Global Recycling Day on 18 March is a timely reminder of how Covid-19 exposed many failures of a linear ‘take-make-dispose’ use of resources, and highlighted the need for a more circular ‘reduce-redesign-reuse’ approach for many stakeholders including investors.
Recent research from the University of Warwick concluded that a circular economy could help the world recover from the pandemic, while also helping nations reach net-zero carbon emissions goals.
As things stand today, it would take 1.6 Earths to produce all the renewable resources used by humans, and this is set to rise to the equivalent of two Earths-worth of renewable resources a year by 2050. Simply put, this is not a sustainable path for the planet’s future.
If there is one upside of any kind that has arisen from the pandemic, it is that it motivates the world to fundamentally re-think societal, business and economic growth models: To avoid waste and seek innovative, less wasteful opportunities.
The linear economic model is just no longer viable. A circular model of production and consumption is needed, one that focuses on extending the life of products, reducing and reusing waste, and leasing and sharing goods and services (see Exhibit 1).
Exhibit 1: Five circular business models
Business models identified by Accenture in its analysis of more than 120 case studies of companies that are improving resource productivity in innovative ways. Source: Accenture, ECPI, BNP Paribas Asset Management; as of 30/04/2019. For illustration purposes only.
USD 4.5 trillion up for grabs
At the 2020 World Economic Forum, it was estimated that there is some USD 4.5 trillion of value potential in the circular economy.
The Ellen MacArthur Foundation, which works to speed up the transition to a circular economy, believes that, post-Covid, “the circular economy, as an instrument to decouple economic growth from resource use and environmental impact, opens up the way for a resilient recovery.”
The foundation recently set out 10 circular investment opportunities across five key sectors:
- The built environment: Renovation and upgrade of buildings; building materials reuse and recycling infrastructure
- Food: Tools enabling farmers to shift to regenerative agricultural production; food surplus and by-product redistribution and valorisation infrastructure
- Plastic packaging: Innovative reuse business models; plastic recycling infrastructure
- Fashion: Rental and resale clothing business model; clothing recycling infrastructure
- Mobility: Shared vehicle systems; low-carbon and resilient transport infrastructure
Companies can also boost their resilience against future pandemics by using disruptive digital technologies or smart manufacturing tools. Big data, for example, can help streamline supplier selection processes. Cloud computing can be used to facilitate and manage supplier relationships. Logistics and shipping processes can be improved through automation and the internet of things.
Circular economy – Ways to close the gap
There are numerous ways for investors to play a role, for example, by:
- Supporting circular economy pure players, be they large companies or start-ups
- Considering green bonds and sustainability-linked loans integrating circular economy performance indicators and targets
- Supporting product-as-a-service approaches and ways to optimise product end-of-life, for example, for information technology equipment.
Companies themselves have begun thinking circular too.
- A leading US sporting goods maker has committed to doubling its business with half the impact. It fights waste through more efficient design and manufacturing technologies.
- Another has an IT equipment recovery unit that processes nearly 30 000 devices a week. Over 99% of the end-of-life equipment and product waste returned is reused or recycled.
- A large earthmover maker operates remanufacturing and rebuild programmes, reducing waste and minimising the need for raw materials for new parts.
Diversification potential for investors
Such companies would qualify for a circular economy index. The ECPI Circular Economy Leaders Equity index, a euro-denominated gauge of 50 major companies, is one point of access for investors interested in this approach.
A tracker on the index includes companies in five categories – circular supplies, resource recovery, product life extension, sharing platforms and product as a service. The variety of sectors covered allows for portfolio diversification benefits and participation in a broad future-proof growth trend.
The circular economy is about ways of producing and consuming that concern all stakeholders in society. Companies that have understood these challenges and implemented the necessary changes should have a sustainable competitive advantage, making them worth investors’ consideration.
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