“I don’t care if it rains or freezes, as long as I got my plastic Jesus”

Plastic waste has BOOMED from the 15 million tonnes we lobbed over the fence in 1964 to approximately 360 million tonnes in 2019(1).   The CO2 emissions from plastic waste are around 80% of the aviation industry’s total footprint (2).

The challenge for humankind is not only environmental pollution but also how to mitigate the impact on our health; plastic has health implications for our continued wellbeing at every stage of our lifespan. It’s estimated that 32% of it ends up in our oceans and rivers each year.

Single use plastic has, understandably, been given all the focus, given there is the least justification (or most guilt) for its continued use. Mechanical recycling rates are low and at best it ‘down-cycles’ rather than displaces the need for virgin resins. The process of ‘plastic pyrolysis’, which is basically a chemical reaction, breaks down plastic to its original naphtha state (a mixture of hydrocarbons). While pyrolysis is a good scrabble word it is not much use for solving our problems yet. There are significant challenges; it produces, for example, lots of diesel – not the favourite hydrocarbon child.  It also requires a very efficient collection mechanism. Therefore the process remains quite expensive compared to cheap virgin feedstock, particularly as commodity prices remain low.

Rain or shine we’ll need our plastics but it seems unlikely that this is enough to prop-up our extractive industries at their current scale. Currently, 69% of a barrel of oil is used in transportation industries (4). As more and more oil demand is displaced from the continued shift to clean modes of transport, the input costs will increase for plastics. On a relative basis other materials may become more attractive, the chemicals industry will therefore have a challenge to retain the relative attractiveness of its product to all its customers.

Even if all the challenges of chemical recycling are surmountable, companies are not investing fast enough. Why would they? I expect the economics look terrible. Currently many refineries, such as those on the US Gulf coast, enjoy geographic cost advantages. They are located, for example, close to supply or shiny new pipelines. The return on investing is likely lower for new projects to invest in recycling where their output will have no such advantage.

All the while the US keeps building pipelines to the Gulf with 20-year payback periods, enabled by loosened environmental controls.

“Cause Jesus’ plastic doesn’t hear
‘Cause he has a plastic ear
The man who invented plastic
Saved my soul.”
Source: ‘Plastic Jesus‘: song by Ed Rush and George Cromarty

1) J.P.Morgan Petrochemicals – Peak Plastic
2) https://www.mckinsey.com/industries/chemicals/our-insights
3) Ellen MacArthur Foundation
4) https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php

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Oil boycott…or not?

Oil, huh, good god
What’s it good for
Absolutely nothing, listen to me…

The recent drone strike on Saudi Aramco’s Abqaiq oil facility caused Brent crude prices to briefly spike over 20% on anticipated short supply. In the end the outage appears manageable but the market reaction was not surprising, with an estimated 5% of global supply offline. So normal service has resumed but it does remind us of our dependence on the black stuff.

Some commentators have fast forwarded to a future without oil… get rid of oil, aside from the environmental benefits, we’ll get less war, less tyranny, less arms deals… sounds good.

Not least because oil has had a hugely distorting effect on economies in the Middle East.  Kingdoms have had access to billions of gallons of light sweet crude through happenstance of geology rather than foresight. The resulting wealth has accrued to elites, with the tacit agreement that the status quo is maintained through services such as the provision of free education and healthcare.

There doesn’t seem to be anything sustainable about all of that. So the expected displacement of oil by renewable sources of energy should be a thing to celebrate. Not so fast, consider the destabilising impact this will have – just consider that the youth is 60% of the Arab population, and they will need to find meaningful employment.

These are currently wealthy countries, for example Saudi Arabia’s debt to GDP is only expected to rise to 25% by 2021. Its budget deficit is forecast by the IMF to rise to 7% of GDP this year. Oil is 12% of GDP for the UAE but for Libya over 50%, Norway’s is only 3%! This is not sustainable, so there is a race to invest and modernise. This will require structural changes to society if there is any hope of delivering the jobs that the population will need to sustain their prosperity.


This is not lost on governments they are investing billions of dollars to deliver a sustainable future; Qatar’s 14 sq km “Education City” on the outskirts of Doha, Saudi Arabia has been investing in its National Science, Technology and Innovation Plan (NSTIP).  It is a mammoth task, in a region that has struggled with decades of instability more challenge seems desperately unfair.

These are massive sustainability challenges for the region and the world – highlighted by the blinding glare of technological progress.  Solutions such renewable energy and storage solutions are key in addressing our climate challenges, let’s also hope that they lead to a better world for all.


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Diluted Disclosures

“We don’t have a sustainability strategy that sits separate from our business strategy, they go hand in hand.”

These were the words of Patrick K. Decker, President, CEO & Director of Xylem Inc, speaking during their Q2 earnings conference call on the 1st August this year.

If you don’t know Xylem, well the clue is in the name. They transport water. Xylem is the tissue found in plants that transports water from the roots to the leaves. Xylem (the company that is), says its mission is to solve water problems globally. They transport, treat and test water for government, municipal and industrial businesses. The name Xylem then, seems perfectly apt to us.

Some of this is less than glamourous. If you’re reading this in London then you have a lot to thank them for – they have delivered on huge infrastructure projects to upgrade waste water pumping and treatment infrastructure over recent years.

Given their end market (what we would call their product), then it’s not surprising that the company attracts a strong ESG investor base. It’s also not surprising to hear them talk about it during earnings calls.

Mr Decker’s words were music to our ears;

“In many industries and business models, positive sustainability outcomes are a cost of doing business. For Xylem, positive sustainability outcomes are a result of doing business.”

move well beyond, kind of, motherhood and apple pie – it always makes us cringe a little inside when we read sustainability reports and the emphasis is on cook-outs, cake bakes and fun runs. These are what we would class as ’immaterial’ disclosures and we see it all too often, these types of disclosure are so diluted, as it were, that they are irrelevant.

But companies such as Xylem understand that material ESG topics are now as important as any other financial disclosure.

 “All about making sure that we attract, retain the top talent across the landscape. And people nowadays, as you all know, they want to believe in something larger than themselves, and they want to work for a company that has a purpose.”

Investors more and more want to invest with a purpose too and like Xylem, we do not believe that ESG analysis is separate from our investment strategy, it is our bread and butter.  We spend as much time thinking about ESG as we do total addressable markets, competitive advantages, valuation, P/E multiples and cash flows.

“But that’s what’s really driving the sustainability goals. It’s good for business, it’s good for the planet, it’s good for everyone involved, and we have a unique opportunity and a role to play here in doing so“, Mr Patrick Decker.

At date of writing – Kames holds Xylem across a number of investment strategies

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Dark patterns: Abuse of power is a strategic mistake

Have you ever found that perfect hotel for your holiday online, only to click on it and find out you MUST BOOK NOW as they only have 2 rooms left? Of course you have- we’ve all been there.

Consumer products and media companies are well aware of human psychological frailties… and have been for decades.  This is a great video that highlights some of the techniques that are commonly used to exploit us (Kate Cooper: The Secrets of  Food Marketing).  Cleverly worded phrases to mislead us, techniques to make us believe that what we’re seeing is positive progress, and that mixed with our own willingness to be ignorant allows us to be exploited. Technology circles refer to these processes as “dark patterns”; there’s even a website devoted to uncovering the practice (Dark Patterns Hall of Fame). 

Consumers are increasingly aware of nefarious online practices and are beginning to ask the questions….

  • What do these platforms know?
  • What value am I giving away?
  • Is my “free” access to this platform worth that cost?

It is very hard for consumers to answer these questions and perhaps they will continue to wilfully ignore them… indeed Facebook and Instagram user data suggests as much. However, it is evident to us that bad practices eventually damage the strategic power of a business. Unsustainable practices are a form of long-term market friction that will eventually be discounted in share prices.  Frictions encourage regulation, slow growth or encourage disruptive competitors to arbitrage the incumbent’s unwillingness to change. As investors, the emergence of such strategic risk should (all else equal) lead us to change our view. For example, whilst we can still see positive social merit in social media platforms, we are now increasingly wary of the negative impacts and thus potential erosion of their strategic power. After all, the social impact of a social network is strategically important to them… the clue is in the name!  A recent example which has reached its ‘end game’ is fixed odds betting machines. These allowed people to ruin themselves financially for the dopamine rush of a fixed-odds bet reward.  This profiteering practice was unsustainable and has largely been regulated out of existence in the UK. Betting shops are now being closed with the ultimate cost evident in both job losses and falling share prices.

The ultimate tonic is transparency. Whilst consumers can be somewhat forgiven for being “wilfully ignorant” (as Kate Cooper explains), this makes us reflect on whether active investors should be doing a better job of identifying these unsustainable “dark patterns” when analysing companies. Why? Because being wilfully ignorant to negative second-order impacts doesn’t just damage society or the environment… it damages long-term shareholder value too.

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A Perfectionist Fallacy

“Electric cars: most of the pollution is still there”– it’s a sentiment you may well have heard. But where did it start? To pinpoint the exact moment would be tricky, so I’ll start my story last weekend when I read an interview with British Cyclist, Chris Boardman.

I’ll get straight to it- what shocked me the most, was his phrase: “The electric car is one of our biggest concerns”

He then continues: “It will make you feel like you’ve done something positive without having to change your behaviour. Most of the pollution’s still there – from the particles produced by tyres and brakes – and it doesn’t address obesity and health, it doesn’t address congestion, yet it will make people feel like they now have the moral high ground. Potentially, electric cars are a real problem.”

“Biggest concerns”? … wow.

He must have a long list of big concerns if electric vehicles make his list. How must he sleep at night with so many worries?

So, after a bit of digging I found a link to a 2017 Guardian article1 which claims Professor Frank Kelly said “Electric cars are not the answer to air pollution”.

Interesting. Perhaps I’ve been wrong all along? Or maybe not. A little more digging and I realise that Professor Kelly has been completely misquoted.  What he actually said was, “even zero-emission vehicles are not the complete answer to poor air quality.” And we’re not suggesting EVs are the answer to poor air quality- but we certainly won’t accept that more electric cars aren’t a significant improvement.

The article also claims that about half of all particulate matter (PM2.5 and PM10) comes from non-exhaust sources.  This seems to come from a 2014 report by the European Commission 2.  However, there are other details in the report that the Guardian article conveniently glosses over. I’ll save you the jargon by paraphrasing (obviously feel free to read the full report though!):

  • There’s a huge difference between emissions generated in residential vs. motorway settings. On the motorway brake-wear only contributed to 3% of overall non-exhaust emissions. Whereas, in a residential area this rises to 16-55% of non-exhaust traffic emissions.(So it’s not very accurate to cherry pick and say about half of particle matter comes from non-exhaust sources).
  • Then think about ‘airborne emissions’- 50% of brake-wear and up to 10% of tyre-wear emissions are airborne… the rest is deposited on the roads or the vehicle. So, there’s a problem with measuring this. Food for thought.
  • Then my main point to reference from the report- the study includes emissions from clutch and engine-wear, wheel bearings and corrosion of components. EVs don’t have a gearbox – therefore, no crunching gears. Electric motor friction accounts for a large portion of braking – so actually the amount that a driver uses the brake pads is less, and therefore the emissions are also less from this.

Let’s take the worst case scenario, say we do believe the quoted figure of nearly half – actually let’s just call it half.   The UK government’s 2019 Clean Air Strategy report states that road transport is responsible for 12% of PM2.5 emissions.  So, allowing for a bit of conflation say that EVs will only cut this by 50%, then that’s surely a huge step in the right direction?

So even the worst case scenario shows we are miles away from the conclusion that with EVs “most of the pollution is still there”.

This is a clear example of a narrative fallacy – presenting the solution as inadequate because it is not perfect.  Imagine a world where we dismissed all progress because it wasn’t progression. How terrible would that be?!

Instead, I prefer to continue to avoid perfectionist narrative fallacies and focus on companies that improve outcomes for society and for investors… even if they’re not quite at the perfect mark yet.

1 https://www.theguardian.com/environment/2017/aug/04/fewer-cars-not-electric-cars-beat-air-pollution-says-top-uk-adviser-prof-frank-kelly

2 http://publications.jrc.ec.europa.eu/repository/bitstream/JRC89231/jrc89231-online%20final%20version%202.pdf

3 https://www.wired.com/story/look-ma-no-brake-youll-drive-electric-cars-with-one-pedal/

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