ESG Focus: Strong Reporting Season For Circularity, Nature, Biodiversity and AI

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: Strong Reporting Season For Circularity, Nature, Biodiversity and AI

The circularity theme kicked off in earnest for the August 2023 reporting season highlighted by packaging companies, biodiversity themes and plenty to say about AI.

-Reporting upped on circularity, biodiversity and AI 
-Packaging companies and consumer goods companies prepare
-Movement on waste and water recycling
-Nature mentions on the rise

By Sarah Mills

There was movement at the circularity, biodiversity and AI stations this 2023 reporting season, with several capital expenditure bills incurred.

Packaging companies and fast-moving-consumer goods companies upped commitments to packaging circularity in preparation for national packaging targets in 2025.

Waste recycling and water management also progressed, buoyed by REITs attempting to meet NABERS ( National Australian Built Environment Rating System) ratings and among low-emissions companies where water consumption is often more central to their operations.

Biodiversity (which includes water and nature) also made a surprising show this season as a few majors prepared the new Taskforce of Nature-related Financial Disclosures (TNFD).

The TNFD has just published its final recommendations on standardised, voluntary corporate reporting, biodiversity-related impacts, dependencies, risks and opportunities.

Last but not least, AI entered the stage as the new reporting season darling, following the technology’s strong media push this year.

While emissions reporting has advanced to the point that it has become easier to measure progress against targets than individual company’s capex and green projects, circularity and biodiversity reporting are still at the target-setting stage and the focus remains on individual company initiatives, save for REITS which are relatively advanced with the NABERs star-rating system.

This is the second of FNArena’s three-part reporting-season series (the first covering emissions); and the third instalment will cover safety, modern slavery, indigenous relations, remuneration, cyber hits, and general governance.

Again, this article leans heavily on Macquarie and Jarden research.

Packaging Recycling In Spotlight

For the past few reporting seasons, it’s been emissions, emissions, emissions, with a smattering of circularity, governance and social themes.

But this August 2023 reporting season witnessed quite a bit of activity on all the traditional laggards.

In this section, we cover some of the packaging companies’ emissions alongside circularity initiatives to provide a more rounded view of their overall ESG progress.

Starting with circularity and to provide context for targets, the Australian government plans to increase waste recovery and recycling rates to 80% from all waste streams (it was 63% in 2020-21).

It has legislated a progressive export ban through 2021 to 2024 on the country’s main waste streams of plastic, paper, glass and tyres.

This is not much of a stick for industry, however, given the waste is just piling up on the fringe of the cities given Australia has the luxury of space. 

The government has also set packaging targets for industry. 

The four targets to be achieved by 2025 include:

-100% of packaging to be reusable, recyclable or compostable.
-70% of plastic packaging to be recycled or composted.
-50% average recycled content to be included in packaging.
-The phase out of problematic and unnecessary single-use plastic packaging by 2025.

It is important to note that these targets are commitments only and have yet to be legislated and it is clear that majors like Amcor ((AMC)) are lagging these targets. 

The government has agreed to reform packaging regulation by 2025 but the pace of progress by some in the industry suggests they give it short shrift and doubt legislation will be forthcoming. Global standards may end up being the driver.

Back To Reporting Season

Packaging giant Amcor announced in December a memorandum of understanding with food processor Mondelez International (think Cadbury) to build a joint-venture recycling plant in Victoria using Licella’s catalytic hydrothermal reactor technology.

Then just in time for reporting season in August, the company announced a financial commitment to the plant of $80m for the first 20,000 tonnes a year capacity, and more than $200m when it exceeded its target of 100,000 tonnes, according to the AFR.

Licella’s technology, which claims to be able to recycle almost all used plastic into virgin oil for re-use in plastics manufacture (and as fuel), which contains -80% to -90% less carbon than crude oil, has yet to be commercially proven. 

But the cake is just about baked with Dow Inc and related Licella company Mura set to open the first commercial plant in Teesside in Britain’s north-east later this year. Another three plants are set to open in other countries by some of the world’s big petrochemical companies.

The Victorian plant is expected to take 18 months to build. 

Amcor has advised it is on track to supply 30% recycled content in packaging by 2030. This appears to be well behind the national target but the figure represents 30% of its global portfolio.

Should Licella’s technology deliver on its promise, the good thing for Amcor is that the technology claims to be highly efficient and easily scalable, allowing Amcor to move quickly to meet changes in the regulatory landscape. The company does not appear to have any major back-up initiatives (although it has many small ones globally), so it must be confident.

Pact Group ((PGH)) signed a recycled packaging agreement with Woolworths ((WOW)) and Aldi and advised it was on track to meet 30% average recycled content target across plastic by the end of FY25 – again well short of national targets. It is currently at 12%.

The agreement with Woolworths involves Pact Group supply sustainable package for use in it its house brands – 18 kilotonnes in all.

It will be interesting to see how Pact Group’s efforts will stack up against Amcor’s Licella offering given theoretically the latter’s environmental credentials are high, and the quality of the plastic is as high as virgin plastic. 

Other forms of plastic recycling typically result in degradation of the plastic with each recycle. Water and electricity use in production could prove deciding factors as well as capital expenditure and licensing fees.

Macquarie observes that the sale of 50% of Pact Group’s crate pooling business during the year is likely to be used to accelerate investment in the company’s Circular Economy Strategy.

On the downside, the analyst also noted the company had logged a -$53m pre-tax impairment due to stranded and redundant plant and equipment, related to recycling.

Macquarie forecast continued impairments relating to stranded assets and redundant plant and equipment as the company’s recycling investment continues.

The company aims to build scaled recycled HDPE (high-density polyethylene) packaging solutions, says the analyst.

Orora ((ORA)) advised it has increased its recycled glass content, advising it had developed 30,000 new sources across all Australian states for the material in FY23.

The company’s corrugated board recycled content rose to 57% from 54%, putting it well within its 60% 2025 target and above the 50% government target.

On the metal recycling front, Sims ((SGM)) announced its Resource Renewal pilot plant was nearing completion.

The plant is designed to take material from cars during the recycling process, and from end of life consumer goods, to be use in the production of valuable productions.

Its core metal recycling business is also likely to benefit from growing momentum in green steel and the likely wider adoption of electric arc furnaces.

The company points to US and EU commitments to negotiate the world’s first carbon-based sectoral arrangement on steel trade by 2024 and the formation of the Global Steel Climate Council which supports a global standard to accelerate the transition to  green steel.

Electric arc furnaces require certain grades of steel and Sims advises it has been undergoing trials to upgrade low-grade scrap to higher grades with promising results.

Of Waste And Water

Corporations are embarking on waste and water management in anticipation of forecast regulation, although in the REITs sector it is very much investors driving change through the NABERs star rating.

To date, both have taken a back seat to climate reporting but the day is soon approaching when they will be expected to lift their game.

We have logged the main initiatives or progress against target for this reporting season and divide them into non-REITs and REITS for ease of reading.

Non-REITS

Among the non-REITs, analysts observed a few standouts on the waste and water fronts.

The amount of waste Transurban ((TCL)) generated in FY23 jumped 256% from FY22, observes Macquarie. The percentage of waste recycled rose to 49% from 47%.

The company didn’t provide much detail on this or on water usage in its FY23 ESG Progress statement, saying only that it planned to reduce waste and increase recycling and minimise the use of potable water.

Ansell ((ANN)), for which water consumption represents a large percentage of its sustainability challenges, set a target of reducing water withdrawals by -35% by the end of FY25 and advised it is conducting reverse osmosis pilots in Sri Lanka and Malaysia, and water optimisation in Thailand.

Notable progress was also registered on the waste front: “We have set impressive sustainability targets for our operations, including zero waste to landfill from manufacturing facilities by year-end 2023,” advised the company.

CSL ((CSL)) increased its waste recycling rate by 6% to 44%.

Endeavour Group ((EDV)) conducted waste audits through its Retail Stores and Hotels and plans to publish a waste strategy in FY24.

It was also examining ways in which its Food Organics Garden Organics (FOGO) business for its hotels, with FY23 trials.

Water is a big ticket item from Inghams Group ((ING)) and the company kicked of construction in December of a $15m water recycling and treatment plant at Osborne Park, WA, providing some indication of future capital expenditure.

The company managed to divert 86% of waste from landfill during the year.

Management announced it would introduce an environmental water consumption measure to its FY24 STI (short term incentive) scorecard, adding a 10% waiting to it ESG for STI, taking the total weighting to 30% in FY24 from 20% in FY23.

JB Hi-Fi ((JBH)) cut plastic bag usage -12% in FY23 and plans to phase them nationally by the end of this years, and will use 100% recyclable paper bags instead and plans to improve its recycling infrastructure across its stores.

The company also intends to introduce a customer trade-in offer for old devices, paving the way for refurbishment and resell.

Treasury Wine Estates ((TWE)) expects smart water meters will be installed at 100% of high and medium risks sites by June 30, 2025.

It is also developing a sustainable packaging solution and has set a target of 100% recyclable, reusable or compostable back by 2025; and for 100% of packaging to comprise 50% average recycled content by the end of 2025.

Among the small caps, Macquarie observes Bapcor ((BAP)) plans to upgrade its pallet management strategy and waste reduction (a cut of -250 a month of damaged pallets). Over the year, the company diverted 47.2% of waste from landfill. 

GUD Holdings ((GUD)) is adopting sustainable packaging principles to reduce associated waste and APCO targets, hoping to reach an advance rating by FY25.

Super Retail Group ((SUL)) diverted 58% of waste from landfill, steady on the previous year, and has a target of 30% by 2030.

Australian REITS

Among the REITs mentions by analysts:

Abacus ((ABP)) retained its 4.5 star water rating and increased the amount of waste diverted from landfill in FY23 to 41% from 35% in FY22.

Charter Hall Retail REIT’s ((CQR)) NABER water for retail rating rose to 4.2 stars from 4.1.

Dexus’ ((DXS)) water rating fell to 4.5 from 4.8 in the first half as water intensity increased 30.8% year on year. Macquarie observes it is still below the company’s FY19 baseline target of 34.6%.

HomeCo Daily Needs REIT’s ((HDN)) water rating slipped to 5.1 stars from 5.3 in the first half.

HealthCo Healthcare & Wellness REIT ((HCW)) says it has achieved a 5.3 star water rating.

Region Group ((RGN)) advised it had conducted audits at all its properties during the financial year and committed to standardising waste recovery contracts and to rid its head office of single-use plastics.

It was a backsliding year for Vicinity Centres ((VCX)), for which waste generation rose 15% and waste diversion fell -2% to 51%. The company’s water intensity increased 11% year on year.

Biodiversity Kicks Off In Earnest

Despite a Jarden non-executive director survey showing directors were less focused on biodiversity due to the lack of useable data, a high proportion of companies mentioned biodiversity/nature themes in their FY23 results.

It is in biodiversity and nature that industry-specific and business specific initiatives really stood out.

The Taskforce for Nature-related Financial Disclosures (TNFD) has set a 2030 biodiversity target for 30% of land and water to be protected by 2030.

In the last few weeks, the taskforce also published recommendations on standardised, voluntary corporate report of biodiversity-related impacts, dependencies, risks and opportunities.

What was surprising about the FY23 results was the number of companies mentioning biodiversity. A2 Milk ((A2M)), BHP Group ((BHP)), Brambles ((BXB)), Commonwealth Bank ((CBA)), Cooper Energy ((COE)), Coles ((COL)), Dexus, Endeavour Group, Evolution Mining ((EVN)), Fortescue Metals Group ((FMG)), Goodman Group ((GMG)), IGO ((IGO)), Mirvac ((MGR)), Mineral Resources ((MIN)), National Australia Bank ((NAB)), Northern Star Resources ((NST)), Pilbara Minerals ((PLS)) South 32 ((S32)), Sandfire Resources ((SFR)), Stockland ((SGP)), Treasury Wine Estates, Woodside Energy ((WDS)), Wesfarmers, Woolworths  all made it onto Jarden’s list.

Some mentions were more financially impactful or interesting than others, so we will focus on these for brevity’s sake and we don’t include carbon-offset plantations as that doubles up with Climate imprimaturs.

A2 Milk set a nature target to cut nitrogen loss to waterways intensity by -45% per kilogram of milk solids by 2030 for farms in the Canterbury region of New Zealand from a FY18 baseline.

BHP, in a mining first, established a natural accounting pilot study at Beenup, and has completed biodiversity and/or ecosystem baseline mapping for land and water areas at operated assets.

Pallet producer Brambles has helped grow 3.85m trees to compensate, having committed to a “forest-positive” target of 2 trees for every tree used to produce its timber pallets by FY25.

Endeavour Group has also identified biodiversity as a key challenge for its business. It is sustainable wine growing Australia certified and Fourth Wave Wine has planted more than 1.3m trees in the Yarra Yarra biodiversity regeneration corridor in WA.

IGO rehabilitated 153 hectares of land in FY23 and logged a -57% reduction in groundwater extractions at Nova.

Mineral Resources has 1217ha under rehabilitation, Northern Star has set aside land for enhancement of the Mallee-fowl habitat, and Pilbara Minerals has chosen to protect the Northern Quoll population.

Sandfire Resources ((SFR)) had a lot to say about projects underway to meet its three long-term biodiversity goals: to demonstrate no net loss of key biodiversity values at its legacy sites and to demonstrate a net gain at greenfield sites; pursue alignment with global frameworks; and use digital solutions to collect and share data with governments and agencies.

Treasury Wine Estates is helping growers certify produce and advises 86% of fruit sources from Australian growers is certified (100% in New Zealand). 

December reporter Woodside has embarked on a Native Restoration Project in WA with the aim of managing their own carbon plantings on 5600ha at company-owned properties – planting commenced in the June half and was 40% complete by June 30. I know we said we wouldn’t include carbon offsets, but it is large enough to gain a mention.

Woolworths has a few initiatives on the run but mainly the company was focused on supply chains. Management advises that its 2023 AR disclosure aligns with the upcoming TNFD.

The company has started determining the nature impacts of its priority fresh produce, and beef and salmon value chains, and the sourcing of high-risk commodities such as pulp, paper, timber, palm oil and cocoa in its own products, arising from deforestation.

It aims to source products from land that has not been deforested since 2020. The TNFD is setting a retrospective date to discourage large-scale clearing and the lighting of forest fires ahead of the introduction of biodiversity initiatives.

AI Storms Onto Reporting Season

Given all the hoo-ha about AI this year, it is perhaps not surprising that companies jumped on the bandwagon and showcased their AI moves, some of which is coming at substantial cost.

Jarden lists all mentions of AI, including for improvement of the customer experience, sales, innovation and operational efficiencies, but again for brevity’s sake, we will only list the more interesting or impactful ones as they relate to ESG, keeping in mind that broad operational efficiencies and innovation do generally play to corporate sustainability.

Companies to mention AI this reporting season included: Adairs ((ADH)), BHP, Brambles, Carsales ((CAR)), Corporate Travel Management ((CTD)), Cleanaway Waste Mangement ((CWY)), Domain Holdings ((DHG)). Flight Centre ((FLT)), Healius ((HLS)), Hub24 ((HUB)), Harvey Norman ((HVN)), Insurance Australia Group ((IAG)), IPH ((IPH)), nib Holdings ((NHF)), NextDC ((NXT)), QBE Insurance ((QBE))), Ramsay Health Care ((RHC)), REA Group ((REA)), Seek ((SEK)), Sonic Healthcare ((SHL)), Seven West Media ((SWM)), Temple & Webster ((TPW)), Wesfarmers ((WES)), Worley ((WOR)), Woolworths.

Of those using AI for sustainability, BHP says it was using AI to become safer, more efficient and more sustainable, and advised it was using autonomous trucks at some sites in WA and Qld which had resulted in a -90% reduction in heavy vehicle safety risks.

Brambles is using AI to remove risks from supply chains and improve sustainability, observing AI and machine learning helped recover 10m pallets in FY23, and helped deliver a reduction in the pallet damage rate since FY21. The company plans digital operational expenditure of -US$110m in FY24.

Nib Holdings is attempting to see how AI might can provide health insights at a population level, claiming the strategy is at the heart of its sustainability agenda, focusing on communities suffering from gaps in access to health and outcomes, particularly indigenous populations.

Wesfarmers is using data and AI to advance its capability in Kmart as the business digitises its supply chains.

Phew! So that rounds up the FY23 reporting season for circularity, waste, water, biodiversity and AI.

Stay tune for the riveting third and final reporting-season instalment, which covers safety, modern slavery, indigenous relations, remuneration and governance.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms