Investing in the circular economy

13/05/2019

How companies can target more sustainable growth – for the planet and their investors – by ‘closing the loop’.

Glossary

For explanations of the investment terms used throughout this article.

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Since the advent of the industrial era, linear economic models have been dominant. Resources have generally been extracted, used, and then cast aside as waste.

This 'take, make and dispose' approach has its limits though, of course. Especially in a world that is growing in both population and wealth, and therefore in the amount it consumes.

Not only are many important resources finite, or increasingly difficult to obtain, but their extraction and single-use can have costly implications for the environment and society.

An alternative to the linear model, and a potential solution to some of its challenges, is moving to a more circular economy, where waste from production and consumption becomes a resource to be recycled, repaired and reused. We can see this as ‘closing the loop’.

Waste not, want not

As well as reducing unnecessary waste and mitigating the risks of resource scarcity, making the transition to closed-loop processes can help decouple long-term growth from the extraction of resources.

The importance of this shift is reflected in the UN Sustainable Development Goals, which articulate the world’s most pressing sustainability issues. Specifically, Goal 12 is to ensure sustainable consumption and production patterns.

Realising this ambition could also deliver an economic windfall. Research by Imperial College London in 2015 estimated that successfully transitioning to a circular economy could add almost £3 billion to the UK economy each year alone, and create 175,000 new jobs.

This transformation will take more than a change in mindset; it also requires new processes and systems. Durable goods must be designed so they can be repaired, not replaced, and global supply chains will have to be reimagined to enable the reuse and recycling of materials.

Closing the loop

Some companies and sectors have already made great progress towards closed-loop processes that can overcome sustainability challenges. A good example is in the packaging industry.

The widespread use of disposable packaging, for all kinds of purposes, has contributed to highly visible environmental challenges, including plastic waste.

The sustainable practices adopted by one of the world’s largest producers of corrugated boxes illustrates how innovation can transform a challenge into an opportunity.

DS Smith is an industry leader when it comes to closed-loop recycling – a process whereby waste is collected, recycled and then used again to make the same product it came from. After collecting corrugated paper from retailers and other businesses, the company processes the recycled material in its own paper mills to create new corrugated boxes. By recycling paper fibres, the company estimates it can save over 360,000 trees a year from being cut down.

Targeting sustainable growth

I believe the transition to a more circular economy should create compelling long-term opportunities for investors who would also like to deliver a positive impact for the environment.

Where companies can successfully shift to closed-loop business models, shareholders can expect to benefit in a range of ways. Transforming waste into a resource should unlock greater value for businesses and, in many cases, reduce costs and risk in their supply chains.

Pioneering companies can also be expected to profit from tailwinds where their businesses align with sustainability trends, such as growing demand for responsibly sourced goods. Early movers stand to steal a march on competitors.

As investors in companies that contribute to a more circular economy – and therefore to more sustainable consumption and production patterns – I believe we can target a positive impact on the environment, alongside sustainable financial returns over the long-term.

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.