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Full cycle: investing for a circular economy

A flood of recent media coverage has highlighted how society’s addiction to plastics is pushing the environment to the limit. But behind the demonisation of plastic itself lies the need for a paradigm shift in the way we produce and consume goods – one in which we can participate as investors as well as consumers.

Despite the recent media focus on plastic as an environmental issue, its popularity as a raw material continues to rise. Half of the total amount of synthetic plastic resins and fibres ever manufactured have been produced in the past 13 years1, and experts estimate that production will increase by a further 40% over the next decade; according to the American Chemistry Council, $186bn has been invested in new plastics manufacturing facilities in the US alone since 20102.

Figure 1. Growth in global plastics production, 1964-2014

Source: World Economic Forum, Ellen Macarthur Foundation, McKinsey & Company as at 2016.

Plastic: the good, the bad and the ugly

As well as being used in packaging, toys, furniture and consumer goods, plastics are in wrapping paper, ribbon, nappies, wet wipes, chewing gum and teabags; they also form the lining in crisp packets, paper cups and food and drink cans, and are used in heavier manufacturing for products including window frames, building insulation and numerous car parts such as bumpers, body panels and interior trim. There are reasons for the ongoing ubiquity of plastic: as a resource it is cheap, lightweight, waterproof and requires less energy to manufacture than many other materials.

Unfortunately, another important advantage of plastic is also the reason it creates such an issue in the environment: its durability. Plastic has become emblematic of the problems inherent in the traditional consumption-led economic model because its durability and visibility mean we are now literally seeing it everywhere. This is unsurprising when we consider that of the 8.3bn metric tonnes of plastic ever produced globally, an estimated 4.9bn tonnes have been discarded rather than incinerated or recycled.

Figure 2. Recycling plastic: more rhetoric than reality

Source: “Production, use, and fate of all plastics ever made,” by by Geyer, R; Janbeck, J R; and Law, K L. Published in Science Advances, July 2017.

While it is possible to reduce the environmental impact of plastics such as the Polyethylene terephthalate (PET) widely used in drinks bottles through more effective and comprehensive recycling, the way plastic is used in other products makes recycling almost impossible. This is because they were never designed to be recycled: they remain part of an economic model in which products are produced, used and simply thrown away.

Toeing the line

However, focusing on plastic itself risks missing the underlying issue, which is that the global economy is overwhelmingly linear.

Essentially, a linear economy is an economic system in which goods are produced, used and then, at the end of their useful life, disposed of. From a purely economic perspective, a linear economy works well because it ensures ongoing demand for new products, which promotes economic growth (especially when demand is stimulated further through designed obsolescence and single-use products). However, from the point of view of resource depletion and pollution, a linear economy is extremely problematic.

Towards a circular economy

A circular economy is focused on sustainability from the outset, with the maximum value of a product being extracted before it is repaired, reused or recycled. It requires products to be designed so that their creation, use, and reuse or recycling has minimal impact on the environment.

A truly circular economy calls for businesses not just to maximise recycling and minimise waste but to fundamentally re-engineer their products and services with a so-called ‘cradle-to-cradle’ approach. It involves intensive resource efficiency relating to water, energy and materials, reduced packaging and high recycling rates, and asks consumers to consider sustainability as a critical factor in their purchasing decisions.

Many companies are already engaging with a circular economic model to a lesser or greater degree.

Figure 3. Cradle-to-cradle circularity

For illustrative purposes only. 

 

Fairphone is an excellent example of a product (and company) which has been created from the outset around a circular economic model, and stands out in the tech industry as having a very mature cradle-to-cradle approach. Described as ‘the world’s first modular, ethical smartphone’, it is built to be repaired and improved, rather than disposed of, and uses clean cobalt in its construction (we highlighted the potential for cobalt to be reused within a circular economy model in a previous piece on cobalt mining).

Key impact areas for mobile phones include climate change, resource depletion, human toxicity and ethical labour, and Fairphone aims to address all these aspects in different ways.

One of the biggest issues with traditional smartphones is longevity – a 2014 study by the Consumer Electronics Association in the US put the average lifespan of a smartphone at 4.7 years , but in developed economies updating to the latest phone every 12-18 months is common. The Fairphone uses modular architecture which is designed to allow different components to be updated or repaired without discarding the whole handset.

The Fairphone is not only designed to last, it also provides a compelling ownership proposition. However, in a world which is increasingly moving away from owning products, the company has recognised the potential of ‘phone-as-service’ as a business model and is piloting the leasing of phones to companies. This allows Fairphone itself to retain ownership of the phone and have greater control over its lifecycle.
The company also operates a takeback recycling programme and uses ethically-sourced materials, with a focus on ethical labour and efficient manufacture.

Originally founded in the US in 1910, Samsonite was listed in Hong Kong in 2011, in an IPO which raised $1.25bn. In light of recent allegations reported by media3, we raised our concerns with the chair and new CEO and were reassured by a strong and convincing rebuttal regarding accounting practices and related party issues. Positively, 
the company has taken several ESG-related steps in the past few years, including its ‘Women First’ campaign focused on female business travellers, and an approach to production planning and growth which recognises that both business and leisure travel tend to track the economic cycle (i.e. people tend to travel more when the economy is doing well and vice versa).

The company recently introduced its ECO-Nu range, described as ‘a bag that will change the world’ and made from ‘100% post-consumer recycled plastic bottles. The ECO-Nu has strong potential to succeed because it is essentially like any other well-made, durable, soft-shell case, but has the added attraction of being more environmentally friendly.

Tesco CEO Dave Lewis chairs a coalition called Champions 12.3, a group dedicated to achieving the UN Sustainable Development Goal target to halve global food waste at the retail and consumer level per capita and reduce food losses in production and supply chains by 2030. It has put in place partnership agreements with 24 suppliers representing over £17bn worth of Tesco sales to achieve these targets4.

The company has also become the first retailer to publish food waste data for its own operations and is pursuing various initiatives such as innovative packaging and simplified use-by dates to help reduce levels of food wastage post-purchase. At the same time, an imperfect fruit and veg range launched in 2016 is helping to reduce waste at the farm level – the unwanted side-effect of those regimented rows of perfect vegetables in supermarkets is the proportion of imperfect ‘wannabes’ which never reach stores.

Meanwhile, as part of its ‘Little Helps Plan’ the company aims to make all packaging either recyclable or compostable by 2025.

Tesco’s plans are ambitious and far-ranging, but we will always look for ways to help companies go further; in our engagement with Tesco, we suggested it set intermediary targets to help track its progress and further improve its reporting.

Engaging on the circular economy

Fairphone is an excellent example of what can be done by an innovative company (see case study above), but larger tech businesses aiming to follow a similar model face legacy production, volume and supply chain issues, so that even willing companies need considerable time and investment to transform their operations. For example, original equipment manufacturers (OEMs) do not have discretion to determine the input materials in the production line.

However, since we have started engagement on this theme, we have initial success in engaging with one company that is a leader in making plastics products for the auto industry to adopt a circular economy approach using re-cycled plastics where possible.  We also encouraged the company to work with their customers on creating a more sustainable supply chain.

Consumer demand as a driver

Even for less complex or critical products there can be technological barriers to a more circular approach. However, consumer demand and investor sentiment can act as key drivers towards a tipping point at which a circular model becomes advantageous from a business perspective.

In the initial phase of transitioning to a circular economy model, businesses tend to use the phrase but are essentially ‘greening up’ their existing linear supply chain. This is an important step in itself and can act as a catalyst towards developing a fully circular approach.

Circular food

While instituting a true ‘cradle-to-cradle’ approach is more complex to achieve within the food retail sector, there are a number of issues which can be addressed on the path to a more circular model.

Food waste is an area which the large chains have understandably latched onto due to its high visibility to consumers. New technology promises to reduce waste – for example, shipping companies can reduce food loss in transit by creating a controlled environment with remote access inside containers. We have pushed for a formal waste reduction programme to reduce food waste in supply chains and stores, while also engaging on a more sustainable approach to packaging.

Circular questions?

The transition to a circular economy raises a number of questions, not all of which have easy answers in every case: What exactly do we mean by recyclable? Is biodegradable a better option in some circumstances? Should no fossil-fuel based packaging be used? Is cutting down trees for a cellulose-based alternative sustainable for a particular usage case?

In any engagement exercise it is important to avoid assumptions about sustainability and enter into discussion with a business to understand what should be aimed for and identify the best approach.

For example, the reintroduction of glass milk bottles may seem like nostalgia, and the environmental benefits are debatable due to the additional resources required for production and transportation (waste charity Wrap suggests that from a carbon perspective a glass bottle would need to be reused at least 20 times to be a better environmental option than plastic3. However, where a sustainable source is used, glass or wood-based packaging can be a viable option, particularly for localised use where the impact of higher transportation costs is lower and a truly circular recycling process can be put in place.

To enable the transition from ‘greening up’ to a truly circular economy supply chains need to be on board, with a cradle-to-cradle approach baked in at the design phase. Depending on the product, research and development can take years, so partnering with suppliers to ensure they are onboard from the start is vital.

A specialist in sustainable food-packaging who describe themselves as ‘the renewable materials company’, Stora Enso’s products are used for one in four of every food containers in the world.

Formed in 1998 through the merger of two companies (one Finnish, the other Swedish) Stora Enso has some 26,000 employees in over 30 countries and boasted sales of EUR 10 billion in 2017. The business is based firmly on a circular model and divides sustainability into nine focus areas, including sustainable forestry, materials, water and energy and business ethics, with human rights integrated into all of them.

Key to Stora Enso’s business model is a collaborative approach with its clients to innovation and product development, which is informed by insights gathered from market analysis of consumer trends.

As the name suggests, China Mengniu Dairy is a major dairy producer which sources milk from small farms across China. Hermes first started engaging with the company in 2008, trying to encourage better dialogue at a time when Chinese firms talking to overseas investors was very unusual.

China Mengniu Dairy was one of 22 companies caught up in the 2008 milk scandal in China, in which milk powder contaminated with melamine led to the deaths of six babies and the hospitalisation of many more 6. The incident triggered a major review of the company’s culture, with sustainability emerging as a core value.

Danone invested in the company, bringing new ideas in terms of global best practice, including an understanding that the quality of the firm’s product is directly determined by the quality of the source, so that the wellbeing of the cow is crucial.

A major challenge for the company was that their milk supplies are sourced from small local farms in remote regions which typically have poor access to electricity and a clean water supply. This led the business to adopt a circular economy approach almost out of necessity: many farms have started to convert cow waste into biomass energy, and all types of waste are separated according to potential use.

Founded in 2013, Circle Economy is a Dutch social enterprise which describes its purpose as to “accelerate the transition to circularity through on-the-ground, action-focused development of practical and scalable solutions and international campaigns, communications and engagement, focused on spreading the circular message”.

As well as co-authoring reports which offer insights and practical solutions for specific aspects of circularity with companies including KPMG and ABN AMRO, Circle Economy offers a range of tools, services and programmes intended to facilitate decision making and action plans for circularity across a range of sectors. These include Circle Portfolio, designed to enable investors to evaluate the circularity of their investments; Circle Market, a global online marketplace for the recovery, reuse and resale of textiles; and Circle Business Case, which assesses circular opportunities throughout the value chain.

The organisation’s list of members includes Canon, Philips and DHL, while it has recently worked with local governments in both Glasgow and Bilbao on circular initiatives. Meanwhile, its sub-brand Circle Lab, described as the “biggest global open-access innovation platform for the circular economy”, has launched a global database of over 1,000 circular economy case studies as an open resource for businesses and organisations wanting to transition to a circular approach.

Commercial imperatives

While companies like Stora Enso and Fairphone are founded around a circular economy model, others come to a more sustainable approach through making a virtue out of a necessity. This scenario in which sustainability becomes a commercial imperative is likely to become more common in the future.

Facilitating the change

As the concept begins to gain traction both within the business community and at a broader social level, circular economy principles are likely to have an increasing impact beyond early adopters. As a result, businesses and initiatives are springing up to act as enablers for any company or organisation which becomes interested in making the change from a traditional linear approach.

Virtuous circle

The benefits of a circular economy for society, the planet and for businesses themselves are clear: resource productivity is maximised, enabling companies and economies to address emerging resource security and scarcity concerns; the environmental impacts of production and consumption are minimised; and waste, a problem for humanity and the environment, becomes a resource rather than refuse.

Through its engagements, Hermes EOS has started to discuss the concept of a circular economy with companies, clarifying that greater recycling and less waste are only the first steps towards adopting a more circular business model.

Investors can also support the development of a circular economy in several ways:

  • By engaging with companies on improving resource efficiency, waste reduction and maximising recycling – within their own operations and throughout their supply chains
  • By engaging with policymakers and industry bodies to support regulations or incentives which encourage circular production
  • By investing in businesses with good return prospects and which demonstrate a clear commitment to the principles underpinning a circular economy

As with all sustainability issues affecting the global economy, the transition to a circular model will require co-ordinated action from consumers, governments, NGOs and businesses. But investors also have a key role to play in creating a sustainable economic future.

  1. 1“Production, use, and fate of all plastics ever made,” by by Geyer, R; Janbeck, J R, Law, K L. Published in Science Advances, July 2017.1“Production, use, and fate of all plastics ever made,” by by Geyer, R; Janbeck, J R, Law, K L. Published in Science Advances, July 2017.
  2. 2“180bn-investment-in-plastic-factories-feeds-global-packaging-binge,” by Matthew Taylor. Published in The Guardian on 26 December 2017
  3. 3“Glass milk bottles making a comeback,” by Rebecca Wearn. Published by BBC News on 12 April 2018.

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