ClearBridge ESG Investment Strategy Q2 2024 Commentary

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Sumedha Lakmal/iStock by way of Getty Photos

By Kevin Boustead, CFA, Kimberly Gifford, CFA, Mary Jane McQuillen, & Charine Park

Dispatches from the Round Economic system

Plastic Alchemy: Remodeling Waste into Revenue

The Ellen MacArthur Basis lists three primary ideas of the round financial system: eliminating waste and air pollution, circulating merchandise and supplies, and regenerating nature. These ideas align with some key elements of ClearBridge’s elementary ESG framework, notably elements resembling useful resource effectivity, recycling, product life cycle administration, renewable era and land utilization, which we interact on as a part of ongoing firm analysis. By decreasing vitality use, stress on the setting and air pollution, the round financial system can also be linked to mitigating local weather change and conserving biodiversity. Many ClearBridge holdings thus contribute to the round financial system as they both execute on finest practices or make enhancements in these areas.

We’ve got usually highlighted TREX as exemplary of the round financial system. Trex is the market share chief of wood-alternative composite decking. Trex’s low-maintenance and high-quality decking merchandise are composed of 95% recycled wooden fibers and plastic, making use of waste that will in any other case find yourself in landfills. Trex has continued to innovate and advance plastic recycling processes. Lately, because the demand for “clear streams” of plastic waste has elevated in numerous elements of the financial system, Trex has upgraded know-how to have the ability to settle for “dirtier” streams of plastic waste into the manufacturing course of. This allowed Trex to start utilizing further portions of waste plastic that will in any other case by no means be recycled, with out compromising product high quality requirements. Trex merchandise are extra sturdy and have an extended life than conventional wooden decking, subsequently decreasing general uncooked materials utilization and end-product manufacturing. Lastly, the standard and sturdiness of the product saves shoppers cash by much less frequent replacements and decrease upkeep and maintenance prices.

Molecular Recycling Takes a Step Ahead

Whereas firms like Trex are making clear good points on plastic recycling, a round financial system that solves for plastics use stays a problem. Regulatory our bodies are stepping up necessities, such because the EU’s new guidelines to scale back, reuse and recycle packaging, provisionally agreed upon in March 2024. Beneath the brand new guidelines, plastic packaging should additionally embrace minimal recycled content material.

Serving to firms meet these new guidelines shall be ClearBridge holding Eastman Chemical (EMN), which makes a variety of superior supplies, chemical compounds and fibers for on a regular basis functions, amongst them plastics for meals packaging.

“Meals waste is an avoidable disaster that has each environmental and societal prices.”

In a current engagement with Eastman Chemical we mentioned two completely different chemical recycling applied sciences it has developed: polyester renewal know-how (‘PRT’) and carbon renewal know-how (CRT). PRT recycles polyester-based supplies resembling soda bottles, carpet fibers and even clothes, breaking down their primary molecules till they’re indistinguishable from supplies comprised of virgin or nonrecycled content material. CRT operates in an identical means however can take a broader vary of plastic varieties and replaces using coal as a feedstock to make fibers. Combining these two applied sciences provides Eastman a aggressive benefit in molecular recycling, as it will possibly take most sorts of waste plastics (Exhibit 1). Paradoxically, securing feedstock (i.e., waste plastic) has been a bottleneck to scaling molecular recycling as competitor applied sciences not utilizing Eastman’s twin applied sciences usually require the waste plastic to be separated purely in keeping with grade, which waste and recycling firms don’t readily supply. Eastman’s twin know-how method permits it to simply accept most moldable grades, making it much less reliant on waste firms’ sorting.

Eastman’s first recycling plant is now operational in Tennessee, which can provide its inside Superior Supplies strains whereas additionally proving out the know-how. The corporate is already working towards a second plant in Texas that may have Pepsi (PEP) as its anchor buyer. Within the second plant, not solely will Eastman assist Pepsi meet its recycled content material objectives, however it’s also anticipated to obtain long-term, take-or-pay quantity commitments, for doing so. This could significantly enhance earnings visibility, and in flip, probably valuation.

Exhibit 1: Eastman Chemical’s Molecular Recycling Strategies

Exhibit 1: Eastman Chemical's Molecular Recycling Methods — Supply: Eastman Chemical.

Sustainable Meals Wants Sustainable Plastic

Because the case of Eastman Chemical suggests, plastic is central to sustainable meals. Accordingly, firms within the meals trade can advance the round financial system by practices resembling recycling, decreasing or bettering the sustainability of packaging and decreasing landfill waste. Canadian grocer Loblaw could make an influence with all three of those practices.

In a current engagement with Loblaw (OTCPK:LBLCF), we mentioned its aim of creating 100% of its management model and in-store plastic packaging recyclable or reusable by 2025. This could put it in compliance with the Golden Design Guidelines (‘GDR’), a algorithm established by the Shopper Items Discussion board, made up of main worldwide retail and shopper items firms, to benchmark packaging design, emphasizing the discount of supplies and the removing of problematic components.

Noteworthy steps alongside the best way have concerned modifications to Loblaw’s protein packaging, which used to return in polystyrene foam trays; the overwhelming majority now are packaged in clear recycled PET trays, that are accepted in all of the municipalities wherein the shop operates and permit for better detectability within the recycling stream. The shift to PET trays for mushrooms led to 39.9 million trays getting into the recycling stream in 2023. Eradicating the plastic window from 10 kg potato baggage allowed 23 million baggage to be extra simply recycled in 2023. As well as, extending expiry dates for its PC Cash Account and PC Mastercard bodily playing cards ought to forestall greater than 10,000 kgs of plastic waste within the subsequent 12 years.

“Producer accountability incentivizes model homeowners to extend the recyclability of their packaging whereas empowering them with management over the recycling methods.”

Loblaw’s advances in these areas additionally communicate to its energy to make use of its dimension to vary the trade, because it communicated its GDR requirements to lots of of management manufacturers and nationwide model distributors, successfully dictating a brand new nationwide trade normal for plastic packaging. Whereas navigating recycling requirements and practices that change from municipality to municipality, to enhance recycling charges general Loblaw helps extending producer accountability, a system that give model homeowners accountability of each the associated fee and efficiency of recycling methods, incentivizing them to extend the recyclability of their packaging whereas empowering them with management over the recycling methods themselves.

Meals waste is an avoidable disaster that has each environmental and societal prices, and linking meals as an natural useful resource in a round financial system can scale back land use and higher help rising populations. Loblaw has set a aim to ship zero meals to landfill by 2030, a aim supportive of Sustainable Growth Aim 12: Accountable Consumption and Manufacturing, specifically goal 12.3, to halve international meals waste by 2030. The corporate is at the moment ramping up knowledge assortment on meals waste however achieved over 78,000 metric tons of diverted meals waste in 2023, with most going to composting, animal feed and redistribution of meals surplus to meals charities.

Supplying the Auto Aftermarket

LKQ can also be targeted on recycling heavy supplies. LKQ is the most important wholesale distributor of different elements for the auto aftermarket in North America and Europe. It supplies “like sort and high quality” (‘LKQ’) auto elements as lower-cost alternate options to these supplied by auto OEMs. It’s the largest wholesale distributor of collision elements (used to restore automobile exteriors) within the U.S. and Canada and the most important distributor of mechanical elements (used to restore inside elements) in Europe. LKQ additionally runs its personal salvage and recycling operations. Because the world’s largest recycler of automobiles at end-of-life, recovering 90%+ of the supplies from scrap automobiles for reuse or recycling, LKQ helps useful resource effectivity and accountable consumption as an investable theme.

In a current engagement with LKQ we had an in depth dialogue about the way it has turn out to be more and more environment friendly over time at inventorying and promoting extra elements from its salvage autos, which reduces the quantity of elements going for scrap and will increase LKQ’s margins, because it earns greater revenues from similar mounted price of products.

Round Economies Span All Sectors

One highly effective side of the round financial system is how, though with differing dynamics and ranges of challenges, each sector could contribute. ClearBridge will proceed to share key firm advances and engagements on the subject as our holdings innovate to function extra effectively and allow a extra resilient financial system, with fewer emissions and fewer waste.

Kevin Boustead, CFA, Director, Portfolio Analyst

Kimberly Gifford, CFA, Vice President, Portfolio Analyst

Mary Jane McQuillen, Head of ESG, Portfolio Supervisor

Charine Park, Vice President, Portfolio Analyst