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In 2012, Ron Gonen was serving as deputy commissioner of sanitation in the administration of New York City Mayor Michael Bloomberg. Shortly before he was to leave that post, he got a call from Rob Kaplan, director of sustainable products with Wal-Mart Stores, Inc. Kaplan asked him for suggestions on how to go about mining a “major opportunity.”
Walmart was turning the spotlight on its product-sustainability portfolio, with an eye toward making better use of recycled content for plastic packaging, Kaplan says. Despite a growing awareness among companies of the need for greener supply chains, recycling rates had remained stagnant for the previous 15 years.
In April of 2013, Walmart brought together a group of 30 recycling, consumer-products and supply-chain experts. Held in New York City, the meeting was co-hosted by Goldman Sachs. The question that was posed: How can Walmart boost both the supply of, and demand for, recycled materials? In the process, it should be able to reduce the cost of collection and reuse.
One of the key themes to emerge from the summit was a lack of access to capital at the municipal level for building recycling infrastructures. In theory, says Kaplan, cities ought to be able to turn their waste-management operations into profit centers. But they were lacking the resources to proceed.
With the backing of Walmart and money from manufacturers, recyclers, other retailers and consumer goods companies, Kaplan and Gonen co-founded the Closed Loop Fund. Additional charter members included Procter & Gamble, The Coca-Cola Co., PepsiCo, Johnson & Johnson, Unilever and Keurig Green Mountain.
The group vowed to invest $100m over the coming five years in the development of recycling infrastructures and services nationwide. The money would be offered to qualifying municipalities in the form of mostly zero-interest loans, to be repaid through savings derived from the sale of recyclable material, and the reduced dependence on landfills. (The term “closed-loop” refers to the financing aspect of the initiative, which is expected to yield profits that are plowed back into future projects. But it also describes the physical flow of recyclable materials in the chain.)
Walmart already knew that the idea was feasible. Historically, says Kaplan, it has spent half a billion dollars annually on waste management. (In 2010, it set a corporate goal of eliminating 20 million metric tons of greenhouse gas emissions from its global supply chain within five years.) What was once a cost center for the retailer is now yielding profits of some $200m a year.
At the outset, Walmart’s effort was driven by a desire to increase its reuse of plastics. As it began engaging cities about their waste-management efforts, however, it saw the need to optimize the recycling of all types of materials. According to Gonen, about half the recycling stream consists of some type of paper or cardboard. Aluminum and other metals are also potentially valuable components for reuse.
Plastics and glass are more problematic. Bottles made out of high-density polyethylene (HDPE) and polyethylene terephthalate (PET) are promising targets, but their value can ebb and flow depending on the market, says Gonen. And recycled glass yields the lowest return of all.
The benefits to be derived from a large-scale recycling operation can be huge, saving cities hundreds of millions of dollars a year. Yet the cost of a modern facility can run between $15m and $50m up front. And it needs to be handling a critical mass of materials in order to become economically viable.
“Nobody builds a facility in an area where there isn’t more than enough material to fill it,” says Gonen. “The issue that cities run into is a lack of adequate collection infrastructure.”
Gonen isn’t aware of a previous example of “impact investing” that has been applied to recycling or environmental initiatives. Under the plan, money from corporate participants will be supplemented by contributions from the federal government, states and local communities, possibly tripling the amount of available funding. So a project in a given city might involve $3m from the Closed Loop Fund, $2m from the government and $5m from the local entity. Municipalities would pay no interest on the loans, while private companies would be charged “modest” interest rates, Gonen says.
More money is on the way. The first fund is being capped at $150m. So far, according to Gonen, the project has met only with companies with revenues of $5bn and above. (The sole exception, it would appear, being Keurig Green Mountain, whose sales in 2013 were $4.36bn.) The initial level of contribution by each member is either $5m or $10m, depending on North American revenues. In the next funding phase, the group will reach out to companies with revenues in the $1bn-$2bn range, and is currently setting an “appropriate” investment level, Gonen says.
The fund officially opened for business on October 15, 2014, but by that date had already amassed enough projects to keep it busy for the next two years. The first series of loans will be awarded in the first quarter of 2015, then on a quarterly basis thereafter. Applications will pass through a management team, an advisory board made up of the investing companies, and finally an independent investment committee with the power of approval.
Gonen stresses the need for each project to generate an eventual financial return, to prove the initiative’s viability and attract additional capital. In fact, candidates for loans must meet four key criteria. The project in question must be designed to yield payback within seven to 10 years. It must be accompanied by proper reporting mechanisms. It must be scalable, to serve as an example to other municipalities. And it must generate a significant amount of tonnage back into the supply chain.
The ultimate goal is to “see the fund fix this issue around recycling, bring this material back into the supply chain, and create a tremendous amount of economic value for cities and companies,” says Gonen. He believes the closed-loop funding concept could also work in the transportation and healthcare sectors, “where companies in the industry have a vested financial interest in seeing environment or social problems solved.”
