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Four ways to invest in a circular economy

Nov 06, 2020

Investing in the circular economy is not only good for the planet but also good for your pocket. Holger Frey identifies four investment clusters that are set to benefit from the alternative economic model.

The boundless appetite for resources, fuelled by linear production and consumption patterns, is exceeding the planet’s regenerative capacity. Regulatory actions for economic circularity are amplified by consumers opting for circular products. With ongoing innovations and technological advancements, prospects for de-materialisation look better than ever. But how can investors navigate this transition to benefit from the emerging investment opportunities?

The traditional linear economy, based on the ‘take-make-dispose’ production and consumption model, has pushed the planet’s capacity out of balance. It has led to a growing coalition of scientists, innovators, policy-makers, and consumers calling for a transition to closed-loop production and consumption systems that minimise waste and emissions, as well as material and energy losses. A switch to the circular economy could unlock an estimated US$4.5 trillion of value globally by 2030, with innovative technologies providing new ways to create service models and extract value from closed-loop systems.

Technological drivers

Technology is a critical enabler of the transition to a circular economy. Advances in artificial intelligence, digital platforms and cloud-based solutions have, in some instances, eliminated the need for physical assets, helping to de-materialise entire value chains. The ongoing digital penetration of production and logistics improves the traceability of resource and product flows. It can also help optimise lifetime product use, including predictive maintenance solutions. Increased visibility enables not only better control over potential waste creation, but also creates more accountability for companies along the value chain. Meanwhile, the advancement of new chemicals and catalysts enables the production of bio-based materials to replace fossil alternatives.

Investing in the circular economy

We have identified four investment clusters that are set to benefit from the transition to the circular economy:

  • Redesign inputs capture investment opportunities that exploit the shift from fossil-based inputs to renewable ones.
  • Enabling technologies focus on solutions that provide the infrastructure for circular economy businesses, contribute to the de-materialisation of production, or create new and non-linear business models, such as product-as-a-service.
  • Circular use includes companies that support circular consumption patterns through sustainable sourcing, the sharing economy, product longevity, and reusability.
  • Loop resources focus on providers of solutions that extend product lifecycles or recover embedded value from disposed of products.

The time is ripe to redirect the global economy toward higher circularity. Governments are standing firm behind their commitments to the circular economy, despite the economic challenges due to the COVID-19 pandemic. By exposing critical vulnerabilities in global supply chains, the pandemic has lent additional urgency to the shift from linear thinking to system thinking, while also providing a glimpse into the extensive de-materialisation possibilities ahead, empowered by maturing digitisation solutions in several sectors.

As innovative technologies help unlock new value from the circular economy, the shift to higher circularity is becoming a matter of basic economics rather than a trend driven purely by environmental urgency. Companies pursuing circular business models are set to win from the structural changes ahead, with innovation leaders applying circular economy principles to differentiate their product offering.

Holger Frey is a Senior Portfolio Manager, Circular Economy Equities & Sustainable Food Equities, at Robeco.