some major companies.
Even Coca-Cola, a leader in the space, states in their current goals to have fully recyclable products by 2025, meaning that not all of their products can currently be recycled. Along those same lines Pepsi (PEP:US) has a goal to have 20% of packaging be reusable by 2030. Coca Cola was the top mentioned company for the three topics in the Consumer Sectors and Pepsi the 6th most mentioned company. From these goals it is clear that the companies are aware of and pushing to address the issue of plastic waste and packaging.
However, maybe the answer isn’t recycling plastic, but taking steps to exclude it from our supply chains altogether as some beverage companies have done. Private water company Liquid Death has recently been mulling IPO options from their recent success, but they are also outspoken critics of plastic waste and only use aluminum cans. Aluminum is infinitely recyclable and 75% of all aluminum ever produced is still in use today. Liquid Death is proof that you can be a successful business in the beverage space without using plastic containers. Liquid Death is not alone in this and Diageo (DGE:GB) and Carlsberg (CARL:DK) have also eliminated plastic from their consumer offerings.
How plastic is used is part of a larger conversation on what the current state of plastics recycling is and where it is going. Not all plastics are recyclable like aluminum, and not all plastics are biodegradable like cardboard and paper, prompting companies to get creative when it comes to packaging. In the next section we cover what the Materials and Industrials sectors have been working on when it comes to “Waste,” “Recycling,” and “Circular Economy.”
While the consumer space is largely focused on packaging, and in particular plastic, the Materials and Industrials sectors have been focused on metals, especially the metals that go into electric vehicles. As supply chains came under strain over the past few years, manufacturers and capital goods had to become smarter with materials sourcing. Companies in the industrial space have also become interested in creating commercial scale plastics recycling, which as we explored in the previous section, carries its own unique set of hurdles. However, when it comes to metals recycling the environmental and business value proposition is a bit more clear.
For businesses that use metals, this equates to reusing scrap from production chains and starting entirely new business lines to grow and support circular economies. This need, coupled with onshoring of EV supply chains in North America, is a result of the Inflation and Reduction Act that has created new business opportunities for the recycling of metals.
Most companies that produce EVs are starting their own in-house recycling programs for batteries, or are partnering with companies that are focused entirely on circularity themselves in this space. Steel, aluminum, lithium, and nickel are just some of the metals we have seen discussed in recent months for these circular use cases. We have also observed increased activity for investment in North American facilities for metals recycling in recent months. Companies such as Aurubis (NDA:DE), AMG NV (AMG:NL), and Rio Tinto (RIO:GB) have all outlined recent projects to open or expand existing metals recycling capacity in North America.
Circular economy, waste, and recycling apply to many different industries and many different resources. The activities we chose to focus on that are getting the most attention from companies are plastic use and packaging in the Consumer sectors, as well as metals in the Materials and Industrials sectors. This is because these areas impact operations the most for these companies, and thus the bottom line. Figuring out how to be more efficient from an operational standpoint is not only good for the environment, but also makes business sense in a world where resource scarcity and supply chain bottlenecks have become the norm. Companies that invest toward insulating their supply chains from external events through the development of recycling capacity will set themselves up for success down the road.
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Amenity Analytics (part of Symphony) is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
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