October 2022 / INVESTMENT INSIGHTS
T. Rowe Price Global Impact Equity Fund Case Study: Trex
Nurturing Circular Economies
Pressure Points
Plastic pollution is one of the most pressing environmental issues our Planet faces. Over the past twenty years, annual plastic production and plastic waste generation have more than doubled. In 2019, only 9% of plastic waste was ultimately recycled, while 19% was incinerated and almost 50% went to sanitary landfills. The remaining 22% was disposed of in uncontrolled dumpsites. The carbon footprint of the plastics lifecycle is significant, contributing 3.4% of global greenhouse gas emissions throughout their lifecycle, coming primarily from their production and conversion from fossil fuels1. Innovation in waste prevention and recycling, leading to more affordable solutions from the private sector, in tandem with more ambitious public policies, are paramount to reducing the environmental impact of plastics.
Impact Thesis
Trex is a manufacturer of wood alternative composite decking products.
Trex’s manufacturing approach uses recycled materials as a feedstock to the extent it is possible. Recycled plastic film and reclaimed wood fiber make up 95% of its residential decking products.
Key Performance Indicator (KPI): Amount of recycled plastic and wood used/ diverted from landfill (lbs millions).
Five Dimensions of Impact
What: Reducing plastic waste otherwise sent to landfill or oceans by recycling it as a feedstock, while contributing to forests preservation by using reclaimed wood fiber by-products (as opposed to cutting trees).
Who: Planet
How much: Largest manufacturer of composite decking globally with growth in capacity of 70% between 2019 and 2021.
Contribution: Trex has completed a USD$200m expansion plan while investing in material science and product development to be able utilize “cruder” and more contaminated feedstock. This will enable additional waste reduction.
Risks: Trex’s impact potential is tied to demand volumes and therefore linked to macroeconomic growth, as well as adoption of its specific composite products, which is inherently dependent on quality and affordability versus competitors.
Progress Monitoring
During our engagement with Trex, we were pleased to learn that the company is making significant capacity investments to help meet rising demand in products using recycled materials. It was also encouraging to learn that the greater the investment in capacity, the greater the tonnage of plastic taken out of landfill. However, recycled plastic film supply is becoming a challenge due to new competitors entering the market, higher demand for recycled plastic content in packaging, and higher costs for non-recycled plastics. We are monitoring the firm’s approach to supply challenges which includes a focus on contaminated and less consistent material streams as part of research and development, in addition to capturing post-consumer waste.
Note: T. Rowe Price uses a proprietary custom structure for impact pillar and sub-pillar classification.
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October 2022 / ASSET ALLOCATION VIEWPOINT
October 2022 / INVESTMENT INSIGHTS
Hari Balkrishna is a portfolio manager for the Global Impact Equity Strategy. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd. He completed an internship at T. Rowe Price in 2009. Prior to joining the firm in 2010, he worked at Goldman Sachs, Sydney, Australia, in the financial institutions group of the Investment Banking Division.
