What is the circular economy and why is it essential for real sustainability?
What is the circular economy and why is it essential for real sustainability?
Today’s population consumes 1.7 times more resources than the Earth can sustain, yet the global population is growing fast*. By 2050 it is set to exceed 9 billion.
Despite plans to reduce them, greenhouse gases are also being produced at a rate which is rapidly destabilising the climate.
Our economic model is outdated and must change. A “circular” economic model offers ways to cut waste in both energy and materials, and reduce environmental harm.
But what is the circular economy, how will we get there, and how can investors engage?
What is the circular economy?
A circular economy delivers what consumers need without accepting that materials will be discarded and pollution created in the process. It challenges the existing “take-make-waste” approach, which consumes finite resources that are used briefly, and then discarded, often directly to landfill.
A circular economy “designs out” waste and pollution to keep materials in use. 55% of global greenhouse gases are created through energy use. What few people realise is that 45% is generated from production processes (spanning industry, agriculture and land use). A circular economy designs products and services with efficiency, reusability and recyclability in mind.
This is a global, durable trend which is essential to protecting the planet and living standards long into the future. Governments are introducing clear targets and policy support to close the economic loop. Consumers are demanding sustainable products and services and insisting on higher environmental standards. Technology is also helping deliver the transition, ranging from materials science to digitisation.
This will create an estimated $4.5 trillion opportunity by 2030 and $25 trillion by 2050. Investors can back - and benefit – from directing capital towards its success. We believe superior returns can be generated by investing into such impactful companies. Competitors that lack the vision or capacity to adopt to a circular model, will wither.
Why is it so important?
The world ecological footprint measures how much biologically productive area it takes to provide for the competing demands of the human population. This includes space for fishing and growing food, for fibre production and timber regeneration. It also includes accommodation, commodity extraction and infrastructure, as well as absorption of CO2 from fossil fuels.
We passed the threshold of natural, annual regeneration in the 1970s, and now require about 170% of the area that can replenish itself naturally. Population growth means we will hit around three times the sustainable level by 2050.
Only around 16% of waste is recycled globally, and waste generation is set to rise by over 70% by 2050. 80% of all plastic produced globally is wasted, with just 9% recycled. That means 12 million tonnes of plastic enter the ocean per year. Nearly a third of all food produced worldwide is wasted.
Over 32 billion cubic metres of water is lost every year due to leaks. 80% of wastewater globally is currently released untreated. This against a backdrop of nearly 60% of the world’s fresh water aquifers having already passed their tipping point for replenishment, with water demand set to grow 50% by 2050.
The International Panel on Climate Change forecasts that to keep temperature change to 1.5 degrees above pre-industrial levels, we need to reduce greenhouse gas emissions by 45% from 2010 levels by 2030, and be at net zero by 2050. Despite this, the US’ Energy Information Administration still expects greenhouse gas emissions in 2050 to be 30% higher than they were in 2010.
While it’s a bleak backdrop, it at least means we have a staggering opportunity-set to target when seeking companies that design out waste and pollution and keep products and materials in use.
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.
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.
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.
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.
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.
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.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.