The Global Plastic Pollution Treaty negotiations – what financial institutions should watch out for…

As the fourth negotiating round of the global plastic treaty approaches, what should financial institutions be looking out for? There are five main considerations: are upstream petrochemical producers in scope? Will hazardous chemicals be called out? Will there be product restrictions? Who will finance the transition? Will the final treaty text be mandatory or voluntary?

The implications for the financial markets could be significant.

Round 4

The fourth round of negotiations (INC-4) to develop an international legally binding instrument on plastic pollution, including in the marine environment, will take place in Ottawa from 23^rd to 29^th April 2024. The mandate is to develop a global plastics treaty to be negotiated before the end of 2024.

At the upcoming meeting, countries are expected to discuss the provisions of the revisedⁱ Zero Draftⁱⁱ – i.e. an initial attempt to gather high-level thoughts on an issue – but look unlikely to progress on the rules of procedure.  The latter has been a major sticking point, used by a small handful of countries – also referred to as the ‘like-minded group of countries’ or the ‘low ambition group’ⁱⁱⁱ – to insist on a consensus-based approach for voting, therefore allowing a single country veto rather than permitting a majority-based system.^iv This is not only making decision-making difficult as contentious issues are sidelined – i.e. agree to disagree – but it is also consuming valuable negotiating time.^v

Moving beyond the revised Zero Draft?

Currently, the revised Zero Draft contains several options that delegates are expected to use as a basis for negotiations, including the scope of the treaty, its implications and the means of implementation. Note that since INC-3, no intersessional work was agreed by the parties, so numerous options remain in the draft.

Below, we highlight five main areas that financial institutions should keep in mind at the upcoming INC-4.

1. What is in scope?

The scope of the treaty is a core issue. In 2022, countries agreed to establish an intergovernmental negotiating committee (INC), tasked with developing a legally binding instrument to end plastic pollution, including in the marine environment. The scope, as set out by the UNEA Resolution 5/14,^vi states it should adopt a comprehensive approach addressing the full life cycle of plastic. However, some countries have expressed different interpretations of the “full life cycle”, especially with regards to the inclusion of measures related to plastic polymer production.

Presently, the equity markets are valuing the plastic producers as a lower risk investment than either the containers & packaging, or consumer staples companies in the plastic supply chain. The implied equity risk premium of the plastic value chain is 5.7%, while the upstream producers trade on a premium of 4.1%.^vii If the treaty takes a view of the “full life cycle of plastic” as including polymer production, then the current relative risk discount for producers could be under threat.

2. Chemicals of Concern

The chemicals and additives used, and emissions originating from plastics production, are a major contributing factor to plastic pollution, affecting both human health and the environment.^viii The revised Zero Draft currently considers measures covering both the use of chemicals in plastics production and the chemicals or polymers contained in plastics themselves. Note that no technical work on these issues has taken place since the last INC as no agreement was reached by the parties.

The financial markets should watch chemicals of concern with interest as they could give rise to changes in methods of production and therefore impact operating and capital expenditure costs, and possibly give rise to significant litigation exposure.^{ix, x}

3. Product restrictions or bans

Country representatives are currently exploring measures to ensure circularity in the production processes and waste management, covering such practices as reuse, refill, repair and repurpose, as well as a possible reduction in production. Certainly, some of the major petrochemical exporters are keen to make sure discussions are focused on downstream waste management rather than production limits. In a push for circularity, we may see the phase out of what the current treaty text terms ‘short-lived and single-use plastics and intentionally added microplastics’.

For financial institutions, the issue is whether a meaningful drive for circularity affects the revenues of plastic supply chain companies, as products are withdrawn or substitutes introduced, and whether sellers of such products are forced to incur extended producer responsibility (EPR) costs as they are moved upstream, away from the municipalities and their waste treatment sub-contractors.

4. Who is financing?

As ever, all these negotiations will have to tackle the tricky issue of financing such a transition. Who is paying for what? The revised Zero Draft text refers to financial resources which “may include domestic and international funding, as well as facilitation of private sector financing, including voluntary contributions”. It also suggests the establishment of a “mechanism for the provision of predictable, sustainable, adequate, accessible and timely financial resources”.

Other financial impacts are possible in global trade, whether that be plastic feedstocks, products, and waste, as well the subsidies and fiscal incentives for parts of the plastic supply chain. Note that such subsidies can be economically very significant. The IMF reported that in 2022, fossil fuel subsidies totalled a record USD 7 trillion, equivalent to 7.1% of global GDP, “about two thirds of what they [governments] spend on healthcare [10.9%]”.^{xi, xii}

Financial institutions will be seeking visibility on financing, not least as they themselves, or their investments, are a potential source. If changes to trade and subsidies are an outcome, sovereign investors will need to evaluate their exposure.

5. The mandate

The original UNEP Resolution 5/14 to end plastic pollution aimed “to develop an international legally binding instrument”. However, with the negotiations’ focus on the text rather than rules of procedure, the exact nature of the treaty remains unclear. For example, in the Paris Agreement (2015), parties do not have a legal obligation to achieve their nationally determined contributions (NDCs) to address climate change.^xiii

This is very important to the capital markets which will need clarity on whether the final treaty text is mandatory or voluntary. Once that is clarified, they can accurately assess the financial risks and opportunities of this treaty.

Planet Tracker’s Head of Policy, Arianna Manili, will be attending INC-4. To discuss the contents of this blog or other INC-4 issues, please contact Arianna at arianna@planet-tracker.org