#BigIdeas2019: Low-Carbon Manufacturing is a Massive Business Opportunity

Looking for a silver lining in the 2018 UN climate change report that concludes the most dire impacts of global warming are only a decade away? There is increasing evidence to support the theory that this global challenge may present “the biggest business opportunity in a century.”  As the authors of the McKinsey book Resource Revolution note, both the First and Second Industrial Revolution were characterized by widespread social and economic pessimism (if not doomsday prepping), followed by periods of accelerated innovation and growing prosperity. We think something similar is unfolding and the data points are everywhere:

• Government enforcement of environmental regulations is costing corporations like Anchor Glass Container tens of millions and shareholders are not happy.
• Both consumers and the media are becoming more savvy in exposing the sometimes inflated sustainability claims of household brands like Coca Cola.
• Sustainable investing trends are gathering momentum throughout the capital markets, from massive state pension funds to the proliferation of new sustainable funds for individual investors to a very timely call to action on sustainability from the Chairman of BlackRock, the world’s largest asset manager.

With renewable energy from wind and solar now price competitive with fossil fuels in many parts of the world, energy-intensive manufacturing is ripe for innovation and disruption, giving the earth some much-needed breathing room. With all this momentum building to close out 2018, we believe the next big sustainability story is that 2019 will be the year of accelerated capital investment in low-carbon manufacturing technologies and processes.

Nowhere is this disruption potential more intriguing than in mature manufacturing segments that are invisible but important parts of the supply chain for consumer packaged goods (CPG) companies. For example, segments like glass container production have been largely hidden from the general public, even while their primary products - in this case, bottles and jars - are highly visible in the daily lives of hundreds of millions of consumers the world over. Go figure.

Let's take a step back for some historical perspective: The market-leading process for synthetic soda ash - a key raw material for making glass - was developed by Ernest Solvay in the 1860s. The first automated bottle-making machine was commercially implemented by Michael J. Owens in 1903. Over the last century and a half the world has changed, and continues to change, at breathtaking speed. But, like The Dude in The Big Lebowski, the glass container industry simply abides. Like The Dude, it actively aspires to do nothing different. Maybe that’s because glass already is one of the most sustainable of packaging materials: glass is inert, biologically inactive, and 100% recyclable. Unfortunately for the environment, the production of raw materials used in glass containers is extremely polluting AND requires huge quantities of water. How polluting? How much water? Here's how the numbers from the previously mentioned Solvay soda ash process stack up:

CO2 emissions => 200-300 kg per ton soda ash

Water use/loss => 28,000 gallons/ton soda ash

Effluent discharge => 18,500 gallons/ton soda ash

Dude, the world can't just abide pollution on this scale any more. Not with CPG companies needing 65 million metric tons of glass containers by 2022 to meet global consumer demand for their products. We need new manufacturing solutions that are less carbon intensive and enable transparent, resilient supply chains. Investments in low carbon manufacturing - especially high visibility segments like glass containers - will be a big thing in 2019 because the stars are lining up in a big way:

• Large Capital Supply

While low-carbon manufacturing falls within the investment charter of various types of PE funds, by far the fastest growing segments are corporate venture capital (CVC) and impact investing. CVC is seeing a major resurgence over the past 5 years. Last year $163B was invested by corporations into new ventures, as compared to the $25-55B invested in 2013.

The impact investing story is even more striking. According to the Global Impact Investing Network’s (GIIN) most recent Annual Investor Survey, the size of the global impact investing market doubled in a year, from $114 billion in assets in 2017 to $228 billion in 2018. Interestingly, the last year has also seen an explosion in the number of impact investing funds from elite investment brands:

Bain Double Impact Fund - $390M

TPG - Rise Fund 1 ($2B), Rise Fund 2 ($3B)

KKR Global Impact Fund - $1B

UBS/Align17 Fund - UBS aims at investing $5B to reach UNSDG 2030 goals. Align17 leverages $2B UBS wealth management assets

BlackRock iShares Sustainable Core Funds (7 ESG ETF’s) - $7B

Given the sheer scale of CVC and impact investing capital chasing sustainability deals globally, it's a low risk bet to assume a significant percentage will find its way into low carbon manufacturing investments.

• Large Market Size

Mature manufacturing markets are inherently large markets. The global packaging market is projected to comprise approximately $1 trillion by 2022, with the global glass container segment being $72 billion. That leaves plenty of room for new technology ventures with disruptive solutions to infiltrate large supply chain ecosystems, win increasing amounts of market share and create value for all stakeholders.

• Large Pain Point

Actually, this is a shared pain point for 3 key stakeholders in the glass manufacturing ecosystem: Consumers + Government + Corporations. As noted above, glass containers are extremely visible to the consumer. There are growing pressures from key influencer segments like LOHAS, HENRYs and Millennials for food & beverage brands to up their sustainability game. Ask the folks at Rawlings Glass and Belu Water how mission critical sustainable packaging is in their battle for consumer mindshare in a crowded market. There’s also intense pressure on governments to enforce corporate compliance with anti-pollution and carbon reduction regulations. Ask the folks at Anchor Glass Container about their $40 Million EPA settlement (mentioned above). Ouch. Finally, CPG companies like Heineken (Drop the C), ABInbev (100+ Sustainability Accelerator) and Coca Cola (World Without Waste) all have signature sustainability programs with ambitious goals based on the UN Sustainable Development Goals (UNSDG's). Yet, according to McKinsey, these and many other corporations are falling short of their self-imposed goals. Some of them even admit to shortfalls in their public scorecards as they attempt to be seen (by consumers, regulators, investment analysts) as more transparent organizations. The most impactful way for corporations to plug this sustainability gap is by ramping up investment in disruptive innovation for manufacturing technology and processes throughout their supply chains.

• Large Upside Potential

Consumers, communities, corporations and investors benefit from innovation in low carbon manufacturing in the glass container segment. A recent American Chemical Society (ACS) policy paper focuses on resources needed to jumpstart sustainable manufacturing in the US chemical and allied industries. In it the ACS calls for $1.5 billion in investments by the federal government. Of course, this level of federal support won't happen under the current US administration, but that’s OK because the upside potential should be attractive enough for an array of PE funds (Impact, Cleantech etc.) and CVC groups (Food & Beverage, Glass, Chemicals) to pursue. Projecting outcomes from the proposed $1.5 Billion in investments, the ACS believes that "(t)he annual energy savings from full commercial deployment would equal 43 dollars per federal dollar invested, and these savings would allow for the creation of almost 500,000 new jobs in these or other sectors over the next 15 years." Energy savings on this order of magnitude significantly enhances profitability, which in turn impacts valuation metrics for public and private companies.

CPG companies stand to gain much more than just financial returns. Consider this: large beverage brands like Heineken push tens of billions of bottles each year through their global distribution network. Each bottle is a potential marketing touchpoint for reinforcing a brand's sustainability credentials with its consumers. Some companies already deploy sustainability messaging - recycling, responsible consumption etc - on their bottles and labels. But imagine the powerful effect on consumer trust that a "clean" or "green" or "smart" bottle would have. Any corporation that implements low-carbon manufacturing technology in the glass container segment of their supply chain will likely be the beneficiary of a PR bonanza generated by this confluence of Earned Media and Owned Media. The value of that media - and the enhanced consumer trust created - is quite literally priceless.

When you think about it all in real world terms, you see that the growing global middle class is only going to consume more, not fewer, bottles of beer and jars of jam. Legacy manufacturing systems - eg, in the glass container segment - are both capital intensive and environmentally destructive. But low-carbon manufacturing systems are a win-win, providing economic benefits and contributing to a lower carbon future for all stakeholders. Hey, let's be honest...change is coming one way or the other. 150 year old technology and processes will be jettisoned; consumers, communities, corporations and the environment will all profit from the immense social and economic gains unleashed. It all adds up to a massive opportunity for low-carbon manufacturing ventures and the savvy investors who fund them. #BigIdeas2019.

[The author wishes to thank Lane Jost for his research support and insights into sustainability best practices; and Omar Sheikh and his team at NY Synthetics, whose highly disruptive low-carbon manufacturing venture is bringing patented technology to market in 2019.]