2025 is a Big Year for Sustainability in Packaging

The year 2025 looms as a major deadline for sustainable packaging. © bodnarphoto – stock.adobe.com

How CPGS Are Responding to Stakeholders

By Brian Flynn, Managing Director at William Blair

Sustainability continues to gain momentum as a key focus area in the consumer-packaged goods (CPG) space, with regulators and, more recently, capital providers joining consumers in applying pressure to CPGs, and ultimately packaging companies. That pressure only shows signs of increasing, especially in the near term for major brands and the companies that make packaging for their products.

Part of the near-term pressure stems from the fact that 2025 looms as a major, if somewhat symbolic, deadline for some of the world’s biggest companies and CPG brands. The problem is partly self-created, as many corporations announced sustainability goals several years ago with 2025 as a deadline — often because it was far in the future, but not too far off to seem meaningless.

Now, with the clock ticking, many companies are well behind their stated goals and must sprint if they want to make up ground. CPGs — already under pressure given the aforementioned trends — will feel an additional push for sustainability, even if they weren’t the ones who committed to the 2025 goals.

Regulatory and Investor Pressures

While consumers’ focus on sustainability is likely the prevailing source of pressure on retail brands and CPGs, actions by regulators and investors have garnered a great deal of attention in recent years. On the regulatory front, the Biden administration in March 2023 announced goals to “demonstrate and deploy cost-effective and sustainable routes to convert bio-based feedstocks into recyclable-by-design polymers that can displace [more than] 90% of today’s plastics and commercial polymers” within 20 years.[1] The goals are nonbinding, but they come as the European Union also seeks to crack down on packaging waste.[2]

Simultaneously, investors’ focus on sustainability continues to increase across both existing investments as well as new opportunities. As of 2021, private equity impact funds, which are pools of capital dedicated to investing in sustainability-centric businesses, had $18 trillion in assets under management, which was forecasted to grow at approximately 15% annually to about $34 trillion by 2026.[3] Even though these trendlines slowed somewhat in 2023 due to the dislocation in the fundraising market, the overall momentum in capital allocation to sustainability-focused investments continues.

In addition to capital specifically being raised for impact (sustainable) investment opportunities, financial investors are applying a sustainability-centric filter when assessing potential investment opportunities. Investment committees at private equity funds continue to face pressure from Limited Partnerships (LPs are investors within the private equity fund) to invest in businesses that are not seen as harmful to the environment.

Going forward, we see a company’s sustainability profile becoming a major consideration in how the business is valued. An increasing number of General Partners (GPs) and LPs are aligning on a standardized set of sustainability metrics and mechanisms for comparative reporting across the packaging industry, to assist in quantifying a relatively qualitative topic to date.

How CPGs Are and Should Consider Responding

To respond to these trendlines, CPGs are utilizing environmental, social, and corporate governance (ESG) or sustainability reports to highlight the progress made in pursuit of previously communicated ESG targets, albeit the results are materially behind schedule. The development and introduction of capabilities and processes to audit and monitor adherence to sustainability-focused metrics and goals communicated by large corporations will continue to come into focus as consumers look to hold companies accountable with their wallets. Additionally, regulators may one day view sustainability targets as forward-looking guidance akin to earnings forecasts.

In addition, packaging providers are turning to novel materials (e.g., bioplastics, molded fiber) and refining the design of existing packaging to replace or reduce the use of virgin and single-use plastic by utilizing more recycled content in plastic formulations. However, the lack of supply for bio-based materials and the state of the world’s recycling infrastructure poses challenges for companies looking to enhance their sustainability profile. Given the ever-increasing demand for sustainable materials and packaging, we see increasing momentum for future investments in innovative, sustainable materials, as well as recycling infrastructure to enable a more circular environment for plastic packaging.

In the near term, packaging providers and CPGs will likely look to diversify their exposure to a specific sustainable material and/or process, given that neither regulators nor consumers have decided on the preferred substrate of choice. This approach will likely result in a slower adoption of a true, sustainable alternative to virgin plastic, but the longer-term benefit of developing a breadth of sustainable options will expand the longevity of utilizing these eco-friendly solutions.

About the Author

Brian Flynn is a managing director for William Blair, based in the firm’s Chicago office. Brian leads William Blair’s North American packaging practice, and he has over 10 years of sector, M&A, and capital markets experience working with corporate and private equity clients globally. Prior to joining William Blair in 2013, Brian worked for Deloitte in their audit advisory practice. Learn more at  www.williamblair.com.

[1] Source: White House: “Bold Goals for U.S. Biotechnology and Biomanufacturing,” March 2023.

[2] Source: European Commission: “European Green Deal: Putting an end to wasteful packaging, boosting reuse and recycling,” November 30, 2022.

[3] Source: PwC: Asset and wealth Management revolution 2022: Exponential expectations for ESG.