As the European Commission considers the future of recycling targets, UK industry and its investors are considering how they can thrive in an increasingly circular economy.
The regulatory framework is providing a clear signal: increased recycling and reuse will be strongly incentivised in the short to medium term, with greater recovery of materials and energy driving more efficient economies across the EU.
But the scale of the targets can be daunting, and the UK will need a transformation in terms of infrastructure, consumer behaviour and off-take markets for recovered materials working in concert.
Investors viewing this challenge will recognise that a circular economy relies on the balance of two forces:
- a ‘push’ from regulation or consumer pressure, to drive waste away from landfill and other ‘least-cost’ disposal options; and
- a ‘pull’ from market demand or incentives, which places a value on the recycled/reused materials and means that each tonne collected is no longer a waste but a commodity.
The Government already provides a strong push away from landfill, through a combination of recycling targets, landfill tax escalation and direct investment in infrastructure. There is also clear policy intent to drive the UK further up the waste hierarchy and tackle crime.
But the market pull for recycled materials is less strong and considered unpredictable by many investors because of the limited number of UK users of recycled materials and fluctuating recyclate prices.
Assuming that a robust policy regime continues in the UK, then future investment in the circular economy will be shaped by how this market demand develops. It will determine how much value the UK can capture through domestic infrastructure and how much we will have to rely on exporting material for recycling overseas.
One of the ways to improve market demand is to generate high-quality recyclate products, which are competitive with virgin materials and can be used to meet domestic demand. This requires a different mindset when developing infrastructure projects, with a focus on creating valuable products through processing/upgrading materials and clean segregation rather than simply minimising disposal costs by extracting recyclable tonnage from the waste stream.
As an example, waste plastic could either be collected, sorted and baled for export or reprocessed into a high-quality granulate that UK businesses use for remanufacturing, for example, to create recycled plastic films, bags and other products. While both options lead to increased recycling and efficiency in the use of materials, the direct reprocessing and remanufacturing route is a clearer example of the circular economy in action.
This change in mindset will deliver many of the benefits which are widely sought from the waste industry: encouraging innovation, creating skilled jobs and delivering investment for local communities. The Green Investment Bank is already observing developers placing efficiency and quality at the core of their project proposals, seeking to generate revenue from valuable products rather than relying on gate fees to underpin project economics.
But this transition also presents a due diligence challenge for both lenders and equity sponsors. There are a wide range of recyclate markets and sub-sectors, each with unique market dynamics that investors need to understand in detail.
It can be easy to forget how specialised the waste sector is and the depth of understanding needed to be confident of the pricing and risks associated with a project based on commodities. For example, a project for recycling waste tyres and one to recycle plastic bottles may seem similar, but the technologies and markets they involve are completely different, requiring detailed due diligence to support investment into infrastructure lasting for more than 20 years.
This challenge is compounded by the diversity of infrastructure required to deliver a truly circular economy – there are only so many areas that an investor can be ‘expert’ in at once.
While the transition to a circular economy is an exciting opportunity, it will require investors that are open to exploring a range of potential investments and willing to commit resources to the diligence needed for success.
Chris Holmes is managing director for waste and bio-energy at the Green Investment Bank