Almost every major asset class has seen the launch or increase of investment products focussed on the Circular Economy. This refers to a less wasteful method of production in which resources are continually reused, remanufactured, and recycled, reducing the dependence on virgin resources.
Circular solutions have been predicted to generate global growth opportunities approaching $4.5 trillion by 2030. Research in 2021 by Bocconi University, the Ellen MacArthur Foundation and Intesa Sanpaolo (based on a sample of 222 companies) showed that companies can deliver superior risk-adjusted returns by implementing circular approaches. Circularity can also help improve countries’ financial resilience and reduce environmental damage.
The need is pressing and clear; the traditional ‘take, make, dispose’ linear approach to production is incompatible with our resource availability. Our current consumption and waste levels are over-extending Earth’s resources by almost double (1.75x), an ecological overshoot2.
The Circular Economy Funding Gap
The European Union produces more than 2.2 billion tonnes of waste every year. Merely adopting renewable energy will only address 55% of the total global greenhouse gas emissions. The remaining environmental impact is derived from our production and utilization of products and food, as well as our land management practices.
Today, our global economy is only 7.2% circular (i.e. sustainable). Despite growing market interest and media ‘buzz’, this is actually a decline from 9.1% of our economy being Circular five years ago.
Initial estimates by Chatham House and Just Economics show that worldwide public sector spending on the circular economy totalled $500bn-$600bn in 2020, compared with overall government spending of about $13 trillion. Meanwhile, the value of annual circular economy spending by the corporate sector is estimated at around $850bn, compared with $35 trillion in linear spending, suggesting that the circular economy’s share of total global investment is only about 3 per cent each year.
There is no denying that governmental support will be crucial if the Circular Economy model is to be fully embedded. While some industry sectors will be more easily able to shift to a circular model and reap rewards without facing high costs, other sectors that would face high capital expenditure to do so should be offered governmental incentives and support. If the transition risk is only to be borne by these companies, wholesale adoption of the Circular Economy model will remain elusive.
Finland stands out for the comprehensiveness of its approach. Back in 2016, it became the first to adopt a national “road map” to a circular economy — a commitment it reaffirmed last year by setting targeted caps on natural-resource extraction.
One example of an initiative in Finland can be found in its plentiful fisheries industry. 93% of Finnish eat fish but only 1/8 of the species available are utilised. As part of its Circular Economy commitment, the Finnish government approved funding for projects that aim to develop under-utilized fish into food, with the goal of increasing usage of under-utilised species by 1 million kg.
How to get exposure to the theme
Recent examples of active thematic equity funds available for investors seeking exposure to the Circular Economy theme include:
- RobecoSAM Circular Economy Equities (MainStreet ESG Rating of 4.6/5.0) – fund that focuses on innovative solutions in the area of redesign inputs, circular use, enabling technologies and loop resources;
- Eurizon Equity Circular Economy (MainStreet ESG Rating of 4.5/5.0) – fund that identifies companies exposed to the circular economy theme through a bottom-up process that put particular attention to a proprietary circularity score, free cash flow yield, and the internal ESG score;
- BGF Circular Economy (MainStreet ESG Rating of 4.4/5.0) – fund that invests in a portfolio of equity securities of companies that are involved in activities related to raw materials, across all industry sectors, that contribute to the advancement of a Circular Economy;
In summary, the circular economy is important to financial markets because it offers opportunities for cost savings, innovation, risk mitigation, and long-term resilience. It aligns with growing consumer demand for sustainable practices, and companies embracing circular principles may attract more investors and enhance their competitive advantage in the marketplace. As awareness of the circular economy’s benefits continues to grow, more investors are likely to prioritize circular economy considerations in their investment decisions.
By Simone Borsetti, Research Associate at MainStreet Partners