Replacement of plastic with suitable alternative materials, including recyclable paper or coated paper, and biobased or compostable materials that can improve the quality of collected plastic packaging waste. Substitution business models offer an alternative where reuse models cannot be scaled or applied.

Substitution solutions can provide benefits in applications that are hard to recycle or reduce, but can have high GHG emissions due to energy-intensive production and end-of-life disposal (e.g. glass and metal), and thus must be undertaken carefully to avoid increasing emission or causing inadvertent food waste.

The applicability of the substitution lever is currently constrained to niche applications due to several boundary conditions, including: technological readiness, performance, climate impact, affordability, and convenience.

At present, the use and innovation on materials for plastic substitution are twofold:

Plastic substitutes

Natural materials that have similar properties to plastics. Paper and fiber are the most used materials, and likely represent the majority of the sector. Plastic applications suitable for substitution with paper and fiber include food and beverages and other packaging applications. Paper substitutes are undergoing rapid innovation, resulting in improved barrier properties and performance, but substitution by paper must be conducted carefully on a case-by-case basis to avoid unintended consequences such as risks of deforestation and GHG emissions.

Substitution with innovative materials

Innovative materials such as compostable materials are prime opportunities for a shift in applications with low recycling rates such as food contaminated product and packaging. However, the higher cost of these materials, and their potential risk of interfering with existing recycling infrastructure limits their functional performance.

All substitution solutions need careful management at end of life and have varied environmental impacts. They create opportunities, risks, and trade-offs that must be carefully managed and assessed on a case-by-case basis.

Costs and revenue model

Operating expenses include recycled or renewable raw materials, utility costs (i.e. energy and water), and logistics

Paper and coated paper packaging is a mature sector, representing roughly 50% of the total packaging market size (Bain & Company (2023). Paper & Packaging Report 2023 ), and the Capex requirements are higher than for innovative materials as their more mature technologies require relatively bigger facilities.

Investment in the paper packaging sector has come both from strategic packaging investors who are looking to improve their supply chain, as well as from external private equity (PE) players. Investment activities have been enabled by resilient end market trends, as well as industry consolidation. Many of the leading paper packaging companies are publicly listed companies.

Investments in innovative technologies are primarily funded as in-house R&D initiatives, such as the Nestlé Institute of Packaging Sciences launched in 2018 dedicated to the research and development of environmentally friendly packaging solutions. Strategic investors have also engaged in acquisition of early-stage companies to acquire technology and knowhow. Nascent technologies and early-stage pilot programs are also eligible to receive support from philanthropic grants.

Grants can be critically important for support of pilot programs of innovative and emerging substitution technologies.

Other enabling conditions

• Improved manufacturing capacity: New natural substitutes are challenged to ramp up manufacturing capacity. While many solutions exist, their production does not yet have the scale to provide a full substitution. Financing and public support is needed to meet product expectations and market demand.

• Paper and organic waste processing capacity: Considerable investment and policies are needed to expand paper and organic waste collection and processing facilities that can accommodate and safely process substitution materials, particularly in middle-/low income countries.

• Standard-setting that defines acceptable compostable materials according to locally available waste infrastructure and provides clarity around definitions of terms such as "biodegradable."

• Technological advancements in materials science and manufacturing technologies to create viable alternatives.

• Nascent technology and unproven business model: New material technology solutions are still in their infancy. Further investment is needed to support the development of these solutions to full maturity.

• Reliance on progressive policies on circularity: Market demand for substitute solutions is driven by regulation targeted at enforcing production choices and/or shifting consumer preferences. For these reasons, most investment capital to date has been deployed in Europe and North America.

• Climate impact: Substitution solutions can have high GHG emissions due to energy-intensive production and end-of-life disposal. Sourcing challenges for virgin wood-pulp for paper mean substitution to paper-based packaging must be carefully considered