Investment outlook for sustainable packaging sector looks promising as changes in consumer habits escalate
A growing global awareness of the impact of plastic packaging is changing customer perceptions.
Nanuk Asset Management (Nanuk), an industry leader in sustainable investing, believes environmentally focused packaging companies are set for solid growth.
The expansion in e-commerce activities and the shift away from plastic towards alternatives like paper and cardboard is increasing, with current valuations for many stocks in this sector yet to reflect the changed outlook.
Peter Wilmshurst, Portfolio Manager of Nanuk Asset Management, said: “Many current packaging products are creating an environmental waste problem while generating greenhouse gases in their production and use.”
The UNEP estimates that approximately 36 percent of all plastics produced are used in packaging, including single-use plastic products for food and beverage containers, with around 85 percent of them ending up in landfill or finding their way into the world’s oceans.
“Plastics are the largest, most harmful and most persistent fraction of marine litter, accounting for at least 85 per cent of total marine waste,” the UNEP said in a report released last year.[1]
The global production of primary plastic is forecast to reach 1,100 million tonnes by 2050 if historical growth trends continue, amid a worrying shift towards single-use plastic products, according to the UN Environment Programme,
Governments around the world, from India and China, to the European Union and the United States, are increasingly taking action to cut the use of plastics in the community. Companies are responding by switching to more environmentally friendly products.
“Thanks to a growing global awareness of the impact of plastic packaging, customer perceptions are rapidly changing and there is growing concern about the end disposal of plastic and what it means. This means that a large proportion of consumers are changing their behaviour towards the use of plastics, especially when out shopping,” Wilmshurst said.
In Australia, the Federal Parliament recently introduced the Climate Change Bill 2022 to provide a 2030 emissions reduction target, further highlighting the importance of sustainability and limiting carbon emissions for consumers and industries across the nation.
Seven out of eight Australian states and territories have already committed to ban single-use plastics., with Tasmania being the only state that has not yet committed to banning single-use plastics.
“There is a significant move from plastic to paper and cardboard products. We see this as an accelerating, sustainable trend. Product innovation in paper packaging is significantly expanding the range of uses for paper-based packaging, replacing plastic being the key aim. This is expanding the sector whilst also encouraging prospective investors,” Wilmshurst said.
E-commerce is another area driving demand for more sustainable packaging. The use of corrugated boxes, in part to ship food and drink and sensitive electronic products, began accelerating from 2009. This coincided with the growth of e-commerce businesses, like Amazon, which have been accelerating over the past decade.
Nanuk does not believe the growth in e-commerce nor the shift away from plastics will trigger a massive growth in sustainable packaging companies as plastic remains a cheap form of packaging that is critical in reducing food wastage due its barrier properties.
“We think two to three percent annual growth is more likely, which is not going to give the companies concerned a Tesla-style multiple,” he said.
However, Nanuk believes this level of industry growth will help prices increase and require higher returns in the industry to justify new investment in paper mills and other production capacity.
“The shift from no growth to a little bit of growth really flips the switch on the returns you can expect from this industry,” Mr Wilmshurst said. “The industry consolidation we’ve seen should provide further support for returns.”
As a result of this improving outlook for more sustainable packaging products, Nanuk has a position in U.S.-based corrugated packaging company WestRock, America’s second largest packaging company, and Fortune 500 company Graphic Packaging International.
In the same sector, the Nanuk New World Fund also holds a stake in Packaging Corporation of America, which focuses on sustainable and environmentally friendly packaging material. It also holds European multinational paper and packaging group Mondi Plc and aseptic packaging leader SIG Group AG.
Around 10% of the Nanuk New World Fund portfolio is invested in these sustainable packaging companies which it believes are set for solid future growth but where current valuations do not reflect the positive business outlook.
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