Manulife Investment Management - Tue, 05/28/2024 - 13:33

Flip-flops: on the path to plastics circularity or a watery grave?

As the scale and extent of the effects from plastic pollution trigger regulation, customer concern, media controversy, and changes in market dynamics, companies will have to better understand how they contribute to the plastic crisis and their consequential exposure to commercial, legal, and reputational risks across their value chains.

On a recent visit to a beautiful beach on the Indian Ocean coast in Southeast Asia, my family and I were stunned at the volume of plastic litter along the shoreline. Cutlery, plastic bottle caps (but no plastic bottles; they sink, apparently), disposable lighters, brightly coloured children’s toys, toothbrushes, and dozens of other everyday items (or parts thereof) were recognizable.

But perhaps most baffling for my children were the number of shoes scattered along the high tide line and caught in the fragile dune vegetation—plastic sandals and flip-flops, to be precise. A “plastic shoe graveyard” they dubbed it. Without much effort, we gathered 500 individual plastic sandals and flip-flops along a 200-meter stretch of beach—that’s a rate of 2.5 plastic shoes per meter. “I’ve never even lost a single shoe! How did all of these get here?” asked my bewildered 7-year-old. “Do sea creatures eat them? Do the little bits that crumble off stay in the ocean forever? Is it safe for these barnacles to grow on flip-flops? How will we clean up all the beaches in the world?” asked the 9-year-old with a growing sense of panic as the scale of the problem became readily apparent.

Their endless stream of questions inspired this article, which I write with a heavy heart knowing that their generation will largely inherit the task of cleaning up hundreds of billions of tons of plastic in our rivers and oceans put there by generations that came before them, quite the opposite of the definition of sustainable development often quoted in their textbooks at school.

How did these flip-flops get into the ocean?

We brainstormed all sorts of explanations: Maybe people lost them as they walked along the beach? Maybe they were washed off fishing boats? Maybe a shipping container sank and spilled thousands of flip-flops into the ocean?

The reality is that most of them washed into the sea from land and eventually found their way back to shore after being carried along with the currents some hundreds or thousands of miles away from their original entry point. We were able to collect and properly dispose of the flip-flops we found on the beach, but an unfathomable and unmeasurable amount of plastic floats in a series of gyres on the ocean’s surface, and more has likely sunk to its depths.

Over 80% of plastic debris found in the ocean washed in from urban and stormwater runoff, sewer overflows, litter, inadequate waste disposal and management, industrial activities, construction, and illegal dumping.

We’ve been mass producing plastics for about 70 years, and today the output is about 430 million tons annually, two-thirds of which are short-lived or single-use plastics. The plastics industry is valued at US$522.6 billion, and it’s expected to double in capacity by 2040. An estimated 14 million tons of plastic end up in the ocean every year, which is projected to triple by 2040. Plastic debris is currently the most abundant type of litter in the ocean and is found on the shorelines of every continent.

Studies vary in their estimates of which rivers emit the most plastics. One study estimated that about 90% of all river-borne plastic that ends up in the ocean comes from just 10 rivers, while another estimated that there were 160 or even 1,600 river contributors. But all agree on the fact that over 80% of ocean plastics are emitted from Asia, which is the world’s most populous region.

Which brings us back to the ubiquitous flip-flop. This inexpensive footwear is popular throughout Asia and other tropical places, easy to mass produce, and widely available in countries in which waste management practices aren’t keeping pace with the speed of growth and consumption.

Why are flip-flops in the ocean such a problem?

Plastic pollution can have devastating effects on our ecosystems and wildlife, our health and well-being, food safety and quality, and coastal tourism, and it contributes to climate change.

Under the influence of solar ultraviolet radiation, wind, currents, and other natural factors, plastic doesn’t biodegrade and disappear, it simply breaks down into smaller and smaller particles that are easy for marine life to ingest. More than 800 marine and coastal species are affected by this pollution through ingestion, entanglement, and other dangers.

Exposure to particles, as well as toxic elements of plastics as they break down, can harm human health, potentially affecting fertility and hormonal, metabolic, and neurological activity.

Asia plays a critical role in the effort to stem biodiversity loss given that the region is home to the coral triangle, the tropical forests of Southeast Asia, and many of the world’s large river basins. This is critical because nature loss to these unique ecosystems could damage 63% (US$19 trillion) of the Asia-Pacific’s gross domestic product (GDP) and risk the loss of 42% of species in Southeast Asia; however, nature-positive business opportunities could generate US$4.3 trillion of GDP and 232 million jobs by 2030.

Who makes flip-flops, and what are they doing about the problem of pollution?

We were able to identify over 20 distinctive brands in our sample of 500 flip-flops, which we could cluster into two categories:

  1. Large publicly traded companies mainly headquartered in the United States and Europe
  2. Small to midsize privately owned producers from Asia

The vast majority of the sample—over 80%—was generic or unidentifiable due to decomposition.

This breakdown illustrates the challenge we’re facing with ocean plastics overall. Most of the pollution comes from smaller private companies producing high volumes of lower-quality and unbranded generic products, mostly originating from fast-growing emerging markets in which waste management policy and practice aren’t keeping up with consumption.

It’s hard to estimate how many flip-flops are produced annually and how many end up improperly disposed of due to the high volume of unbranded products. Havaianas sells 250 million pairs in 100 countries according to its website, while Crocs says it sells 150 million pairs in 85 countries, which provides some idea of the scale from publicly listed companies alone.

Companies such as Nike have long since been aiming to reclaim and reuse plastics from their own footwear and beyond to create new products and materials. Our family has benefited from the safer rubber playground materials that underpin play structures in many neighbourhoods and are an example of how reclaimed plastics can be put to longer-term use. This is the concept of the circular economy in a nutshell.

The traditional linear lifecycle for materials would involve extraction, production, use, and disposal. But there has been an effort to use less raw materials, keep more in circulation longer, collect and reuse materials, and minimize waste produced. This is known as circularity or the circular economy.

Most of the publicly traded brands producing the flip-flops we found on the beach have embraced circular economy concepts and have initiatives such as:

  • Using recycled rubber or other plastics in their new shoes
  • Reducing the carbon footprint of shoe production
  • Reducing water usage in shoe production
  • Innovating with more durable materials or biodegradable materials
  • Take-back schemes in which customers can return lightly used shoes to the shop or trade them in for a newer pair
  • Various recycling, refurbishing, donation, or recreation programs
  • Design measures to increase the longevity of products

A shift to a circular economy can reduce the volume of plastics entering oceans by over 80% by 2040, reduce virgin plastic production by 55%, save governments US$70 billion by 2040, reduce greenhouse gas emissions by 25%, and create 700,000 additional jobs—mainly in the global south.

The circular economy limits the need for continual extraction of raw materials

Infographic shows that from the extraction of raw materials, the circular economy—moving through product design, production, distribution, consumption/use/reuse/repair, collection, and recycling—can help limit the production of waste.

Source: European Commission, 2020. 

Even with some of these material and design improvements, the flip-flops we found seemed to have traveled a one-way street to the ocean, so what can companies do to close the loop on plastics circularity? There’s a quote on Nike’s website that says, “Waste is simply excess material in the wrong person’s hands.”

The problem is that ocean plastics aren’t in anyone’s hands—they’re in the oceans, rivers, waterways, and shorelines.

Why do ocean plastics matter for investors?

Plastics producers and consumers today are detached from the costs of environmental damage or recovery, a classic illustration of a negative externality. But as the scale and extent of the effects from plastic pollution trigger regulation, customer concern, media controversy, and changes in market dynamics, companies will have to better understand how they contribute to the plastic crisis and their consequential exposure to commercial, legal, and reputational risks across their value chains.

Investors cannot mitigate these risks simply by diversifying financial portfolios; they threaten the functioning of wider systems on which company profitability relies. Some of the ways plastic pollution is financially material for companies:

  • The raw material needed for plastic production is fossil fuels; therefore, plastic production and pollution are exposed to climate transition risk.
  • Waste management regulations and laws governing plastic production and use are becoming more common and stringent, creating margin risk for issuers that don’t adapt. 
  • Companies will face legal, reputational, and liability risk, which will affect their margins and their social license to operate. 
  • On the upside, an opportunity exists for plastics alternative solutions to thrive as both consumers and businesses shift toward alternatives.

Investors recognize that water-related risks and opportunities can be financially material and should be integrated into investment processes. To do that, comparable, standardized data is needed on company practices and performance. The world’s most widely used environmental reporting standard, the CDP, introduced a water security module in 2023 that contains a segment on plastics due to the high correlation between the two issues.

CDP asks for information from all companies that use, produce, or commercialize plastics covering the entirety of their value chain, including plastics waste management, reprocessing, and disposal. In the first year it was available, over 3,000 companies from around the world disclosed plastic-related data, which is very encouraging.

In recognition of the impact of plastics on nature, the Taskforce on Nature-related Financial Disclosures (TNFD) includes a plastics disclosure metric: C2.3 under pollution or pollution removal as a driver of nature change, “plastic footprint as measured by total weight (t) of plastics (polymers, durable goods and packaging) used or sold broken down into raw material content.”

What’s being done about plastic pollution?

The case of the flip-flop demonstrates the system-level risk that we’re facing with plastic pollution. To tackle this, back in 2022, 175 nations decided to end plastic pollution and forge an international legally binding agreement by 2024. This would be one of the most important international environmental treaties alongside the Paris Agreement and the Kunming-Montreal Global Biodiversity Framework. The fourth session of the Intergovernmental Negotiating Committee to develop an international legally binding instrument on plastic pollution, including in the marine environment (INC-4), took place in Ottawa, Canada, in early 2024, and the final meeting is scheduled for end of the year in South Korea.

This legally binding instrument covers the whole lifecycle of plastics, from extraction to production, design, use, consumption, disposal, and remediation, and addresses all sources of plastic pollution. It covers plastic materials and products as well as plastic-related chemicals and microplastics. It recognizes the risk of plastic pollution to human health and the environment and the impact on climate change and biodiversity. Investors welcomed progress made on a possible polluter-pays fee of US$60 to US$90 per ton of plastic resin that could be used for cleanup efforts. Other potential measures include single-use plastics restrictions and mandated minimum recycled content; however, a cap on plastics production remains contentious and faces global enforcement challenges.

The next time you find yourself strolling along a shoreline or a river, have a look to see if plastics have found their way into the ecosystem. The challenge we face requires all of us—countries, companies, and consumers—to take action that’s urgently needed to stem the flow of plastics into our oceans.


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