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Canny investors profit from waste

Investors should be looking in the bin for inspiration, writes Robbie Parker, analyst at Osmosis Investment Management

There are vast opportunities in waste to be exploited. The World Bank estimates that the annual cost of solid waste management alone is to rise from US$205bn (£131bn) to $375bn by 2025. During 2010, the UK Government budget announced an increase in the standard rate of landfill tax of £8 per tonne each year from April 2011 until 2014 with a floor price of £80/tonne in place until 2019/20. This increase in the cost of landfill is a trend being replicated on a global basis. Global resource prices are rising and so the opportunity cost of ‘wasted resources’ is rising too. 

Until relatively recently, waste has been considered an expected and necessary cost.  Zero waste has always been a possibility and now ‘negative waste’ is the ultimate target. That is, not only creating zero waste, but using the waste of others as a productive input as well.  Asahi Glass (Japan) currently has a recycling rate of 99.8% and was the first in the flat glass industry to work towards the collection and recycling of used glass from municipalities in Japan. Although economics ultimately drives change, social influences are putting further pressure for a move to a more sustainable business model.

At the lower end of the market capitalisation scale, there are the small-mid cap companies which are offering solutions and technologies to efficiently manage waste through corporate or municipal contracts.  These companies vary from complete supply chain management, culminating with waste-to-energy or recycled materials, to the transportation and sorting.  There are multiple avenues from which an investor can exploit this opportunity. 

Returns from waste management companies have been strong for investors.  Waste constituents in the Osmosis Environmental Enterprises Index have on average outperformed the market on a 1, 3 and 5-year basis.

The Osmosis Environmental Enterprises Index focuses on three key areas: Low Carbon Energy Production, Energy Efficiency & Management and Waste, Water & Pollution Control. It covers companies whose shares are publicly traded and that have a single business focus, who are at the forefront of producing solutions to global energy and environmental issues. 

Waste companies are benefitting as the global economy transitions from a linear economic model to a more circular one. Exciting new technologies and processes, however, are not confined just to ‘specialist’ waste firms. Innovative and adaptive technologies can ultimately be found on the balance sheets of the largest companies globally.

For example, Unilever runs over half of its factories at zero waste. This is compared to 2011, when just 25% of its 258 factories achieved zero waste. The redesigning of its packaging has resulted not only in a reduction of factory waste, but a more efficient method of transporting goods. Although only small changes have been implemented, these changes add up to a large impact. Unilever estimates that the annual savings are worth at least US$94 million per annum. Not a drop in the bucket, even to a large organisation.

The Osmosis Model of Resource Efficiency (MoRE) was created to systematically identify innovative companies that are able to generate greater revenue from less productive inputs. The investment model is based on the analysis of observed energy and water used and waste created in producing a unit of revenue for any given company.

As seen in the Unilever example, companies that produce less waste than peers can create significant cost advantages. Not just cost savings, such companies are extracting greater levels of economic value from their inputs. It is important to recognise that it is invariably an economic imperative which drives corporate behaviour to a zero waste target and below.

BMW has been one of the most resource and waste efficient businesses in the world for years.  BMW sweats its assets far more efficiently than its peer group. In fact, the Leipzig and Munich assembly plants produce an average of only 50g of disposable waste per vehicle manufactured. To put this into perspective, the amount of disposable waste generated per car is less than the weight of the keys. Its management are successfully adopting this principle throughout the manufacturing business, showing the same type of efficiency in its use of both water and energy as a leader in the automobile industry in resource efficiency.

From an investor perspective, low waste intensity in an organisation is an indicator of management foresight, highlighting how efficiently a company converts its many inputs into revenue generating outputs. Empirical evidence tells us that companies which produce less waste per unit of revenue than their competitors tend to display greater net margins, leading to a greater return on equity and ultimately greater shareholder return. Additionally, high waste efficiency is associated with newer plant and equipment and higher return on assets.

Competitive advantages have come about from good management running these companies in a better manner, generating internal improvements and efficiency gains supplemented by smaller companies providing leading edge technologies and services.  Shanks Plc is a good example of this, having recently signed a deal with both M&S and Heineken.  An anaerobic digestion energy deal involves M&S sending its food waste to Shanks to be converted into biogas for renewable energy generation and digestate for use as a nutrient-rich soil conditioner. The Heineken contract involves Shanks recycling glass bottles for the international brewer. Both companies have avoided hefty landfill charges, while generating resource (energy for M&S and recycled glass for Heineken); a win-win for all companies.  Synergies such as this generate both short-term and long-term shareholder value for all involved.

Today, waste is as much an economic opportunity as it is a costly expense.  The efficient treatment of waste in a production cycle, down to a zero level and below is an indicator of management foresight and management quality.  Those companies solely in the waste management business are gaining traction in a world where the efficient management of waste is one of the largest opportunities going. Investors would do well to take heed of waste efficiency. It may be very profitable.

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