The transition to a circular economy should bring huge environmental benefits, including reducing greenhouse-gas emissions, slowing down the use of natural resources and helping to limit biodiversity loss. It should also create significant opportunities for investors.
Political authorities around the globe have a central part to play in driving businesses and consumers to apply the key tenets of a circular economy:reduce, reuse and recycle. That could involve adopting regulations and/or incentives that encourage a move to greater use of digital products, virtual experiences, and more recycling of consumer durables and clothes.
You may not find the US, China and the EU agreeing on many things, but they appear united on the importance of forcing through the transition to a circular economy. All three have passed legislation that will support the transition. While there are very good environmental reasons for doing so, governments also recognise the long-run competitive advantages that will accrue as US, Chinese and European companies adapt and rethink their operations, and gain an edge before the rules are tightened in the rest of the world.
Sounding the alarm
Evidence as to why action is required abounds. A well-known measure of humankind’s impact on the planet’s resources is Earth Overshoot Day. Created in 1971, this marks the date when humanity’s demand for ecological resources and services in a given year exceeds what the planet can regenerate in that same year. This year, Earth Overshoot Day fell on 2 August, meaning that 1.7 planets are required to satisfy global consumption this year.
As living standards rise in less developed regions, the pressure on planetary resources will only intensify. Our current linear economic model, or ‘take-make-waste’, in which resources are extracted, products made and waste material discarded, is devouring ever more resources each year. By 2050, if we don’t follow the path to a circular economy, we will be consuming almost double the amount of resources that were used in 2019: 184 gigatonnes (Gt) in 2050, compared with 100 Gt in 2019.
Reasons to be cheerful
However, there is hope. The OECD’s 2019 Global Material Resources Outlook to 2060 projects that structural and technological change could slow the growth in materials use. Moreover, there is huge scope to make relatively easy gains. Currently, for example, over 90% of all materials are wasted. Worryingly, the percentage of secondary materials recycled back into the global economy has fallen from 9.1% in 2018 to 7.2% now.
So, where can the gains be made? We could start simply by recycling more of our electronic items – less than 40% of electronic waste in the EU is recycled, for example. Recycling this waste stops toxic materials from being dumped in landfills, hence protecting the health of human beings and wildlife. Recovering valuable materials from electronic products also saves and conserves natural resources. Moreover, while electrifying transport should help reduce greenhouse-gas emissions, the batteries that power these vehicles also need to become more sustainable: recycling and repurposing more of the materials used to make batteries will help achieve this goal. There is huge scope to increase recycling in other areas; packaging waste in Europe, for example, reached a record 173 kg per inhabitant in 2017.
Engaging and investing to promote the circular economy
Most of the negative effects of the linear economy are generated by a relatively small number of companies. Around 20 petrochemical companies are responsible for 55% of the world’s single-use plastic waste. Consequently, by engaging with these companies, asset owners (as well as consumers and other stakeholders) can make a significant impact.
Moreover, there is a huge investment opportunity – potentially of around USD 4.5 trillion – in ‘circularity agents’, or those companies that will facilitate the shift to a circular economy. The development of this sector will also create significant employment and drive economic growth. The fact that currently around half of the world’s top 100 companies are already aiming to ensure that the materials they use remain constantly in use provides a snapshot of the scale of the investment opportunity.
The role of investors
We believe financial institutions and investment managers have an important role to play. At BNP Paribas Asset Management, we have built a comprehensive stewardship policy and investing directly in circular topics. Our EUR 1 billion circular thematic Exchange-Traded Fund (ETF) replicates 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. The main circular business models and industrial sectors that we are examining for possible investment opportunities include the following:
- Circular supplies: companies that provide renewable energy, or bio-based or fully recyclable input material to replace single-lifecycle inputs. Industrial sectors include renewable energy generation and equipment, biofuels, and fuel cells.
- Resource recovery: companies that recover useful resources or energy from disposed products or by-products. Industrial sectors include waste management and 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, and 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, and house sharing.
- Product as a service: companies that offer product access and retain ownership. Industrial sectors include cloud computing and leasing services.
In conclusion, the transition to a circular economy should help to reduce pressure on natural resources, the environment and supply chains, while boosting economic growth and creating jobs. Moreover, the transition is likely to create a wealth of opportunities for investors.