Responsible Investment

The ESG implications of COVID-19: Focus on ocean health

The ESG implications of COVID-19 for our oceans

June 2020

Oceans make up about 71% of the earth’s surface

Roughly 97% of all earth’s water is in the oceans

The ocean ecosystem provides over 90% of the habitable space on earth¹

50% of the oxygen on earth is generated by the oceans²

Oceans absorb around 33% of global carbon dioxide emissions³

A healthy marine environment is critical to the health of the planet and its inhabitants. Currently only 2-6% of our oceans are classified as Marine Protected Areas (MPAs), and it is estimated that we need 30% protected to ensure a thriving ocean ecosystem⁴. In addition to the social and environmental benefits, around $2.5tn of economic value is generated annually by the oceans⁵.

Oceans in crisis

Human activity has had a massive effect on our oceans, and they have not received the protection needed to support a sustainable future for our planet. Climate change is having a profound impact – we are seeing ocean acidification causing biodiversity damage, due to the absorption of higher levels of CO2; melting ice sheets; and rising sea levels. 37% of people live in coastal communities⁶, and they are particularly vulnerable to these impacts.

80% of ocean pollution comes from land-based activities⁷.

The lack of protection has allowed ocean pollution to accelerate unabated, with issues of plastic waste, pesticide and nutrient runoff, chemical or oil leaks and spills, all being factors that have a significant impact on the marine environment.

2020 was set to be a significant year of progress for oceans, with activities such as the implementation of key regulation, the 2020 UN Ocean Conference and COP26. With the outbreak of the COVID-19 pandemic, priorities have shifted and the way many of us do business has totally changed. Some regulation has been delayed and COP26 has been postponed to 2021. However, efforts are being made to regain lost momentum, and some conferences and resources have gone online, making them more accessible to a wider audience, such as the World Economic Forum’s ‘Virtual Ocean Dialogues’.

Here we are going to focus on the issue of plastic and the circular economy, and the impacts COVID-19 is having. We are seeing both the amount of waste being generated increase and disruptions to the operational functionality of the waste management industry.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Use our handy glossary to look up any technical terms you are unfamiliar with.

Plastic pollution: the issue

It has been estimated that on a business-as-usual basis there would be more plastic than fish in the ocean by 2050, with a huge 8 million tonnes currently reaching the ocean each year⁸.

Use our handy glossary to look up any technical jargon you are unfamiliar with.

1.9 million pieces of microplastic

per square metre were found on the Mediterranean ocean floor, likely to have come from clothing fibres, other synthetic textiles, and small fragments from bigger plastic items that have broken down over time⁹.

In the River Nile, three-quarters of fish

have been found to contain microplastics. The Nile is the longest river in the world, running through eleven countries and the pollution was found all the way from the source to where it enters the sea¹⁰.

30% of fish caught in the UK

were found to contain plastic¹¹.

50% of all protein consumed

in least developed countries comes from seafood¹². Given widespread plastic contamination, this may have human health impacts which are not yet fully understood.

Much momentum has been created in the past few years to drive the reversal of these trends, with consumer demand being strong for alternatives to single-use plastic in some markets, and global media shining a light on the issue. Companies have also made bold commitments and policy makers have been working on national plans for improving the marine environment in relation to plastic pollution.

Product packaging – a shift back to plastics

Whilst some consumers were moving towards purchasing models that demanded less reliance on single-use plastic, that trend has now reversed, with people currently purchasing more products in single-use plastic once again. The Food Standards Agency and the World Health Organisation have said that it is “very unlikely” that people can catch COVID-19 from food, and that there have been no confirmed cases of transmission via food or food packaging. However, there is understandable consumer concern, and the preference is to buy food wrapped in plastic, rather than loose items at this time. Some of the change is due to the closure of fresh food counters, where consumers could often bring in their own containers, and now are buying the packaged food items once more. For instance, sales of pre-packed bread and battered fish are up around 54%, and sales of loose bacon, sausages, cooked meats and cheese were down considerably compared to their pre-packaged alternatives in April 2020, versus the same timeframe in 2019¹³.

Another factor is single-use plastic for the On-The-Go category, where consumers were increasingly using reusable cups and bottles that they were taking into cafes. Whilst the closure of many cafes and the prevalence of home working has reduced total demand in this area, as lockdowns ease, most cafes will no longer be accepting the use of reusable cups for safety reasons¹⁴. We are, therefore, likely to see a spike in this waste product again here, but hopefully one that will be short-lived.

We hope that the current situation will drive further innovation in packaging materials, to satisfy consumer concerns around both safety as well as the desire to use less plastic.

Adding to the challenges, some legislation has been paused. For example, UK regulation banning plastic straws, stirrers, earbuds and other such single-use items was due to take effect in April 2020, but has now been postponed. This is due to slower and and disrupted supply chains for the alternatives and to reduce pressure on companies that are already in crisis¹⁵. The charge for plastic carrier bags has also been suspended for some outlets during this time¹⁶.

We predict that whilst these negative trends may continue for some months, they will ultimately reverse back, as consumers do want to see meaningful change in this area and companies are already responding. We hope that the current situation will drive further innovation in packaging materials, to satisfy consumer concerns around both safety as well as the desire to use less plastic. We will continue to follow this issue carefully and engage where relevant to make sure that we maintain the progress that was being achieved.

Personal Protective Equipment (PPE)

The use of PPE is critical to protect medical staff and other key workers. Much of it is made from single use plastic or has components which are; and at the point of disposal, it is generally medically contaminated and so can’t be recycled¹⁷. The use and disposal of latex gloves and masks has also increased by people around the world, and we are seeing pictures of these now entering the marine environment¹⁸.

At this point in time, waste from this essential use of plastic is unavoidable. However, we do think going forward that medical companies and suppliers of such equipment can innovate at the design phase, to think more and more about what happens to the product at the end of its life. We think that this is an opportunity for these companies, and one that would have a significant positive impact going forward.

Recycling – the circular economy disrupted

In a circular economy, a reliable stream of recycled inputs is required as part of an integrated supply chain. The COVID-19 pandemic has created disruption to this system, and affected the amount of recycled materials in supply chains including paper, aluminium and plastics. There are now interesting questions being raised as to whether processes could be automated or redesigned to prevent disruptions in the future.

Recycling collection systems have suffered disruption. In the UK’s lockdown, for instance, 46% of all local authority waste management services have stopped or been reduced, as worker safety is of of course paramount in these public service industries¹⁹. Consumers have therefore returned to a higher rate of disposing waste products in the traditional bins, rather than recycling. People have also been spending much more time at home, and so waste disposal has been concentrated in residential areas, rather than distributed as before during commutes or in office areas, adding to the challenges.

The disruptions to recycling collection and processing are threatening the supply of renewable products back into supply chains. 9% of plastics are, on average, recycled²⁰ – much lower than for other materials such as aluminium (64% is the industry average²¹). Many companies have targets in place to increase the amount of recycled content in their packaging, and the fact that recycled inputs aren’t coming into the cycle to the same degree, could delay the achievement of these ambitions.

We believe that whilst there may be pauses, and processes slowed down during this difficult period, the momentum that had previously gathered will pick back up.

The constraints in existing waste management systems, being emphasised now, are adding to the pressure on governments to increase the capacity of recycling infrastructure and processing facilities²². So, a silver lining from this could be that we see real advancements in this area, with investments being made which would help towards building a more global circular economy.

Adding to the practical challenges in the supply of recycled plastic, the economics have also become more challenging. The crude oil price has fallen significantly, 40% since the beginning of the year²³. This is due to a combination of national producer disputes, the economic slowdown, reduced demand and a surplus in supply. Given that virgin plastic (PET) is made from oil, the prices of the two commodities are intrinsically linked. Therefore, there is increased pressure on the financial viability of using recycled materials; recycled PET (R-PET) was a more expensive option for companies previously, and so now, for some companies, using virgin PET remains even more attractive on a cost basis²⁴. We do encourage companies to still be using RPET where possible.

Conclusion

Whilst the global pandemic presents some significant headwinds to the momentum that was being achieved in tackling plastic pollution, we are optimistic for the future; that the combination of consumer demand and corporate commitments will drive innovation and progress. We believe that whilst there may be pauses, and processes slowed down during this difficult period, that the momentum that had previously gathered will pick back up. We may even see that this event acts as a catalyst for solutions to be found at a greater scale, with increased innovation, at a more rapid pace, in particular within product design and recycling infrastructure.