Why we need circular economy and how to invest in it?Matthias Krey
Most of the world’s current efforts to tackle the climate crisis have focused on two tracks: the transition from fossil fuels to renewable energy and achieving greater energy efficiency. However, you might be surprised to learn that these measures, taken together, can only cut 55% of total emissions. The other 45% actually arises from the supply chain for everyday products like food, cars, clothes, and buildings. This is where the circular economy concept comes in.
By transforming the way we make and use products, we can go a long way towards cutting the remaining emissions. So then, what is circular economy? Why exactly is it necessary to invest in it? And which Pure Climate Stocks in the circularity space could offer investment opportunities?
Our current production and consumption system operates in a fairly linear way. Essentially, we collect materials, make products, and then toss them in the garbage.
Importantly, the linear economic model exacerbates climate change in two main ways:
- The resource extraction phase, according to a study done by the UN Environment Program, accounts for more than half of the world’s total carbon emissions. When it comes to regenerative resources – say, fish in the ocean or timber – we continually extract faster than the earth can replenish. Shockingly, we now use about 1.6 Earths each year, a rate that’s only expected to grow to 3-4 earths per year by 2050.
- Waste, at other end of the chain, also contributes directly to greenhouse gas emissions. Since the 2015 Paris Agreement was signed, more than half a trillion tons of first-use materials have been used and discarded. While many statistics focus specifically on plastic waste and its harmful effects, for climate, landfills are highly problematic. These heaps of garbage release methane, a greenhouse gas 84 times more potent than CO2, in enormous quantities. In the U.S. alone, super-emitter landfills accounted for 43% of the nation’s total methane emissions.
What’s exciting about the circular economy concept is that it seeks to tackle these two issues simultaneously – namely, by drastically reducing waste and pollution, making products and materials “circular”, and regenerating nature.
Through these three pillars, circularity would help decouple economic activity from the consumption of finite resources. Increasingly re-using products and assets, while also recycling the materials from which they are made, could shrink the demand for natural resources and eliminate the concept of waste altogether.
Circularity would mean that, instead of the usual “take-make-use-dispose” model, we could move towards a “take-make-use-use-use…” model. It goes even one step further than simply recycling, because it actually designs the “throwaway” stage out of the system.
Around the world, governments and businesses have made circularity a priority and are working towards implementing appropriate measures. But unfortunately, only 9.1% of the global economy is circular so far.
So, how can investors help move the circular economy forward?
Should you invest in the circular economy ?
We have discussed how a circular economy is necessary to transition to a climate positive production and consumption model. But an added and less known bonus is that it can also fetch big wins for investors.
According to Jessica Matthews, the head of sustainable investing at J.P. Morgan, by 2030, the circular economy could yield up to US$4.5 trillion in economic benefits globally – all while diverting 92 million tons of textiles and 1.3 billion tons of food waste from landfills and saving 45 trillion gallons of water wasted, every year.
This multi-trillion dollar opportunity isn’t only for the climate-conscious investor. Actually, it’s getting the attention of all growth-oriented investors, as the push to build a circular economy drives innovation and inspires new business models. Companies that drive the circular wave stand to profit more by reusing, refurbishing, and repairing products than they would by sourcing virgin materials.
For example, in 2019, the resale market for fashion grew 25 times faster than the retail sector broadly. And, with some major companies refining their methods of production and pledging to cut out first-use resources, new startups are popping up to provide the materials that facilitate this shift.
Where are the opportunities to invest in circular economy ?
The Ellen MacArthur Foundation has identified a number of ETFs that claim to focus on the circular economy, including BlackRock’s BGF Circular Economy Fund, the Geneva-based Decalia Circular Economy Fund, and BNP Paribas’s Easy ECPI Circular Economy Leaders UCITS ETF. But, after a closer look, it becomes clear that these funds carry a large risk of greenwashing.
Let’s get into the weeds and look at an example. Among the main constituents of BlackRock’s BGF Circular Economy Fund, which is also highly rated by ESG standards, are Microsoft, Coca-Cola, and Nestlé. It’s the same story in the other popular funds: they support companies that, although they might have a well-thought out circularity strategy, still obtain most of their profit from climate-damaging operations.
On the other hand, single stocks that obtain 100% of their profit from fully circular economic business models offer a more impactful and sustainable opportunity for investors.
In this arena, Pure Climate Stocks has singled out two companies:
- Rebelle (OM: BELLE): Hamburg-based startup Rebelle is an online marketplace for selling and buying second-hand fashion items. Founded back in 2013, the company had an IPO in the Swedish market earlier this year. Although it has had consistent revenue growth in its earnings and fairly positive industry forecasts at IPO stage, the stock has been hit by the current economic downturn and is now trading almost 70% below its initial price. If second-hand retail seems like an enticing area for investment, and if a company from Germany makes an interesting addition to your portfolio, it might be worthwhile to put Rebelle on your watch list and see how the company fares in the challenging times ahead.
- Carbios SAS (OTCMKTS:COOSF): Focusing on providing recyclable materials, the French green chemistry company specializes in industrial bioprocesses for polymer degradation and recycling. In the last year, the share price has also tumbled, loosing around 25%. For a venture investment such as Carbios, this is still a remarkable relative performance, particularly when compared to other non-profitable venture companies that have lost up to 50% – or even 75%, in some cases – of their stock market value in recent months.
Summing it all up
It’s clear that the world needs to transition from a linear to a circular economic model, if it hopes to hit the goals set by the Paris Agreement. The circularity gap is still very wide and presents a clear opportunity for investors to join in early on a systemic shift, all while standing to reap gains. Among the existing options, “circular” ETFs remain flooded with greenwashing. Climate-conscious investors would be much better off choosing single stocks with business models 100% focused on the circular economy. Given the current economic crisis, however, these stocks might seem like risky investments… But a possible turnaround might be around the corner, if the stocks manage to weather the current crisis. As always, we will keep you updated, as we add other circular economy-focused companies to our Pure Climate Stocks.
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