Ahead of World Ocean Day, RBC BlueBay Asset Management’s Harrison Hill looks at some of the drivers of plastic pollution, and the potential role of the fixed income market for investors who want to make an impact.
Each year it is estimated that between eight and 13 million metric tons of plastic end up in the ocean, wreaking havoc on marine ecosystems, entangling wildlife, and breaking down into toxic microplastics that infiltrate food chains.
Fixed income investing isn’t necessarily the first thing that comes to mind when considering these issues. However, looking at the fixed income market now compared to 10 years ago, there is an increasing number of investment vehicles emerging aimed at countering the damage done by this pollution, which offer investors the potential for an attractive return profile.
Drivers of pollution
While plastic waste is a global issue, certain countries are contributing more today than others. These countries include developing nations experiencing rapid urbanization, whose economies are growing too fast for their waste management infrastructure.
Developed countries are not exempt from responsibility either. Countries like Germany, the Netherlands, Japan, the UK, and the US are all known for exporting large swathes of waste to countries with less stringent waste management systems in place. While only accounting for roughly 35% of plastic consumption, OECD member countries account for almost 80% of plastic waste exports, of which nearly 50% is heading to non-OECD member countries. This practice allows developed nations to publish recycling rates that do not necessarily reflect the reality of waste ending up in foreign landfills or the oceans.
Additionally, the economics of plastic recycling versus new plastic production make a transition to reducing plastics pollution challenging. While oil subsidies persist and recycling operations remains expensive and labour-intensive, it is cheaper to produce new plastics than go through the energy intensive process of recycling. There are also issues with the recyclability of plastic, which tends to degrade in quality after a few cycles.
However, the fixed income market does present avenues for investors interested in impact and impact-aligned investment.
Fixed income focus
Funding projects dedicated to environmental sustainability such as waste management infrastructure and recycling facilities is one option. Such projects could provide investors core yields likely at or near cycle highs, as well as the potential to drive real-world change.
The World Bank recently issued the Plastic Waste Reduction-Linked Bond, which leverages the concept of plastic credits, linking financial returns towards achieving tangible waste reduction targets. The bond’s proceeds funding projects in developing countries where plastic waste management is a pressing concern.
While this issuance represents a significant step forward, the new projects’ effectiveness in reducing plastic pollution in the oceans remains to be seen.
However, can financial instruments in this vein be scaled up to meet the enormity of plastics pollution within the oceans? Biodiversity directed outcomes-based bonds are difficult to scale due to the different projects being funded. Conversely, plastic waste reduction outcome-based bonds should be more predisposed to pooled structures. This would increase the likelihood of a deal large enough to be included in standard fixed income indices, which would help improve liquidity in this niche market.
Municipal bonds are also emerging as a strategic financial tool in reducing oceanic plastic pollution. While municipal bonds specifically targeting plastic pollution are also still quite niche, they offer investors another option to consider.
Investor considerations
As awareness grows and demand for sustainable investment options increases, we can expect to see more innovative financial solutions aimed at tackling environmental issues. The fixed income market is where we believe this innovation is likely to take place, given the nature of the asset class, where it can provide a direct line of funding to specific projects. Whilst it remains incredibly challenging to measure the impact of investment instruments and projects like these, they do offer investors the potential of being able to do so.
Harrison Hill is an impact-aligned bond strategy portfolio manager at RBC BlueBay Asset Management.
