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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. 

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.

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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Amy D’Eugenio,
Head of Client Service and Business Development, Hermes EOS