The Closed Loop Fund, at age two, goes with the flow
It’s been a bit over two years since a group of large companies pooled their money to boost recycling. Their goal: invest $100 million to scale municipal recycling programs. And, in the process, put more recovered materials into manufacturing supply chains.
Since then, the Closed Loop Fund has been finding its way, identifying communities across the United States where a little money can go a long way toward boosting recycling, and doing so profitably.
Today, the fund is issuing its first “impact report” (download PDF), taking stock of its progress and learnings after two years of operations. Some of its initial investments are starting to bear fruit, and CLF’s collective-action model is evolving as a prototype for how the private sector can deploy both money and expertise to build the components of a circular and low-carbon economy, especially in the absence of political leadership, funding and will.
Recycling could use some help. Over the past few years, materials recovery rates have stagnated. In 2013, the most recent date for which the federal government has released data, the national recycling rate (“sustainable materials management,” in the new government parlance) was around 34 percent, not much higher than the 31 percent rate in 2005, according to the U.S. EPA.Private-sector data confirms the stagnation. For example, the 2015 U.S. plastic bottle recycling rate decreased 0.5 percent compared with 2014, according to data from the Association of Plastic Recyclers and American Chemistry Council.
Private-sector data confirms the stagnation. For example, the 2015 U.S. plastic bottle recycling rate decreased 0.5 percent compared with 2014, according to data from the Association of Plastic Recyclers and American Chemistry Council.
Meanwhile, Americans’ overall generation of waste — about 4.4 pounds per person per day in 2013 — was only slightly below where it was in 1990 (4.57 pounds), though U.S. population grew by almost 70 million people. The net result is break-even: Aggregate waste to landfills in 2013 was exactly the same as in 1990 — 134 million tons.
It all amounts to a lost opportunity of significant proportions. Americans toss out $11.4 billion worth of recyclable containers and packaging annually, according to As You Sow, an advocacy group.
All the while, corporate use of recovered feedstocks in products and packaging has increased as companies ramp up sustainability commitments. In 2014, for example, Procter & Gamble committed to double its use of recycled resin in plastic packaging by 2020. Earlier this year, Unilever said it would increase use of post-consumer recycled materials to 25 percent of its plastic packaging by 2025. In 2013, Dell committed to putting 50 million pounds of recovered materials back into its products by 2020. So far, Dell has reused just over 36 million pounds over three years.
Growing demand, stagnating supply
The lack of quality recycled materials can make it a challenge for companies meet such goals. Case in point: Coca-Cola failed to meet its 25 percent recycled- and renewable-content goal last year, coming in at just 12.4 percent, according to its 2014-15 sustainability report.
"The challenge with recycled content today is it's tough to get material," Bruce Karas, vice president of environment and sustainability at Coca-Cola North America, told Resource Recycling, a trade publication. "So we put recycled content in our PET but it's challenging to get ahold of enough to really make a difference."
Meanwhile, a few leadership firms are beginning to probe the potential for next-generation designs and materials flows that, collectively, are referred to as the circular economy. Increasing use of recycled materials is a key part of such strategies.
How do you reconcile growing demand with stagnating supply? That’s the goal of the Closed Loop Fund.
In 2014, a group of companies — 3M, Colgate Palmolive, Coca-Cola, Dr Pepper Snapple Group, Goldman Sachs, Johnson & Johnson, Keurig Green Mountain, PepsiCo, Procter & Gamble, Unilever and Walmart — each kicked in between $5 million and $10 million to build a fund that would provide municipalities with zero-interest loans and private firms engaged in public-private partnerships with below-market interest rates in order to spur investments in recycling programs.
Over the past two years, the fund has deployed $20 million in project-finance loans, which in turn has leveraged another $60 million for these projects from banks and other financial institutions. And the organization has expanded beyond the original debt fund to add a venture fund for backing early-stage companies and a foundation that funds R&D of “technologies and business models focused on building the circular economy.” All three entities are now housed under an umbrella organization, Closed Loop Partners.
So far, so good
So, how’s it going? The short answer: So far, so good, though for all its money and ambition, CLF isn’t poised to transform the recycling industry by itself.
“We've been thrilled with the performance of our investments so far,” Rob Kaplan, CLF’s managing director, told me recently. “They are diverting significant tonnage, they're bringing recycling to millions of households that didn't have it before and they're paying back the loans.”
It’s still early days. After spending the bulk of its first year getting organized, the fund has made 10 investments, though only six are operational and only four of those have reported outcomes. The four include an upgrade of an existing municipal recycling facility (or MRF) just outside Chicago; a plastics recovery facility capable of handling harder-to-recycle resins, in Baltimore; new trucks and curbside bins to upgrade an aging system in Portage County, Ohio; and a baler at an existing facility in Council Bluffs, Iowa, generating new revenue by collecting and selling materials that would otherwise go to landfill.
Two additional projects — an upgrade of a recycling facility to enable single-stream collection in Scott County, Iowa, home to Davenport; and investing in carts for 105,000 households in Memphis — have only recently come online.
This is decidedly unsexy stuff, the nuts and bolts of waste-recovery systems. But CLF’s investments to date demonstrate the three bottlenecks and barriers in recycling infrastructure that the group has identified and targeted:
- Collection (increasing curbside and other programs that address “recycling deserts,” particularly in small towns and rural communities, as well as in low-income, multifamily housing);
- Sortation (building or upgrading MRFs to accept a broader range of post-consumer materials, along with innovations to address “problem” materials, such as flexible plastic and films); and
- Processing (fostering innovations and infrastructure for turning waste back into raw materials, especially low- and no-value materials such as mixed plastics and mixed glass).
Low prices, high barriers
All this is taking place at a time when low commodity prices are buffeting recycling programs, depressing prices of recycled materials, especially plastics, making them less competitive with their virgin equivalents.
Kaplan believes that while commodity pressure has impacted waste haulers and recycling companies, “Municipalities are still the ones who will benefit from recycling. It almost always makes sense to recycle regardless of where commodities prices are because your alternative is to landfill,” for which cities pay “tipping fees” in order to dump waste.
Still, there’s no question that low prices of petroleum and other raw materials are roiling recycling. As CLF’s impact report notes:
Unprecedented lows in recycled commodities prices have become an “innovation killer” in the near-term, while continued low interest rates reflect a lack of growth and investment opportunities. Our expectation is that the current commodity market trends will reverse or at least stabilize; and those business models that have weathered the storms will emerge stronger and more profitable than those who maintained the status quo. Our hope is that these best-in-class operators from the private and public sectors will have a positive influence on the rest of the system.
Another challenge is that recycling is still a political football in some circles. Those arguing against it make the case that recycling actually increases pollution, thanks to the increased number of collection trucks on roads; that there’s no actual “landfill crisis” that needs to be addressed; and that recycling hurts the economy because it costs cities more money than it saves. All of these claims have factual and, for the most part, compelling counter arguments. But, as we’ve all learned, perception and misinformation often outweigh science and economics, especially when it comes to environmental issues.
Admits Kaplan: “The narrative around recycling has gotten a lot more complicated in the last year or two.”
The potential impact of the Closed Loop Fund’s investments extend beyond the individual projects it funds. Its mission includes propagating best practices and creating replicable models other municipalities can emulate. Its new impact report describes under what conditions each of its projects can be replicated, along with the project’s impacts — tonnage diverted, greenhouse gases avoided, the financial benefits to communities and other metrics, both to date and projected through 2025.
Another important role for CLF is to help municipalities understand what it means to be “best in class.” As with most things in the world of sustainability, the answer depends — in this case, on such factors as on-the-ground political leadership, citizen awareness, legacy waste-hauling contracts, existing infrastructure and other factors. It also may depend on breaking through the intransigence of old institutions and traditional ways of doing things, even if they no longer make economic or practical sense.
As a result, CLF loans are what investors often describe as “smart money” — investments that come with consultative expertise.
Consider Memphis, where CLF provided nearly half the $7.5 million needed to purchase 105,000 curbside recycling carts. In addition to the 10-year, no-interest $3.25 million loan, says Kaplan, “We're in regular conversations about how we can help. We help bring in other partners to help with education and things like that.”
“Memphis is a good example of the infrastructure challenge if you don't already have carts out," explains Margot Kane, Closed Loop Fund’s chief investment and financial officer. "Other cities have routing issues, which is an operational challenge that we have helped figure out, which can transform a recycling program from something that's not profitable to something that's profitable.”
The group isn’t afraid to use its influence along with its money. “When we're deciding whether we're going to capitalize a municipality, we look at some of the operational choices that they're making,” says Bridget Croke, who leads external affairs for CLF. “There are certain things that we know work and are going to be operationally and financially more sound and successful. Either we will make strong recommendations and give them guidance, or we'll integrate that into our contract so that we know it's going to be successful and have the impact we need, and also have the payback.”
Adds Kaplan: “It can be very expensive to drive recycling carts to everybody's house if you don't know how to do it efficiently. If you only do parts of the city or you do it in waves at different times, you can waste significant amounts of money.”
Stamp of approval
The presence of CLF’s smart money offers yet another benefit: It can provide assurance to traditional banks and other funders looking to give additional funding to municipal recycling programs. Banks like to co-invest in project financing, and CLF’s money and expertise can be seen as a stamp of approval by an independent party that the project makes sense and will get the guidance it needs to succeed.
“They just made it a more attractive opportunity,” Robert Knecht, director of public works for Memphis, says of CLF. “You can make it happen a little faster if you can obtain a loan from an organization like Closed Loop Fund, who is promoting recycling at a high level and is willing to partner with you with some favorable terms.”
In Chicago, CLF provided funding to upgrade an existing MRF to increase its throughput from 20 tons a day to 20 tons an hour, with increased revenue opportunities and savings for the operator, Lakeshore Recycling Systems. The fund loaned Lakeshore $1.5 million, which leveraged another $7 million coming from Comerica Bank.
The problem was that Lakeshore was collecting more recyclables than it could process. “We controlled 100,000 or so tons of recycled material that we were basically using fairly rudimentary and fairly antiquated sorting technology to harvest,” Alan Handley, Lakeshore’s CEO, explained. “A lot of it we were ultimately unable to harvest. We either had to send it to other parties to have them take the value, or send it to landfills.”
When the 40,000-square-foot high-tech materials recovery facility, called the Heartland MRF, opened in March in Forest View, Ill., just west of Chicago, it became a victim of its own success. When word got out about a new facility, Handley told me, “We found out that there's a massive supply and demand disequilibrium, that there's not enough single-stream recovery assets out there.” The company found it could make more money taking in recyclables from other firms than from processing the recyclables it collected at curbside. Today, the plant runs at capacity with third-party waste from the Chicago region, while workers hand-sort the recyclables Lakeshore collects within its own service area. Clearly, there's a need for even more Chicagoland MRFs.
Closed Loop Fund’s limited partners — the big brands that kicked in the original $100 million — seem satisfied with the results, if Unilever is any indication.
Since 2010, Unilever has had a recycling target as part of its Sustainable Living Plan, which is global in scope. But the company’s U.S. operations were lagging.
“We needed to think more transformatively,” Jonathan Atwood, who heads sustainability for Unilever North America, told me. “We needed to think about something that's going to change the way we do recycling in the U.S. A combination of more recycling systems for residential homes, education programs — all were well-intended, but they weren’t moving the needle fast enough, big enough, and in my mind, systemically.”
The company had tried its own packaging takeback programs. It partnered with a small firm to recycle deodorant packages, but the recycler went out of business.
The deodorant project pointed up the challenge. “The tonnage that would come through was decent, but it wasn't necessarily something that would self-sustain in the longer term if we're trying to produce post-consumer material to feed back into our products,” explained Julie Zaniewski, packaging sustainability manager at Unilever. “We need massive scale to do that and to have a consistent material. It's very difficult to essentially close the loop on your own bottle individually. That's where the wide-scale systemic piece came in.”
When recycled materials flows become available at scale, opportunity follows, says Zaniewski. “Once we have a consistent feedstock of, say, polypropylene, then you can start including it in your packaging at much higher levels. We've seen that market in particular exponentially grow. Ten years ago, we didn't see any recycled polypropylene. Now you see it across a number of different products. That's simply because they're finding value in it where they didn't otherwise look.”
Beyond the material benefits to Unilever is the partnership among CLF’s investors. “This has been just phenomenally important for Unilever North America because it is a pre-competitive collaboration,” says Atwood. “We're regularly getting together. We're reviewing proposals coming in. We’re seeing the value of the due diligence process.”
He continued. “In a pre-collaborative space, not everybody gets exactly what they want by design. Everybody has been very open about what their needs are or what they're focused on, but it doesn't mean that any one company wins and everybody else loses. The whole idea here is, ‘Let's start getting more valued material back and raising the bar for all materials.’"
Buoyed by the collaboration, the deal flow and the initial success of its portfolio, the Closed Loop Fund already is viewing opportunities to leverage its model to support the emerging circular economy. “We are very excited about the potential for a circular economy,” says Rob Kaplan. “Which is why we decided to expand the platform to look at other waste streams like food and organics, as well as electronics and apparel. Which are all substantial pieces of what's going to landfill today.”
As CLF expands its scope, Unilever’s Atwood is all in. “I could envision a day when we have a CLF on biodigesters or a CLF on agriculture. I think this model of corporations and companies coming together and putting financial resources on the table is going to be the driver of transformative change — not waiting for government or others to step in.
“It's like, ‘We want in on this issue. It's important to our company. We don't necessarily know what the end looks like. We've tried on our own and didn't get as far as we want to. Let's do it together.’"