When analysing the global waste problem, one tends to think about recycling rates and circular ways of using materials. These solutions are of course part of the investment theme– but we can also work with more surprising parts of the waste hierarchy. Let us discuss the untapped financial and environmental opportunity, from creating renewable energy at landfill sites in the US.
Historically, trash was collected and thrown into dumps, i.e. holes in the ground, where it often was burned too. Modern sanitary landfills became the solution to this problem, where waste was systematically buried, compacted with heavy equipment, and then covered. Today, there are about 2,600 landfills that handle municipal solid waste across the US.
When the organic matter in these landfills degrades, it releases methane – a potent greenhouse gas that contributes to climate change. Most landfills currently do not capture it effectively, which means that methane from landfill currently makes up 14% of the US’s methane emissions.
While only a small percentage of modern landfills in the US do so, methane can be captured, piped to a central location, and then treated for secondary or advanced uses. “Renewable natural gas” (RNG) is an upgraded, compressed version of these landfill emissions. This is specifically exciting as it can be used to substitute fossil fuels in the likes of transport applications. It is an alternative to crop-based biofuels which controversially compete for land and food crops.
This untapped opportunity is vast, as demand for RNG is expected to grow five times by 2030 due to its carbon-avoiding characteristics (that can be recognised and valued in “environmental credits” called RIN in the US). Demand is driven by the likes of tighter environmental regulation on transport fuels, increasing the minimum renewable components over time, and voluntary or compliance carbon markets.
Of the 2,600 landfills in the US, the Environmental Protection Agency (EPA) has identified 500 sites with great potentials for RNG – of which more than a third are managed by three companies held in EQ’s portfolios. The largest, Waste Management Inc (WM), is working to capture this new commodity revenue stream for itself. While some other companies are leasing rights to the landfill gas to external partners, this company is investing in RNG facilities themselves to keep control.
Through unlocking these fully new revenue streams, the company projects to significantly increase its free cashflow (money left after paying operating and capital expenses) https://statics.teams.cdn.office.net/evergreen-assets/safelinks/1/atp-safelinks.html.
On top of this, WM’s investment in RNG facilities unlock new tax credits from the Inflation Reduction Act rules, introduced in the US to help decarbonise their economies.
Together, we expect this to be a significant tailwind to WM’s share price going forward on top of its recent positive performance (up already 17% in 2024 as of 22/05).
This is another example of how sustainability developments like Renewable Natural Gas can be captured by innovative businesses and turned into financial opportunities for investors.
