The next big thing in investing? Greening landfills while boosting bank balances

Landfills are the mortal enemies of environmentalists, and for good reason. The mountainous dumping ground is often an “out of sight, out of mind” necessity for the community that contributes to its growth, but forms a massive environmental hazard with risks of groundwater contamination, methane gas formation and migration, and disease vector issues. In other words, they are the antithesis of the current movement towards greater sustainability, and certainly not an obvious protagonist for a classic impact investing playbook.

However, Greenfill Trust is a mechanism aimed at harnessing the power of finance in the fight against plastic trash. Conceived by Ang Hui Xue, Goh Hanming Kenneth, Heng Wei Xin Jessica, and Lau Chen Lin from the SMU MSc of Wealth Management (MWM) programme, the project emerged as a top 16 finalist at the 11th Kellogg-Morgan Stanley Sustainable Investing Challenge, held virtually in April 2021.

The idea leverages on the securitisation of landfill through real estate investment trusts (REITs), to turn plastic trash into dividends for investors, while creating a circular economy by ensuring that plastic waste is properly recycled, reused, or repurposed to generate further economic activity.

“One of the biggest challenges we face in sustainable investing is that we often have to sacrifice returns to provide for the environment, and this is not something we stand for,” says Kenneth.

“As Singaporeans, we are a practical bunch and wanted a solution that is both financially attractive, as well as purely sustainable. Combining those traits with Singaporean’s love for real estate, we thought that a structure like this may be able to tick all the boxes.”

In the current waste management lifecycle, waste is collected from the municipals and dumped into their own landfills. However, a portion of this process is often mismanaged, leading to 79 per cent of plastic ending up in landfills rather than recycled, because of the challenges in sorting the trash and the relative ease of simply dumping plastics. Hence, Greenfill Trust aims to securitise the last part of the disposal process and develop it into a REIT, in a bid to recover proper management of plastic waste.

While the notion of waste management REITs is not entirely new — a Credit Suisse analyst had predicted that waste management REITs will pick up steam back in 2013 — the SMU MWM team brought to the table specifics that could make the financial instrument a reality. The trust is structured such that equity investors receive dividends redistributed back via three main revenue streams: The first is a tipping fee, which is a gate fee paid by anyone who disposes of waste into a landfill. Next, before disposal into a landfill, a facility will be put in place where wastes are filtered, further processed and then resold for a second revenue stream. The third revenue stream lies in the sale of renewable energy: once the land has reached its full capacity, it will be reused by being converted into solar farms.

“Equity raised and recurring revenue will be used to invest in new recycling technologies, which will increase both the revenue from sales of recycled products and increase the lifespan of the landfill,” says Chen Lin.

As an investor, the product provides a wider avenue for returns as it is a more liquid asset and is listed on an exchange, providing accessibility to a pure sustainable security that is also income yielding.

“In fact, rather than phrasing it as a substitute financial product to the typical buying of company shares, we would also actually encourage waste management companies to invest in the REIT,” adds Hui Xue.

“Because, from a waste management company’s perspective, removing the land from its balance sheet provides for an asset-light model, increasing return on assets (ROA) and removing the liability of any future potential environmental issues.”

With such a novel take on reducing plastic waste, it was no surprise that the team excelled at the Kellogg-Morgan Stanley Sustainable Investing Challenge. A competition dominated by established US and European universities, the 2021 edition of the challenge was considered one of the most competitive in its 11-year history. There was a 34 per cent jump from 2020 in the number of students pitching innovative finance and investing ideas, with a total of 414 students from 50 countries submitting over 120 proposals that targeted sustainability challenges in 33 countries.

Sixteen teams were shortlisted for the finals, with participants from University of Oxford, Said Business School, University of St. Gallen, Queens University’s Smith School of Business, Frankfurt School of Finance and Management, University of Edinburgh Business School, New York University’s Stern School of Business, Kellogg School of Management, Berkeley’s Haas School of Business, Yale University’s School of Management, Stanford University’s Stanford School of Engineering, and Columbia University’s School of International and Public Affairs and School of Professional Studies

“It was a humbling experience, as we had the opportunity and exposure to showcase our product on the global stage and learn from the best in the business,” shares Kenneth.

“The participants from the other schools had great ideas as well and it was refreshing to hear from students of different nationalities and geographies talk about the sustainability issues they each identified and the solutions which they proposed.”

And coming up with a cool financial product was just the first of many steps during the competition process, especially when the team was made to revise its proposal based on the preliminary judges’ comments, source for subject experts to provide feedback, speak to industry practitioners to better understand the waste management situation, and produce a final presentation deck — all of which took place during their study block. Study blocks are intensive periods during the programme that comprise classes, assignments, case studies, field trips, projects, team activities, evening talks and social gatherings.

“It was challenging for all of us, but we are glad to have survived it through and we gained a lot from our peers from the Ivy League schools and thought process of renowned judges,” admits Jessica.

Besides being a step closer to its aim of creating awareness around sustainability investing, by promoting a circular economy and enabling investors to invest responsibly in an innovative and sustainable product, the challenge also inspired the students to embark on a lifelong impact investing mission.

Hui Xue, for example, is currently working in Mapletree as part of the Singapore real estate developer’s executive programme, and has hopes of launching the REIT soon; while his teammates are also on the lookout for job opportunities in the impact investing space.

“About 10 years ago, the concept of impact investing is probably never heard of,” notes Jessica.

“Now, we see impact investing connecting the financial markets with the real economy and is constantly in the spotlight as we become more aware of the environmental, social, governance struggles across the globe.”