What this story clearly illustrates is that there is no one-size-fits-all when it comes to achieving circularity, and finding the specific solution for any company requires continued commitment and innovation. (UBS)

While headlines of LEGO “abandoning” sustainability seem concerning, the company has made clear this is just one setback in their ongoing transition journey. We unpack the decision in the context of our overall conviction in the circular economy.

First, RPET appears to be a poor fit specifically for the company—their bricks are traditionally made with a harder plastic. Not only would RPET require significant energy-intensive processing to meet their requirements, but it would also require the company to change everything in their factories, ultimately negating lifecycle emissions savings from replacing virgin plastic. Of course, we suspect this also entails significant costs that may not be passed through to their customers.

Meanwhile, RPET is being applied in other industries and companies, with Adidas reporting that 96% of their plastic content is recycled as of 2022, for example, showing that it can be part of the solution for some. Significant hurdles remain, however—insufficient recycling of plastic bottles limits scale, and quality degradation inherent in mechanical recycling technology limits use cases, among others. For more details, see Circular economy Longer-Term Investments.

Returning to LEGO, this setback serves as a reminder that “moonshot” solutions may not exist—the company’s hopes of finding a “magic material” have thus far proved futile, and the solution would likely be more complex. In a way, it could be positive, too. If it was simply a case of replacing raw materials, the transition could just mean higher costs that may not be passed through. With this easy path blocked, it forces the company to get creative, and in the process new business lines may emerge.

The company has reiterated its commitment to sustainability, indicating a tripling in sustainability spend to USD 430 million a year by 2025. The current strategic focus is on “reuse”— reusing a box of LEGO blocks would reduce its lifetime footprint by 80%. LEGO already encourages consumers to return used bricks to be cleaned and donated. Meanwhile, unofficial LEGO subscription services run by third parties also exist, charging anywhere from USD 20 to 80 per month.

Some brands who have dipped their toes in subscription or products-as-a-service (PaaS) business models have reported synergies through diversification of cash flows and margin profiles. But again, this is highly dependent on the specific company and its execution to deliver scale.

Ultimately, what this story clearly illustrates is that there is no one-size-fits-all when it comes to achieving circularity, and finding the specific solution for any company requires continued commitment and innovation. Plastics reduction, in particular, is an incredibly difficult problem to solve, requiring a multi-pronged approach across new recycling methods and material science, as well as infrastructure and design innovation. More recycled content and still niche solutions like bioplastic offer hope but remain undersupplied or expensive, respectively, and as LEGO shows with RPET, can be difficult to implement depending on the business model.

Takeaways for investors:

  • Media headlines have focused on the failure of one of LEGO’s many sustainability initiatives, but the company has in fact reiterated its long-term commitment to decarbonize. We reiterate our view that bottom-up selection matters as there is no one-size-fits-all pathway to circularity.
  • While recycled plastic bottles may not be the solution for this application, we continue to see various use cases and demand growth for new materials overall.
  • Additionally, we see increasing traction in “product-as-a- service” business model shifts, where subscription-based sales could shift cash flows while delivering sustainability improvements.

For more, see Perspectives: LEGO's plastics' commitment, fixed income innovation, US strike implications , 10 October, 2023.

UBS Trending: Watch Amantia Muhedini and Michelle Laliberte discuss plastics alternatives