How do we deal with man-made ecological degradation and the fastest depletion of resources in the history of our planet? The solution may include a move to more digital products, virtual experiences, and more recycling of consumer durables and clothes. Broadly speaking, it is about transitioning to a circular economy: reduce, reuse, recycle.
Fortunately, there are policy initiatives supporting this transition. They include China’s ‘green is gold’ approach to integrating economic, social and ecological developments and its implementation via the 2008 Circular Economy Promotion Law, 2013 Circular Economy Development strategy and 2021 Circular Economy development plan.
Among EU and US regulation, you’ll find the Circular Economy Action Plan and A European Green Deal for Europe; the Resource Recovery and Circular Economy Act, the US Circular Economy Policy Database and National Recycling Strategy for the US.
Arguably, such measures can bring long-run competitive advantages since they encourage European, US, and Chinese companies to adapt and rethink their operations before the rules are tightened in the rest of the world.
Reasons for alarm
The need for action is illustrated by the depletion of rare resources, increasing waste generation, and pollution of land and water. Geopolitical tensions hinder global logistics, limiting access to resources and adding to the strains.
A well-known measure of our impact on the planet’s resources is Earth Overshoot Day. Created in 1971, it marks the date when humanity’s demand for ecological resources and services in a given year exceeds what the planet can regenerate in that year. This year, Earth Overshoot Day falls on 2 August, meaning that 1.7 planets are required to satisfy this year’s needs for renewable resources.
With living standards forecast to rise in less developed regions, thepressure on planetary resources will only grow from here. Business as usual, also known as the linear economy, is estimated to require almost double the resources – 184 Gigatonnes in 2050 – compared with 100 Gt in 2019.
The OECD’s 2019 Global Material Resources Outlook to 2060 report offers a glimmer of hope: it projects that structural and technology change could slow the growth in materials use.
A whole lot of room for improvement
Efficiency gains will be crucial. Currently, over 90% of all materials are wasted. The percentage of secondary materials cycled back into the global economy has fallen from 9.1% in 2018 to 7.2% now.
Where can gains be made?
- Less than 40% of electronic waste is recycled in the EU
- Moving to electric mobility solutions enhances the sustainability of the battery value chain
- In 2017, packaging waste in Europe reached a record – 173 kg per inhabitant
- According to OECD, global plastic waste generation more than doubled between 2000 and 2019 to reach 353 million tonnes, but only 9% of it is being recycled
- Less than 1% of all textiles worldwide are recycled into new textiles
- The construction sector is responsible for over 35% of the EU’s total waste generation
- In the EU, an estimated 20% of the total food produced is lost or wasted.
Where to start?
The linear ‘take-make-use-dispose’ model needs to be replaced by a circular economy that allows products to maintain their highest level of value for as long as possible. It is an eco-system in which the waste of one area acts as the ‘food’ for another. It uses various optimisation approaches, for example:
- Using circular supplies, i.e., fully renewable resources
- Working towards product life-extension: reselling, repairing, remanufacturing, upgrading
- Having products as a service and working with sharing platforms: product ownership is retained by the manufacturer or mutualised to reduce inefficiencies
- Implementing resource recovery when treating disposed products.
Rethinking product life and recycling options means working on product concept, avoiding planned obsolescence, and using IT technologies to ensure better starting conditions for future circularity.
Investing to promote the circular economy
The bulk of negative linear economy effects appear to come from a limited number of companies: for example, 20 petrochemical companies are responsible for 55% of the world’s single-use plastic waste. This makes it easier for asset owners (and also for consumers and other stakeholders) to engage with the primary contributors.
Circularity agents – companies facilitating the shift to the circular economy – are looking to tap a USD 4.5 trillion potential global growth opportunity that could create millions of new jobs. Today, almost half of the world’s top 100 companies already aim to ensure that the materials they use remain constantly in use.
We believe financial institutions and investment managers have an important role to play. At BNP Paribas Asset Management, we are building an efficient stewardship policy and are enabling investors to invest in circular topics. Index investing is one option: for example, through the ECPI Circular Economy Leaders index, a basket of 50 stocks in major companies whose selection is primarily based on environmental, social and governance (ESG) criteria.
The index is designed to include companies that either operate in sectors that are circular by nature or that are most likely to benefit from adopting practices and business models typical of the circular economy. Here is an overview of circular business models and industrial sectors:
- Circular supplies: companies that provide renewable energy, bio-based or fully recyclable input material to replace single-lifecycle inputs. Industrial sectors include renewable energy generation and equipment, biofuels, fuel cells.
- Resource recovery: companies that recover useful resources or energy from disposed products or by-products. Industrial sectors include waste management, environmental services & equipment.
- Product life extension: companies that extend the working lifecycle of products and components by repairing, upgrading and reselling. Industrial sectors include apparel & textiles, cars, chemicals, construction materials.
- Sharing platforms: companies that increase the utilisation rate of products by making shared use, access and ownership possible. Industrial sectors include technology, ride sharing, house sharing.
- Product as a service: companies that offer product access and retain ownership. Industrial sectors include cloud computing, leasing services.
The circular economy transition is a move in the right direction of engendering virtuous industrial practices, helping to reduce pressure on resources, the environment and supply chains while boosting economic growth and creating jobs. Circular solutions can provide opportunities for a wide range of stakeholders and investors.
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