It is our belief that companies who are “pure plays” on the circular economy have a unique opportunity to deliver outsized growth and profits in the coming years.
The transition to a circular economy means moving from the existing “take-make-waste” economic model, to an approach that designs out waste and pollution to keep materials in use. It is driven by the urgent requirement to improve resource efficiency, as well as the need to rapidly decarbonise the global economy.
Accenture estimates that the resource gap (the difference between supply and demand) opening up over the coming decades will create a $25 trillion opportunity by 2050 for circular economy business models. This means there are a lot of opportunities for investors to aim at.
But the best opportunities will be those that are genuine pure plays on the circular economy. We have developed a unique “Circular Score” approach to assessing a company’s circular economy credentials.
As circular economy investors, we want to focus only on these opportunities and our Circular Score approach helps to ensure this. Using this approach, we’ve found that Microsoft and other big tech companies don’t make the cut.
Focus on pure plays, not “good citizens”
We see pure play circular economy firms being able to tap into the trillions of dollars of opportunity over the coming years by helping to close the resource gap. “Good citizens” are more likely to be buying the products/services of our pure-plays than tapping directly into the resource gap opportunity.
We class the likes of Microsoft as a “good citizen”. The company is doing great work on emissions reduction, recycling waste and old electronics from its data centres, as well as investing hundreds of millions of dollars into a climate innovation fund.
But in terms of their Circular Score, Microsoft fails our assessment because the products and services it sells don’t enable or contribute to the circular economy in a direct manner. Microsoft sells software and cloud services (along with other business lines like Bing, Xbox, tablets etc.). These aren’t circular economy enabling products nor are they driven directly by the need for a circular economy.
This is not to say that Microsoft is not a good investment; it clearly has been in the past and has the characteristics of a business that could continue to be in the future.
The same “good citizen” perspective applies to other companies adopting some circular economy best practice. For example, many fast-moving consumer goods companies (FMCGs – often food & beverage or personal care firms) are introducing higher levels of recycled content and other recyclable materials for their packaging. But we don’t view these as pure plays on the circular economy either.
The issue is that these companies don’t see their revenue and profits grow as a result of the adoption of these circular practices. It’s not clear to us that, for example, consumers buy more soft drinks or make-up due to higher recycled plastic content in packages. We anticipate greater opportunity in the companies providing the solutions to solve FMCG firms’ circularity challenges.
These types of companies don’t form part of the universe of stocks that we see benefitting from the circular economy growth theme. And we don’t feel the need to expand our universe to “good citizens” given the size of the opportunity ahead for the pure play winners.
Our Circular Score approach ensures differentiated exposure to a long-term growth theme
We can imagine most investors already have high exposure to the likes of Microsoft and other “mega-cap” companies. These dominate not just the global stock market indices but also many sustainability (including circular economy) and growth funds.
Our approach of assessing every company we invest in through the lens of our proprietary Circular Score helps to ensure investors are getting diversified exposure to a differentiated secular growth theme.
These companies will be the authentic circular economy winners that we believe will see accelerated growth and enhanced cost control from embedding circular practices in their operations. It gives us confidence as investors to put capital behind companies with such a strong tailwind in their sails.
Our approach leads us to a greater focus on the smaller and mid-cap parts of the market, rather than the mega-caps who tend to be more in the “good citizen” bucket. These firms tend to be more directly geared into the structural growth trend of the circular economy and are what excites us about the opportunity given we believe these are “underfished”, or lesser-known, waters.