Environmental, social, and governance (ESG) risks and opportunities can affect an entity’s capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts–both qualitative and quantitative–to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see “The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis,” published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular qualitative listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity’s credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, privacy, (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.
The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.
Environmental And Social Exposure
S&P Global Ratings considers environmental and social risk factors for the containers and packaging sector as average compared with those of other industries. However, we consider the plastic packaging subsector as having higher environmental and social exposure within containers and packaging, given the waste concerns and related consumer and regulatory changes on the biodegradability and recyclability of plastic packaging. By contrast, paper and metal packaging companies will most likely benefit from plastic substitution.
Environmental risks concerning the biodegradability and recyclability of plastic is leading to reduced plastic packaging. Although we expect a material reduction in its use, it will certainly remain indispensable for certain sectors (such as health care) due to its unique properties. Many governments and regulators have implemented plastic levies or banned products, such as plastic carrier bags, plastics straws, cotton buds, and drink stirrers. Rated plastic packaging companies have a very limited exposure to such banned products. There is also a growing trend among plastic packaging companies to use a higher portion of recycled plastics, leading to increased demand and prices for recycled plastic. Most packaging producers also focus on weight reduction on increasing the recyclability of their products. Plastic packaging producers are reducing the number of chemicals, laminates, and colors of their polymers. In some cases, companies are moving toward bioplastics, which can be plant-based and fully biodegradable. Many packaging companies are also seeking to increase the recyclability of their products via the collaboration with local communities and regulators or the forward integration into plastic recycling facilities. The latter allows plastic packaging producers to improve the recycling rates of their products and facilitates the internal sourcing of recycled plastics.
We believe that paper and metal packaging companies will most likely benefit from plastic substitution. Paper and cardboard are quickly biodegradable and recyclable. In the U.S., about 70% of plastic containers went to landfills, compared with only 21% for the paper and paperboard packaging containers. U.S. recycling rates for plastic packaging are about 13%, compared with 73% for paper packaging. The appeal of metal as a fully recyclable material is balanced by the substance’s low biodegradability and impact on taste in beverages. Glass packaging has the lowest substitution potential, in our view, due to high transportation costs and breakage risk.
We closely monitor governance risks, especially given the number of private-equity-owned companies within the sector. Our analysis includes the quality of a company’s public disclosures and the transparency it provides investors and industry stakeholders. We also evaluate company-oversight characteristics such as independent representation on the board of directors, the concentration of controlling ownership, and internal controls behaviors that promote enterprise risk management.
ESG Risks In The Containers And Packaging Industry
|ESG Issuer Review–Containers And Packaging|
|Ardagh Group S.A.(B+/Stable/–)|
|As a producer of metal beverage cans (51% of revenues) and glass packaging (49% of revenues), Ardagh’s exposure to environmental and social risk is comparable to that of the broader industry. The company is continuously seeking to improve its environmental performance in areas such as emissions reduction, maximizing the use of recycled content, minimizing raw material, energy consumption and material waste, and optimizing logistics. The group is constantly investing in upgrading and renewing its furnaces to make them more energy efficient. It is also seeking to increase its use of recycled products (such as cullet) used in its manufacturing process. Ardagh also encourages consumers to recycle aluminum cans and glass containers. The group also has a series of investments in cullet (recycled glass) processing businesses. Although neither glass nor metal are biodegradable, both can be recycled repeatedly without loss of quality (unlike paper and plastics). Social factors, such as service reputation, labor relations, safety, and noise, are a moderate, ongoing risk for the industry. Ardagh only uses suppliers that adhere to its responsible-procurement policy and engages in continuous audits of current and prospective suppliers. The company is also very proactive on the health and safety front and constantly seeks to prevent and minimize the number of work-related accidents. The group has appointed a chief sustainability officer and has established a board-level sustainability committee. Ardagh is also likely to benefit from the increased substitution of plastic by other packaging substrates due to the infinite recyclability of metal beverage cans and glass packagings.||Ireland||Desiree Menjivar|
|Smurfit Kappa Group Plc(BB+/Stable/–)|
|Environmental and social factors are important to the container and packaging industry, given the energy- and water-intensive nature of the containerboard production process. Social factors, such as health and safety, are particularly important in the more labor-intensive packaging production process. As a producer of corrugated packaging only, Smurfit Kappa’s exposure to environmental and social risk is comparable to that of the broader industry. Although the company owns only 68,000 hectares of forest, it promotes sustainable forest management. Among other things, the group focuses on waste reduction, energy efficiency (to limit carbon emissions), and improving the quality of the water it discharges during paper production. Health and safety issues are equally important to the group, which seeks to maintain a productive and safe workplace by minimizing the risk of accidents, injury, and exposure to health hazards. Although not assumed in our forecast, we believe that the group is also likely to benefit from the switch away from plastic packaging in the medium-to-long term because of the recyclable nature of its paper packaging products.||Ireland||Desiree Menjivar|
|We view Ball Corp. as a packaging company whose operations might benefit from increased focus on effective management of environmental risks. There is increasing concern about packaging waste taking up space in landfills or polluting the ocean, specifically single-use plastics. However, Ball is relatively insulated from these concerns because its aluminum beverage cans (which constitute almost 90% of its revenue) are fully and repeatedly recyclable and are estimated to be recycled at much higher rates globally (about 69%) than single-use plastics (5%). Still, the can-making process is not completely renewable, producing greenhouse gas emissions both during the manufacturing process and in the downstream and upstream value chains. In an effort to further improve sustainability, the company announced in 2019 that it will power its North American corporate, packaging, and aerospace operations entirely through purchased renewable energy by the end of 2021 utilizing Virtual Power Purchase Agreements. The company is also pursuing additional renewable energy projects in Europe to further improve its products’ carbon footprint. Slightly offsetting Ball’s favorable environmental attributes is that the company’s aerospace division manufactures products used in electronic warfare applications. The segment provides technology and services to the U.S. government largely for on-orbit defense sensors and satellites to support U.S. intelligence, surveillance, and reconnaissance needs as well as providing climate and weather monitoring and prediction. Although this involvement could expose the company to reputational and political risk, we do not view it to be a material factor in the rating.||U.S.||James T. Siahaan|
|Sonoco Products Co.(BBB+/Negative/A-2)|
|Sonoco’s products are helpful in mitigating food spoilage globally, and packaging waste has an environmental impact the company is focused on reducing. Sonoco operates with a diverse mix of substrates and makes paper-based as well as rigid plastic- and flexible-based products. Recycling rates for plastic are much lower than for metal. The company divested its rigid-plastic blow-molding operation in 2016, which helped reduce plastic exposure somewhat, but still depends on customers’ demand for plastic packaging. Despite this, we regard Sonoco as a relatively sustainable company. It has made a series of commitments to increase the sustainable use and recyclability of packaging by 2025. These include: By weight, increasing the amount it recycles, or causes to be recycled, by 75%-85% relative to the volume of packaging it places into to the global marketplace; increasing the portion of post-consumer recycled resins in its plastic packaging to 25% from 19%; and ensuring that approximately 75% of its rigid-plastic packaging can carry the relevant on-package recyclable claim. The company indicated in its most recent corporate responsibility report that it reduced total greenhouse gas emissions from operations by approximately 6.2% and total landfill disposal 9.4%.||U.S.||James T. Siahaan|
|Our ratings on WestRock recognize the environmental risk in the company’s operations due to the resource-intensive nature of its manufacturing process, which necessitates virgin fiber, large water volumes, and high energy input. In efforts to limit its impact on the environment, the company has publicly committed to sustainable forestry practices (it has the largest paper recycling network in the U.S.), stringent water recycling and wastewater quality standards, and increased renewable energy use. WestRock has long operated containerboard, coated recycled board , and uncoated recycled board mills that produce 100% recycled paperboard. Over 15 of the company’s corrugated and consumer mills run using recycled fiber, helping to mitigate landfill waste. In the past three years, the company has increased the amount of fiber it sources from certified lands by 3.6% and has decreased its absolute greenhouse gas emissions 9.0%. About two-thirds of the company’s total energy mix is sourced from renewable carbon-neutral biomass. Still, the company’s manufacturing process contains environmental risk it has yet to fully mitigate. As a pure paper packaging producer, WestRock stands to benefit from the social and government efforts aimed at limiting the environmental impact of single-use plastics. Although relatively few local and state governments have taken official regulatory action, we expect that regulatory efforts will increase. Combined with a shift in consumer sentiment away from plastic packaging, we believe that these regulations will positively affect WestRock’s financial and operating performance.||U.S.||James T. Siahaan|
|Berry Global Group Inc.(BB+/Negative/–)|
|Berry is one of the largest global designers and producers of plastic-based packaging. Despite its notable size, we believe Berry’s exposure to the negative market sentiment toward single-use plastics is limited to its consumer packaging (CP) segment. Its two other business units, which include engineered materials and health, hygiene, and specialties, are subject to more stringent performance and safety standards. CP represents about a third of Berry’s pro forma sales and includes both flexible (such as food films and microwaveable pouches) and rigid (such as cups, containers, and closures) packaging products. Given current market sentiment and stricter legislation (particularly in Europe), we believe Berry is likely to face growing pressure to incorporate a greater proportion of renewable or environmentally friendly materials into its packaging design. We believe this shift to more sustainable materials will be an expense borne not only by the company, but also its customers and end-consumers. We do not see substitution risk from alternative materials (such as paper, glass, and metal) as a meaningful threat to Berry because we do not believe there are viable alternatives offering similar performance standards or the low cost basis relative to the majority of CP’s flexible packaging solution and to a large extent its rigid product offerings. Given these factors, we do not believe Berry’s long-term operating performance will be meaningfully affected by negative market sentiment toward single-use plastics. The company has been extremely proactive in addressing the environmental risks around plastics and the growing demand for more sustainable solutions. It is part of a number of groups focused on improving recycling standards and reducing plastic waste, the most notable of which is the Alliance to End Plastic Waste, composed of 27 companies across the value chain whose collaborative goal is to reduce and ultimately eliminate plastic waste in the environment. To support this initiative, the group has committed to an initial five-year, $1.5 billion investment. In addition, Berry’s product development process continues to focus on incorporating higher recyclable and compostable raw material inputs while reducing overall material content used. As part of its continuous productivity initiatives, the company is targeting a number of benchmarks, such as reducing greenhouse gas emissions 25% by 2025 (relative to 2016), production-related landfill waste by 5% per year, and energy and water consumptions by 1% annually.||U.S.||Daniel Lee|
|Plastipak Holdings Inc.(B+/Stable/–)|
|We believe Plastipak is less favorably positioned with respect to environmental and social factors relative to packaging peers, due to its significant exposure to processed juices and beverages (carbonated or noncarbonated) and the widespread use of single-use plastics in these product categories. Processed juices and beverages are notable consumers of single-use plastic packaging, a category that has been under increased consumer scrutiny due to concerns over its long-term environmental impact. Plastipak is a major producer of single-use plastic containers with processed juices and beverages representing about half of its total sales. In addition, we believe there are a number of established, widely available, smaller format (that is, one liter or less) alternative packaging solutions for beverages and juices, such as metal cans and paper-based containers, that compete directly with Plastipak’s product offerings. As a result, we believe the market’s negative sentiment toward plastics, the growing demand for more environmentally friendly packaging, and the availability of alternative solutions for smaller formats could result in sustained pressure on the company’s rigid container volumes and operating performance. Somewhat offsetting these dynamics is Plastipak’s concerted effort to incorporate more recycled content into its packaging solutions. For the past several decades, the company’s management has been a major proponent of sustainable packaging through the increased use of processed recycled resins (PCR). Plastipak has supported this effort by owning, operating, and expanding its global network of plastic recycling facilities, which in turn provide a dedicated internal source of PCR and has enabled the company to incorporate a greater amount of recycled materials into its overall manufacturing process. We view the increased use of recycled resins as a viable, near-term alternative that somewhat addresses consumers’ concerns. We believe management’s long-term efforts to use renewable materials for the past several decades reflects its proactive nature and that it will continue aggressively pursuing resin recycling assets. .||U.S.||Daniel Lee|
|International Paper Co. (IP)(BBB/Stable /A-2)|
|IP, like its peers in the fiber-based packaging, pulp, and paper industry, faces a number of environmental risks related to production of fiber, pulp, and paper-based products. Issues facing the industry include air, water, and land pollution; high-energy usage rates; paper waste ending up in landfills; and greenhouse gas emissions. As a result, a number of regulations to mitigate the effects of these issues affects the industry and the wide variance of regulations by country only add to the complexity of compliance. Capital investments and continuing costs to meet regulatory compliance affect IP’s profitability. Further regulations to mitigate the effects of climate change, pollution, and waste could have direct or indirect impacts on IP, such as increasing input, transportation and other costs, as well as delaying permitting for capital projects that may require additional evaluation for regulatory compliance. These cost increases could materially affect IP’s margins and cash flows, and cause us to reassess the company’s profitability compared with that of the paper industry and other packaging substrates. In addition, IP’s business model requires that it maintain a sustainable supply of wood fiber, the majority of which is sourced from privately owned forests. However, we believe that IP has adequate measures to monitor potential regulatory changes in state, federal, and foreign countries in which it operates. The company has 18 recycling plants to process recovery of old corrugated containers, which allows the company to recover post-consumer fiber that can be used to produce recycled paper and packaging products.||U.S.||Michael Tsai|
|Amcor is a global packaging company with close to 250 sites in more than 40 countries. The company develops and produces packaging solutions for food, beverage, pharmaceutical, medical-device, home- and personal-care, and other products. Environmental risks have grown alongside increased plastics use, with the key one concerning plastics being landfill overuse and marine contamination. We believe Amcor is well positioned to address these risks and has potential to convert some of these risks into long-term opportunities. The company has integrated ESG management practices with its business strategy, core operations, and investment decisions. For example, in January 2018 Amcor became the first global packaging company that pledged to develop fully recyclable or reusable packaging by 2025, which will harness more sustainable growth. For the year to date, about 97% of the company’s rigid packaging is recyclable in practice and at scale. This means Amcor’s packaging format must achieve a post-consumer recycling rate of 30% in multiple regions collectively representing at least 400 million inhabitants. Although the company’s flexible packaging is technically recyclable and readily accepted for recycling in some countries, it does not meet the full definition of recycled in practice and at scale. Social factors are relevant to our analysis, due to increased consumer and regulatory concern toward single-use plastic and other packaging materials. For the year ended June 30, 2019, Amcor remained materially compliant with all environmental laws and regulations across all countries in which it operates. The company seeks to reduce emissions by 60% by 2030 from fiscal 2006 levels. In 2019, Amcor decreased greenhouse gas emissions intensity by 32.6%, which is more than half of its long-term goal of 60% by 2030. It achieved this via lowering energy consumption, improving product design, optimizing transport, selecting less carbon-intensive materials, and incorporating climate change strategy into relevant business decisions. Furthermore, in fiscal 2019, Amcor’s total manufacturing waste sent to landfill fell 83.3% compared with that in 2006.||U.K.||Ieva Erkule|
|Celulose Irani S.A.(brA-/Stable/–)|
|We view Irani’s credit quality as more exposed to governance factors than rated peers globally in the packaging sector, because of the limited track record of the effectiveness of independent members in its board combined with the concentration on decision making with 88.46% ownership concentration of the “Habitasul Group.” A second independent board member was added in 2016, the year in which Irani’s main shareholder stepped down from his position as board president due to judicial disputes at the group level, which nevertheless did not involve Irani or its operations directly. The dispute in question had grounds on the Environmental Crimes Act and was settled in 2019, when federal courts dismissed the case due to its statute of limitations. On the other hand, Irani has a recognized concern with its social and environmental impacts as noted by its Clean Development Mechanism, registered at the UN and its carbon-neutral certification. The company self-generates more than half of its energy requirements through its biomass-based cogeneration and hydroelectric plants. We believe that its exposure to environmental and social factors is in line with that of rated peers globally, although it has a more relevant awareness than its local peers. Despite the company’s use of recycled fiber in about 70% of its manufacturing needs, helping to mitigate landfill waste, Irani’s manufacturing process contains environmental risks it has yet to fully mitigate. Like other paper packaging players, although not included in our base-case forecast, we believe that in the medium-to-long term, the company is likely to benefit from the potential shift in consumer preference away from plastic packing toward more sustainable packaging solutions, due to the recyclability of paper packaging.||Brazil||Victor Laudisio|
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