Podcast: Everything you need to know about the circular economy but were afraid to ask
Fund Manager Jack Dempsey joins the pod to discuss investing in the circular economy.
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[00:00:07.880] - David Brett
Welcome to the Investor Download the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett.
[00:00:23.560] - David Brett
Until relatively recently, the world didn't need to worry about the circular economy. In fact, if you mentioned the phrase circular economy just a few decades ago, no one would have a clue as to what you were talking about. And I would guess even today, many of us, while hazarding a guess as to what it is, would struggle to define it.
[00:00:43.040] - Jack Dempsey
If I too were to describe it, it would be about resource efficiency.
[00:00:45.880] - David Brett
That's Jack Dempsey. He's a fund manager at Schroders with a particular focus on the circular economy.
[00:00:52.280] - Jack Dempsey
So what it's really about is trying to decouple economic growth from resource consumption.
[00:00:56.720] - David Brett
In this show we'll be discussing what the circular economy is, why it's not just about recycling and how investors could potentially benefit from it. But in the first part of the show, we're going to take a step back in time.
[00:01:14.060] - Announcer
On Apple Podcasts, Spotify or wherever you get your podcasts. You're listening to the Investor Download.
[00:01:21.340] - David Brett
The foundation of the circular economy is one where products are designed to be reused, remanufactured and recycled. It's a mindset that contrasts sharply with our traditional linear economy, which follows a take, make dispose approach. But to understand why the circular economy is so important now, we need to go back over a quarter of a millennia to before the Industrial Revolution.
[00:01:44.780] - David Brett
Back then, living standards were generally low. Most people lived in rural areas and relied on agriculture to meet their needs. Life expectancy was shorter. Then the Industrial Revolution happened.
[00:01:57.180] - Jack Dempsey
If you go back 150 years ago to the Industrial Revolution, and you started to actually see the world economy growing.
[00:02:02.980] - David Brett
The Industrial Revolution shifted economies from farm based systems to industrialized manufacturing. And despite protestations from some groups, the machines began to take over from manual labor. Factories rose, which created jobs, improved wages, and access to goods. Populations flocked to cities. Improvements in technology, transportation and infrastructure led to increased productivity, better access to education, and improvements in healthcare. Ultimately, the industrial revolution laid the groundwork for the modern economy.
[00:02:35.840] - Jack Dempsey
Think about living standards today versus then. You know, everyone's a lot better off.
[00:02:39.000] - David Brett
For nearly 3000 years. Economic growth averaged only 0.01% per year. In other words, global living standards were essentially flat. According to the Bank of England. But since 1750, GDP growth per person has been 1.5% per year. This means that each generation has been around a third better off than the one before it, on average. One way to see this is to compare how long it takes for the economy to double in size in each of these two periods. Between 1750 and now, based on the average growth rates, this would take around 50 years. Before 1750 it would have taken 6000 years for the economy to double in size. But economic prosperity and rising living standards came with its own problems. Overcrowding, pollution and sanitation became problems in cities, which consumed more and more resources.
[00:03:30.620] - Jack Dempsey
During that time, every unit of economic growth came with one unit of resource consumption, and that's been the same ever since. And so that was fine for the first 200 odd years. And because the planet was a big place and there was not a lot of people on it.
[00:03:43.260] - David Brett
Improved living conditions and healthcare also began to impact life expectancy. In 1750, the global population was estimated to be around 791 million. Now things were accelerating. Jump forward two centuries and the population had trebled in size. By 1950 it was 2.5 billion. Not long after, the concept of a circular economy begins to take root. Environmentalists began to raise alarms about pollution and resource depletion. In 1966, economist Kenneth Boulding famously stated that the Earth is a closed system, urging us to rethink our consumption patterns fueled by a growing population.
[00:04:24.080] - Jack Dempsey
So the population had about 3.5 billion people in the 1970s. And since then we started to, I guess, run into a resource overconsumption problem. So if you think about if we've got one planet full of resources and we produce one unit a year, in the 1970s, we started to go above one. And today, as you know, population has gone from 3.5 billion to well over 8 billion today. We're now consuming at a rate of about 1.7 planet Earths.
[00:04:47.480] - David Brett
And it doesn't end there. By 2050, the UN forecast, the global population will reach nearly 10 billion people, 25% more people on Earth than there are today.
[00:04:57.440] - Jack Dempsey
And obviously everyone wants to have a nicer life. And historically that's meant, you know, consuming more resources. So it's it's going to be consuming at a rate of about three planet Earth by By 2050.
[00:05:06.780] - David Brett
Which is clearly unsustainable. Yet we and the economy still need to grow.
[00:05:10.940] - Jack Dempsey
So the circular economy is all about how can we achieve that growth without basically keep pushing ourselves into resource deficits?
[00:05:18.460] - David Brett
Doing so doesn't just require a change in consumption habits. It requires businesses, consumers, and investors to focus on sustainable practices that contribute to a circular economy. Finding those companies and investments that meet the requirements of a circular economy. That's coming up in the next part of the show.
[00:05:37.460] - Announcer
Get in touch with us by email at. Or visit our website schroders.com/theinvestordownload.
[00:05:48.380] - David Brett
In the 21st century, we find ourselves at a critical juncture. We're grappling with climate change over consumption and waste management, among many other issues.
[00:05:57.940] - Jack Dempsey
So we're basically going to produce way too much waste, and we're going to consume way too much resources doing that. And if all those resources end up, as you know, in the ocean or in landfills or in dumps, you know, basically, you know, we're going to run into big problems.
[00:06:10.480] - David Brett
The circular economy to sustainability is one pathway to finding growth and reducing consumption, but it requires businesses and consumers to rethink their roles.
[00:06:19.720] - Jack Dempsey
You know, if we all went back and lived in caves, like I'm sure there'd be less carbon emissions, right? But no one wants to do that, right? So it's like, how do you find a way to to do both?
[00:06:26.720] - David Brett
Dempsey says the circular economy shouldn't be seen in reductive terms, either. He's clear this isn't about not taking that long haul flight or eating less red meat.
[00:06:35.760] - Jack Dempsey
It's how do we do all this stuff in, I guess, a more sustainable way by just basically doing more with less, by being more resource efficient.
[00:06:43.080] - David Brett
The other thing Dempsey says the circular economy is not is it's not just about recycling.
[00:06:48.160] - Jack Dempsey
It irks me a bit when people say it's just a recycling fund. It's a lot broader than that. So, I mean, we kind of invest in... We've got five areas we invest in, basically, of which one of them is waste and of which recycling is a subset of waste. So again, yeah, it's an interesting part and it's an area that we do invest in. But it's only just one small segment. It's just a lot more broader and diversified than that. And I think that's almost the attraction of the circular economy as a thematic is that it is extremely broad and diversified and plays into lots of bits of the economy. And so it's not just a bet on I don't know how much people recycle or how much I don't know, plastic bottles we use, rather than our paper bottles rather than plastic, etc., etc..
[00:07:23.820] - David Brett
So it's not just about recycling. The circular economy is about finding those businesses that can manage their waste, harness renewable energy, and develop products designed for longevity and reuse. And they need to be profitable.
[00:07:35.940] - Jack Dempsey
And so it's how can you identify the companies who can solve those problems? And you know, which is I guess, good for the world, but how can we investors identify the companies who can, um, you know, solve that problem and get paid very well to do it, because, you know, that's what it's all about at the end of the day, is find companies who can grow their profits.
[00:07:51.780] - David Brett
To help find those businesses, Jack and his team have designed a scorecard system, although perfection is unlikely.
[00:07:58.860] - Jack Dempsey
As we score companies out of 100, the highest company we have is 81 out of 100. So it's pretty, um, it's pretty strict. Yeah. There's no there's no such thing as perfection as it says. And even if you got close to it, there's always more to do. So you always have to accept a little bit of waste, but it's always like, what's the... And I guess it comes down to like often, you know, you meet companies, you kind of get a idea of the culture and the ethos of like, are they striving to do more and more and more, which is obviously what you want to see because it's, you know, it's often a it's a journey rather than a destination. Um, but, you know, the direction of travel is, I think is pretty clear on all this stuff. And again, it comes back to why it's an attractive place to invest.
[00:08:32.120] - David Brett
I think. As an example, Dempsey cites two firms in the US that make decking the type you might have in your back garden.
[00:08:38.120] - Jack Dempsey
And they basically realised a few years ago that they can make decking that last for 50 years by using composites, but especially they can make composites using recycled PVC, which is a very difficult plastic. It's a topic for another pod, but it's a very difficult plastic to recycle. And they can take that. And actually what that did is that it created this massive profit gap to their peers who weren't using recycling. And so you're starting to see companies go, well, actually, if I can take this thing that's a waste and turn it into not, you know, not a cost, but rather a kind of profit driver. Um, it's natural because, you know, at the end of the day, CEOs of companies get paid to drive profits.
[00:09:09.840] - David Brett
The journey, however, is not without hurdles that investors have to work hard at to overcome.
[00:09:14.420] - Jack Dempsey
Let's come back to the work that we do as investors of making sure that these companies are aligned to the theme. So in our circular score, which I kind of reference the revenue part, but then we go one step further and then the next leg is to look at actually how a company operates. So we're looking at, you know, the energy they use, the water they use, the materials they use in their supply chain. And we're basically getting an idea of like, you know, they you know, if they're talking the talk, are they actually walking the walk. And so it's kind of it's not just the products and services they're providing. It's also how they go about it.
[00:09:42.380] - David Brett
Many argue that the circular economy is not a panacea. In the final part of the show, we'll look at the pros and cons of investing in the circular economy. The shift to the circular economy requires not just innovation, but also a deep cultural change in how we perceive value and ownership. For every success story, there are challenges, logistical issues, economic disparities, and regulatory barriers. So the question remains, is investing in a circular economy worth it?
[00:10:18.440] - Jack Dempsey
The opportunities are absolutely everywhere to go after. So again, if you can find a growth theme that we think is quite attractively valued and you can really invest behind, then there's not a lot you know not to like I think.
[00:10:30.320] - David Brett
There are cons though. Being a theme makes it difficult to invest in certain assets, particularly if you want to be faithful to that theme. That means potentially missing out on some notable gains in areas such as AI. AI has been touted as a potential saviour of humanity by its disciples, but it's also a voracious consumer of natural resources.
[00:10:50.880] - Jack Dempsey
You know, obviously, I guess over the last year you'd say, well, actually, I'd been better off owning an AI fund or something like that, which is completely fair. You would have been. But I guess, you know, given you completely differentiated exposure to what you might get in, you know, your passive fund or your global growth fund or whatever, which, you know, again, are increasingly concentrated in a small number of names. And so it's again, it's a differentiated growth exposure, which um, you know, performs well despite not being as tech heavy as as I guess many of the industry's.
[00:11:18.500] - David Brett
Investors are beginning to recognise the value of circular economy initiatives. Venture capital funds are increasingly directing resources towards sustainable businesses. In fact, the global market for circular economy solutions is projected to reach trillions of dollars in the coming years.
[00:11:34.300] - Jack Dempsey
And so you just increasingly see it come through and through, which I think is quite positive from a, you know, I guess, you know, if you run a circular economy fund, but also just as the universe grows, because there's more and more companies do this sort of thing, you get a wider and wider investment universe, which which, I guess, you know, can't be anything but positive.
[00:11:53.340] - David Brett
The circular economy is not just an economic model. It's a mind shift.
[00:11:58.300] - Jack Dempsey
It's an enduring growth thematic. And it's going to, you know, it's going to play out whether politics or legislation or whatever. It's just, you know, the end of the day, unless we solve interplanetary travel, um, quite soon, then, you know, we've only got one planet Earth to work with.
[00:12:23.280] - David Brett
That was the show. We very much hope you enjoyed it. You can subscribe to the investor download wherever you get your podcasts. And if you want to get in touch with us, it's schroderspodcasts@schroders.com. And you can find out much, much more at schroders.com/insights. New shows drop every other Thursday at 5 p.m. UK time. In the meantime, keep safe and go well.
[00:12:47.360] - Speaker 4
The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.
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