Plastics and packaging is a hot topic for business and government as consumers’ demand for change grows.
Thanks to the ‘Blue Planet effect’ and the sustained effort of campaigning organisations such as Extinction Rebellion and Greenpeace, consumer attitudes are hardening against the over-use of plastic, with 82% saying they want to cut down the amount of plastics they use. As a result, investors are increasingly viewing packaging as a business risk and demanding action from portfolio companies and asset managers to tackle the issue.
Businesses have started to wake up to the plastics challenge at a more functional level. They are taking steps to reduce the amount of plastic packaging in their products and finding ways of increasing the amount of recyclable packaging they use. The government too is responding to growing pressure, not least because the cost of processing the 3.3 million tonnes of plastic packaging waste that is produced in the UK each year sits with local government and the taxpayer.
However, efforts to tackle the volume of packaging waste produced are insufficient to address the bigger, more fundamental challenge that, in the very short term, the financial burden of using plastic packaging will become so high that businesses will not be able to continue using it as before.
The plastics squeeze is happening on three fronts. The first is the skyrocketing cost of packaging recovery notes (compliance fees that businesses have to pay for their packaging waste). The charge for plastics has risen from an average of £50 a tonne in 2017 to more than £400 a tonne today. For every £1,000 a business was spending in 2017 on plastics compliance, it is now spending around £8,000, and all the signs suggest the figure will only rise.
The second pressure comes from a new tax that comes into play from April 2022, which will see an estimated charge of around £150–£200 per tonne for plastic packaging that does not meet the criterion of containing at least 30% recycled material.
In the very short term, the financial burden of using plastic packaging will be so high that businesses will not be able to continue using it as before
The third, and perhaps the most significant, challenge will come from the new extended producer responsibility legislation, which will force producers and users of packaging to pay the full net cost of its collection, reprocessing and recycling. As a result, by the government’s own calculations, packaging compliance fees will be 21 times what they were in 2017.
All this represents significant cost inflation for businesses, but few organisations know how to defuse this ticking timebomb. Reduction and recycling have an important role to play, not just to manage compliance costs but also to protect the environment. Yet plastics reduction and recycling alone cannot prevent costs rising – there simply is not enough plastic in the recycling economy to cope.
Time for a rethink
The new operating environment calls for companies to rethink their business model so that plastics and packaging is not seen as a compliance and cost management issue. There is a need instead to understand the fundamental changes that have to be made to the business for it to thrive sustainably and profitably both now and in the future.
Finance teams have a critical role to play in preparing their businesses for all this. One priority task is to give the right person the job of sizing the problem and forming a response. Currently, even in the largest organisations, plastics compliance is still considered as little more than an overhead, much like a monthly gas bill, and paying for it is part of a fairly junior person’s role. It should now be considered an important job in its own right, and given to someone with the right skills and knowledge as a short-term priority.
It is equally important to understand the nature of the financial risk to the business today, and how that might change as a result of shifting plastics policy and the broader packaging landscape. Finance teams need to shine a light in their organisations around the extent of their use of plastics – and other non-recyclable packaging – today and in the future, and model the costs. It is only once this job is done that the business will be able to forecast the impact of potential cost increases on the bottom line.
A third area of focus should be to make a case for fixing the disconnect that typically exists between the people deciding which packaging to use, the person who procures that packaging, and the person in the finance team paying the packaging recovery note bill.
In the future, businesses will need a packaging strategy to minimise their exposure to the future costs of using plastics and other packaging, and the finance team should lead on making the case for this.
The plastics challenge will bring significant transformation and disruption to every business affected. This is not something that someone with delegated responsibility can overcome alone. It requires buy-in at board level and commitment across the organisation, which means leadership on the issue, from the CFO or FD, to ensure a whole-business response.
There is competitive advantage to be had by being ahead of the curve. But in addition to the reputational benefits in the eyes of customers whose spending will increasingly be governed by sustainability considerations, businesses that act now will be better prepared for further legislation that will have an impact on their operations. They will also have a business model that is sustainable in the long term.