Every year, Earth Overshoot Day shows us the extent to which we live at the expense of the environment. Do investments in the circular economy offer a solution?
Against the backdrop of intensifying raw material shortages, growing mountains of garbage and plastic waste in the oceans, the concept of the circular economy is becoming increasingly important. In this interview, Thomas Hassl, Senior Equity Analyst at LGT Private Banking Europe, talks about how circular economy models can address these challenges and the types of opportunities they offer investors.
Many experts see the shift to a circular economy as being key to sustainable development. Why is that?
Thomas Hassl: At present, humanity’s appetite for natural resources is largely unsustainable from a "planetary boundary" perspective, thus pushing climate stability and ecosystems around the world to their limits. Global consumption of natural resources has more than tripled since 1970. And it continues to increase steadily. The related extraction and the ensuing processing of natural resources are responsible for more than 90 percent of biodiversity loss and about half of anthropogenic greenhouse gas emissions. They also contribute to extensive water scarcity.
In addition, 242 million metric tons of plastic waste are generated globally each year, with an estimated 13 million metric tons ending up in oceans. Further to this, about one-third of the world’s food production (1308 million metric tons) is wasted year after year, while the equivalent of a garbage truck full of clothes ends up in landfills every second (92 million metric tons annually).
The prevailing linear economic model means that manufactured products are used and ultimately thrown away. But because resources on our planet are limited, this way of doing business is not sustainable.
The circular economy, on the other hand, focuses on reusing and recycling. People should think of the earth as a spaceship with limited resources, which, as part of a cycle, are used over and over again as many times as possible.
These are dramatic figures – where does the circular economy come into play?
Thomas Hassl: The basic idea behind a circular economy is to establish an economic system that is regenerative by intention and design. The circular approach addresses some of the biggest sustainability challenges of our time, including climate change, resource scarcity, biodiversity loss and pollution. If the economy were circular, it is estimated that greenhouse gas emissions could be reduced by about 40 percent and the need for primary raw materials by nearly 28 percent. The circular economy could thus play a key role in achieving the United Nations’ twelfth Sustainable Development Goal (SDG), which focuses on responsible global consumption and production.
How can investors support the circular economy?
Thomas Hassl: This concept holds great potential for investors. Currently, only 8.6 percent of the global economy is circular – which means there is significant growth potential for companies that offer products and services, that incorporate circularity considerations. We have identified possible investment opportunities in three key areas of the circular economy:
Let’s talk about the last point, resource recovery, first. Does that refer primarily to recycling? What role does that play?
Thomas Hassl: From the point of view of economic and environmental sustainability, it is wiser to first focus on resource efficiency and the possibilities arising from a functional economy. Only once that has been done should we look at strategies for resource recovery and thus also recycling.
Having said that, there will always be waste. As a result, strategies have to be developed that allow us to maximize the residual value that can be extracted from unwanted or defective products. This requires an efficient infrastructure to recover valuable materials, while simultaneously minimizing landfill waste. For the private sector, this creates opportunities in the form of waste management and recycling infrastructure. Leading companies in these industries deploy innovative technologies to collect and dispose of waste sustainably, or to convert it into valuable products that can be reintroduced into the economic cycle.
We are all familiar with the logos on products and packaging that indicate whether and how they can be recycled. This has helped popularize the idea of recyclability. In contrast, circular supply models seem to be far less well known. Why is that?
Thomas Hassl: Circular supply models are pretty much the first line of defense to sustainably reduce the demand for virgin materials. More specifically, they are about researching and introducing alternative materials and measures that help companies use the available resources more efficiently.
So in other words, increased sustainability when materials are being selected and greater efficiency in terms of processes. But how can I invest my money in a way that ensures we actually make progress on this front? Can you give me a concrete example?
Thomas Hassl: Sure! The sporting goods industry, which consumes large quantities of synthetic fibers and plastics, is a good example. Some manufacturers are now using a comparatively high proportion of alternative materials. These bio-based, renewable or recycled materials often have superior environmental characteristics. And using them can be profitable for companies: according to estimates, these alternatives could reduce material consumption by up to 90 percent and increase gross profit by 50 percent.
Beyond investing in an innovative sporting goods manufacturer, investors can, for example, also look at who supplies these innovative raw materials. For example, there’s a chemical company in Europe that supplies the clothing industry and other sectors with textile fibers and pulp made from sustainably sourced natural wood. It also produces fibers obtained through “upcycling”. This means turning unwanted products or waste into new raw materials. The chemicals group has succeeded in producing a new, high-quality fiber using scraps left over from the production of cotton clothing as well as post-consumer garments, thereby contributing to solving the waste problem in the textile industry.
It sounds like alternative materials offer opportunities for attractive returns. But what about the more efficient use of resources – earning more with less sounds like a challenge.
Thomas Hassl: There are two ways for companies to work on their resource efficiency. On the one hand, they can improve their production processes; and on the other, they can increase the efficiency of their products and services. For example, investors can identify companies that offer products and services that enable their customers to operate more efficiently. This often involves automating and digitizing workflows. All of this increases productivity, flexibility and reliability in the long term.
You also mentioned the “functional economy” as another key area. What is that, exactly?
Thomas Hassl: The main goal of the functional economy is to transition from a product-oriented business model towards a customer-oriented one, which creates the highest possible use value of a product for the longest possible time. In this process, as few material resources and as little energy as possible should be consumed. This can be achieved, for example, with product life extension models, product service systems or sharing models.
When it comes to extending the service life of products, the quality of the products plays an important role, does it not?
Thomas Hassl: Yes, but that’s not the only factor. It is also about promoting the reuse, repair and refurbishment of products. If a product’s quality is good, it is more likely to be sold on a secondhand platform once the original user no longer wants it.
A second way to extend a product’s life is to turn the product into a service. I alluded to this earlier when I talked about product service systems. For example, when someone buys a lamp, they ultimately need the light that the lamp produces. So according to the concept of product service systems, it’s no longer the lamp that’s being bought but the light it generates.
One lighting manufacturer, for example, offers “Light-as-a-Service” options, where customers pay only for the light they use, while the company manages, reuses and recycles the luminaires. The entire concept is circular. The lamps can be produced by a 3D printer and the concept behind their design is that it should be as easy as possible to recycle them as completely as possible. The customer then subscribes to this service or pays a certain rate per use. This concept also exists in the IT industry for printers, for example, in aviation for aircraft engines, as well as for medical equipment.
So investing in companies that are best-in-class in terms of the circular economy offers a combination of opportunities for impact and returns?
Thomas Hassl: Absolutely. That is why we dedicated an entire issue in our Sustainable Investment Idea series to this topic. It provides clients who are interested in this topic with in-depth information on the subject and concrete investment ideas. We recommend that potential investors request this brochure from a relationship manager and then in a second step, discuss which specific investment ideas fit their individual investment strategy and personal goals. With any luck, Earth Overshoot Day will come a bit later next year thanks to these investors!
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