Tackling the plastic problem
Archipelago’s Partners Lucy Mortimer & Justin Guest provided an op-ed piece to Environmental Finance on the financing of solutions to the plastics problem. To read the full article, click here.
Plastics use is a modern necessity, but the current plastics economy is often resource intensive and inefficient.
Unlike some of the challenges that environmental and impact-driven finance seeks to solve, the loss of resource through often single-use plastic waste and pollution is a visible, physical, daily problem. We wrestle with it in our everyday lives, trying to buy food that comes wrapped in less plastic, and wondering how best to recycle what we do use. We see plastic packaging discarded in our towns and countryside alike, and we're shocked by images of plastic waste piled high in landfill sites or floating in great swathes on our oceans. Our children can tell us all about the harm that plastic pollution causes to marine life, yet their parents are currently failing to find a solution.
The problem is also getting increasingly more difficult to solve. Over 300 million tonnes of fossil fuel-based plastic is produced each year, but only 12% of that is currently recycled, with the rest being lost to landfill, incineration or leaking into the natural environment.
Our current recycling infrastructure is already overwhelmed (so much so that the UK has to ship a large proportion of it overseas for 'treatment'). By 2050 we expect to see up to a billion tonnes of plastic being produced annually – three times the current level. And whilst plastic can be really useful in reducing the carbon footprint of products, it is often itself a carbon intensive material.
By 2050, plastics may account for 20% of total oil production and up to 6 billion tonnes of CO2 equivalent – 15% of the annual carbon budget under a 2⁰C scenario.
The problem of our relationship with plastics may seem overwhelming. Where and how do we begin to take action given the scale of the issue, and where do boundaries and responsibilities lie?
The scale of the issue, however, also presents potential for significant rewards in identifying the technologies able to support systemic change in the current plastics economy. We are optimistic that foreseeable, near- and medium-term shifts in market dynamics, production models, regulation, public opinion and technology are aligning to make it possible to solve a complex and challenging problem.
Responding to both the issue and the opportunity, we've established Plastic Fund 1, a €100 million Luxembourg based Private Equity Impact Investment Fund which aims to support technologies able to contribute to solving the plastic problem at scale, often by plugging a post venture capital, pre-commercialisation funding gap.
We're currently fundraising with a range of strategic and ESG-focused investors, aiming for a first close later this year. Plastics Fund 1 is one modest, but critical, step towards solving the plastics and climate crises.
Here's how we see the problem, and a possible way out of it.
Plastic packaging is the largest application within the sector, representing 26% of total plastic production. Its seemingly wasteful, single-use, nature means it's often portrayed as the biggest villain.
But other end-uses are equally problematic to recycle. Rigid plastics such as those used in medical equipment, and the PPE integral to management of the Covid pandemic, are both hard to recycle with current technology.
More than half of textiles come from fossil-fuel based plastics, and less than one per cent is ultimately recycled and recovered due to lack of appropriate recycling infrastructure and difficulty of deconstructing and separating textiles into a variety of component parts and materials (zips, threads, labels, buttons and of course sometimes multiple fabrics), all of which adds complexity and cost to the recycling process.
Processing all these different types of plastic waste will become incrementally harder as volumes increase. Only half of household plastic waste collected in Europe is currently recycled, and of that a small fraction makes it into more beneficial 'closed loop' recycling stream, turning waste plastic into new plastic items.
Material not making the grade – such as hard-to-recycle plastics, laminates, films and small items – is incinerated or used as feedstock in waste-to-energy plants, an end-of-life solution which is becoming increasingly socially unpopular; recent analysis shows that producing electricity from waste is more carbon intensive than producing it from gas, and second only to coal.
We do not even attempt to recover a significant amount of plastic – polystyrene and the thin films from the cover of food packaging, for example, are rarely collected at all, often going straight to landfill.
At the same time, changes in market dynamics driven by China closing its borders to waste imports – with Vietnam, Malaysia and others following suit – and further restrictions of certain exports under the Basel Convention, mean demand for new infrastructure in Europe is increasing substantially.
Whilst there is notionally enough capacity in Europe to manage present levels of plastics that are desirable to recycle – clear PET, for example – there is a significant shortfall in the recycling infrastructure required to process the expected increase in volumes, or the hard-to-recycle plastics that aren't currently recycled in most countries.
Solutions to produce food-grade polyolefins (polyethene and polypropene) are almost completely absent. Even mechanically recycling PET has its limitations as a result of polymer degradation.
Linear models of production have come under fire from consumers and governments, driving the sector to start designing circular economy models within plastic supply chains, waste management processes, and the chemicals and oil & gas sectors.
Regulatory changes mean FMCGs and retailers are now required to both make packaging recyclable, and – critically – use recycled plastic in their packaging in the first place. Many are now feeling the squeeze on available volumes of recycled plastics, with capacity in Europe reaching its limits. Voluntary commitments by retailers, consumer goods companies and fashion houses promise serious future reductions in waste packaging and increases in recycled content by 2025 or 2030.
With demand for recycled content and output already high, pressure on recycling supply chains is set to increase substantially as a result of the limits on technical and physical capacity available to meet these increasing demands.
Until recently, the plastics economy has seen decades of relative stability, with limited drivers for change. Now, however, a raft of new, SME-led, technologies are responding to the opportunities arising from this coalescence of regulatory change, commercial & societal pressures, and new market dynamics.
Innovation is emerging both upstream – in the form of alternative materials, return/reuse models and the streamlining of packaging materials – and downstream, as AI sorting, textile processing and novel chemical recycling approaches are developed.
Often having secured early-stage VC and grant funding, these entrepreneurial SMEs have the potential to scale up relatively quickly. However, many are not yet at the point of commercialisation and so are challenged in securing debt or, for the most part, the equity needed to fulfil their business plans and so ultimately satisfy Europe's broader need for new infrastructure and solutions.
As we make progress towards a more resource-constrained, low-carbon-plastics economy, these innovations may ultimately contribute to solving the complex and diverse problem with plastics; addressing regulatory requirements, providing technical solutions to waste management, supporting sustainable plastic supply chains and providing sustainable feedstock for oil & gas majors who are exposed to the move away from virgin plastic production from fossil fuels. Aside from the environmental urgency, there is a market ready and waiting.
While there is currently a spotlight on the plastics problem, bringing capital to bear in a focussed, systematic, fashion to plug the post VC/pre commercialisation gap in the funding cycle will be crucial for the successful development of the sector.
With the support of the International Climate Finance Accelerator (ICFA), which has backed Plastic Fund 1's low-plastic, low-carbon thesis with early-stage support funding, we are bringing together LPs from the FMCG, retail, oil & gas, chemicals and plastics sectors who are all exposed to the pressure to move away from linear fossil-based plastics.
We are also in talks with family offices and financial and public institutions who share an interest in profitable solutions to the plastic waste problem which also provide a carbon benefit.
The fund plans to make its first investments later this year to seize opportunities and enable the scaling of novel technologies that address some of the big issues in the sector, aiming to remove barriers across plastics supply chains. Investing at a relatively early stage also allows us to embed high quality ESG practices in these young companies from the outset, setting the standard for the sector.
We're currently focused on European solutions and infrastructure, but we aim to back technologies which have the potential for global application. The countries where most plastic enters the natural environment – in South East Asia, for example – may currently have less regulatory support than European nations, hampering the successful deployment of relatively early stage technologies, but they may benefit from the application of more mature technologies in just a few years' time, and the scale they will bring could be transformative.
The nature of waste plastic pollution requires technologies and solutions with potential for global scale and relevance, but will also meet the specific, granular needs of local communities and market dynamics.
With an additional 700 million tonnes of plastic potentially entering the market each year by 2050, identifying this new wave of technologies and helping them reach commercial maturity and scale is both an urgent environmental necessity, and a significant financial opportunity.