Future of Waste Part 3: Investment opportunities in waste

Investment views and best practices to address waste that could prove profitable for businesses and investors.

11 Mar 2020

Future of Waste series

The Future of Waste publication outlines effective waste reduction solutions that can increase businesses’ financial returns. In the first part of the series, we analyze the main sources of waste and its impact. In part two, we highlight mainstream and innovative companies that have cut fuel costs by billions of dollars, slashed landfill waste by up to 90%, or reduced food spoilage to less than 1%. And in the final part, summarized below, we present best practices to address waste that can prove profitable for businesses and investors. We also use data from UBS Evidence Lab to highlight regional, country and sector insights on waste.

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How can I tackle waste in my portfolio?

The overall waste sector is growing quickly. Municipal solid waste is one part of a market that, in 2018, had an estimated size of around USD 1.7tr. By the end of this year that figure is projected to reach USD 2tr. And higher value-added treatment plus better waste collection rates should increase the industry’s size in the coming decades. In addition, energy waste reduction opportunities should abound.

Investment opportunities in waste (across both public and private markets) are likely to be concentrated in three categories.

Companies that manage waste proactively

Consider equities and bonds of main­stream companies who operate in sec­tors where waste is of significant impor­tance and that tackle waste more proactively than peers.

Doing so may give these companies cost advantages (reducing waste and unnecessary expenditures), a more loyal customer base, or new lines of revenue (such as opening up their own specialized waste treatment programs to external clients).

To establish whether waste has a significant impact on a sec­tor’s financial performance and to evaluate how companies within this sector manage it, investors can use a waste and pollution data set as part of a wider methodology that ana­lyzes companies on several sustainability criteria. Applying materiality principles to conventional sector classification high­lights four key sectors where waste is of significant impor­tance: consumer discretionary, energy, materials, and utilities.

Dedicated waste management companies

Investigate equities and private invest­ments in dedicated waste management companies or green bonds from those businesses that issue debt to specifically tackle waste.

Increased focus on reducing solid and energy waste is most likely to have a positive impact on these firms’ revenue and profitability through higher volumes. The estimated size of this market is USD 2tr, or twice that of Australia’s stock mar­ket (MSCI Australia Index).

In addition, green bonds could help engage with waste management projects and companies. Most often the waste projects financed by green bonds relate to managing waste, including recycling to conserve materials. Waste currently represents only 4% of the reported use of pro­ceeds of the USD 700bn green bond market, which is more tilted toward energy efficiency and green buildings.

A new concept for “Waste Reduction (WaRe) Bonds” also sug­gests a way for companies to tackle waste by raising dedicated financing for its reduction. One innovation could be waste-reduction-linked corporate debt. Like green bonds, these would be standard bonds that appeal both to mainstream traditional investors and to the growing cohort of sustainable investors.

Engagement opportunities

Look into equities and bonds of main­stream companies with potential for cor­porate engagement to improve waste management and commercial perfor­mance.

Examples of investors using engagement strategies to reduce waste, emissions, and pollution could include: encouraging construction firms to apply new design and build techniques that reduce waste; pressing them to reduce waste and raise efficiencies across supply chains; and engaging with them to drive up energy-efficiency levels both in new and in existing buildings.

However individual investors are unlikely to be able to engage directly with companies to drive waste and pollution reduction. Engagement is more likely to take place through an invest­ment manager that uses commercial expertise and their finan­cial power (as a significant holder of company equity or debt and with potential voting or board influence) to effect corpo­rate change that can improve company performance and enhance investor returns.

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