What is the circular economy and why is it essential for real sustainability?
The current economic model is outdated. A transition to a circular economy is needed to ensure greater efficiency and a reduction in harmful practices.
Where are the opportunities emerging?
The success of the transition to a circular economy relies on a combination of influence and innovation. Large, mature firms represent the financial clout and size to enact change on a required scale. Equally, the longevity of linear economic models means certain behaviours are very deeply entrenched. Younger, more agile companies are often delivering the most disruptive and revolutionary ideas. Many young companies – those challenging the status quo - are still private, and not yet listed on public stock markets.
To evolve at the pace needed, both budding companies and those with deep roots will need to play a role. Investors seeking to participate in the circular economy transition should aim to cultivate the greatest flexibility possible, in order to access innovation where it is most abundant.
There are five key sub-themes – originally identified by Accenture and now widely adopted – that will deliver investment opportunities as the global economy makes the transition.
1. Circular supply chain
This involves the introduction of fully renewable, recyclable or biodegradable materials that can be used in consecutive lifecycles. This can reduce long-term costs while increasing predictability within, and control over, a supply chain.
2. Recovery and recycling
Recovery and recycling refers to a production and consumption system where everything that used to be considered waste is revived for other uses. Companies can recover end-of-life products to recapture and reuse valuable material, energy and components.
3. Sharing platforms and product as a service (PaaS)
Sharing platforms use technology to increase the utilisation of assets, prevent idle capacity or find products a new home. Product as a service involves consumers paying for the use of a product rather than the product itself. This shifts the manufacturers’ focus to longevity, reliability and reusability.
4. Product life extension
The product life extension model aims to capture the value from products that may be broken, out of
fashion or no longer needed. By maintaining and improving products through repairs, upgrades or remanufacturing - or by finding a new owner - companies can create massive economic value. More than that, they can greatly reduce the consumption of raw materials and emissions generated from production processes.
5. Technology enablers
These are companies whose products or services provide the tools for a transition to a circular economy. These companies can range across the software, electronics and industrial sectors but all provide necessary tools for a successful circular transition.
Real world example: Back Market
Back Market is one of the word’s largest market places for refurbished electronics including smartphones and laptops. Schroders Capital co-invested in Back Market alongside a longstanding and highly regarded co-investment partner. It now serves more than five million customers across Europe, the UK, the US and Japan.
Back Market was identified as an opportunity because of its strong business model and ambitious expansion plans, but also its contribution to sustainable production of consumer goods. The company has successfully prevented the creation of1,600 tonnes of e-waste as well as 260,000 tonnes of CO2, and saved 160,000 tonnes of raw materials.
Real world example: Case study: Norsk Gjenvinning
Norsk Gjenvinning is a leading waste management company and recycling leader. Of the 2.5 million tonnes of waste under its management in 2021, it recycled 98%, with 60% being recovered as new raw materials. That 2.5 million tonnes represents over 20% of all Norwegian waste, and its recycling activity can save the equivalent of more than 550,000 tonnes of CO2 per year.
Real world example: UPM
UPM is a leading forest products company in based in Finland. From its origins in paper manufacture, the company has been using a “beyond fossils fuels” approach to guide their growth investments.
In recent years UPM has expanded further into pulp and emission-free energy, as well as into sustainable labelling and biofuels. Their next large investment is into bioplastics. They are currently building a plant that will use residue materials from sustainably managed forests to produce bio-alternatives to petrochemical based plastics and rubbers. They are currently working with Coca-Cola to help replace oil-based PET in their bottles with ‘plant-based’ plastics, for example.
UPM’s forests act as natural carbon sinks, while many of their products help to displace fossil-fuel based alternatives. Additionally they have been working on increasing their share of raw materials from sustainable sources towards 100% (83% currently). UPM is also aiming to reduce the amount of waste that goes to landfill, targeting 100% of process waste to be either recovered or recycled by 2030 (89% today). These are only a few examples of companies that are aligned with progress on the circular economy, and we continue to engage with them to ensure their influence will expand.
Urgency to act building investable change
We have pushed past the planet’s limits to support humanity. World leaders, having woken up to the challenge, are now lifting their heads out of the sand and understanding its scale. We need to drastically cut the strain on the earth by rapidly recalibrating the global economy entirely. We believe that by backing companies that will help to deliver this economic reality will outperform those that remain wedded to the old paradigm. More than that, we can ensure that prosperity for future generations is maintained, or bettered.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.