How can institutional investors accelerate the transition to a circular economy?
This October, BlackRock launched its BGF Circular Economy Fund, signalling its confidence in circular business models and bringing more attention to the conversation around Circular Economy (‘CE’). This momentum is inevitable as we shift from a linear ‘take-make-dispose’ approach to a circular ‘reduce-reuse-recycle’ one. This blog provides an overview of the CE landscape relating to institutional investors, fund managers, large enterprises and SMEs; the challenges these stakeholders encounter; and how institutional investors can contribute to the CE transition.
‘Rapid urbanisation, population growth, and economic development will push global waste to increase by 70% over the next 30 years’ – World Bank
How does a circular economy differ from a linear economy?
Ellen MacArthur Foundation, a forerunner in the field, defines CE as ‘the concept of minimising waste by considering the full life-cycle of materials, and redesigning products and operations to encourage greater re-use and recycling’. According to the foundation, the model for CE is grounded on three principles: design out waste and pollution, keep products and materials in use and regenerate natural systems.
The definition puts greater responsibility on large corporations to rethink their product design, minimise waste, and sow the economic benefits of doing so.
Next to in-house frameworks, EllenMacArthur Foundation’s definition of CE and the associated ‘butterfly’ diagram have been widely referenced by companies measuring circular initiatives .
‘Circular Economy could generate $4.5 trillion of additional economic output by 2030’ — Accenture
The seven circular business model categories as listed by the ‘Circular Economy Finance Guidelines’ include circular inputs, circular design, sharing business models, life-time extension, product-as-a-service, material recovery, circular facilitators and enablers .
Taking a circular approach is essential to achieve multiple UN Sustainable Development Goals and fulfil the 2030 SDG agenda.
Understanding the circular economy landscape
1. Institutional investors
Many institutional investors have shown commitment to achieving a CE, and are evaluating the possibilities of doing so. Last July, insurance companies NN Group, VIVAT, and Centraal Beheer investigated the prospects the CE can offer to financial services companies . Banks Rabobank, ING, and ABN AMRO launched the finance guidelines for CE. The banks presented these guidelines on behalf of the finanCE working group founded by asset manager PGGM as a part of EllenMacArthur Foundation’s Circular Economy 100 program . PGGM (on behalf of pension fund PFZW) and ACTIAM (on behalf of insurers Reaal, Zwitserleven, and the ASN Bank) partnered with Circle Economy to create ‘Circle Portfolio’, an online tool which evaluates the circularity of investment portfolios . C&A Foundation recently announced an RFP for businesses revolving around ‘Circular Fashion’ .
The investment approach to CE varies from investor to investor. CE is a vital impact investment theme for the Finnish Parliament’s Sitra and asset manager MN (on behalf of pension funds PME and PMT) . For pension fund AP1, CE serves as a basis for its resource efficiency framework. The resource efficiency framework is integrated into the pension fund’s overall investment decision-making process .
While institutional investors feel a dearth of performance data and enough fund managers with a proven track record, they are paying close attention to the happenings in the field.
For many institutional investors, Circular Economy is an important ‘work in progress’ — IPE
2. Fund managers
Fund managers within the sustainable/impact investment space are catering to the investor appetite by launching CE-themed funds. Some specialist funds include BGF Circular Economy Fund, Closed Loop Leadership Fund, and Circularity European Growth Fund.
However, many perceive universe constraints and find the theme too narrow to build a balanced and diversified portfolio. The CE space is largely occupied by early-stage, high-risk, high-growth companies which do not fit the public equity funds’ investment criteria. In generalist funds such as M&G Positive Impact Fund, Hermes Impact Opportunities Fund, and Pictet Global Environmental Opportunities, CE is either incorporated as a sub-theme or considered to overlap with other environmental impact themes such as environmental management and renewable energy .
For many fund managers, Circular Economy is a narrow investment theme with not enough suitable companies
The figure below provides a sample of investment solutions and asset owners supporting the transition towards CE.
Even within specialist CE-themed funds, the definition and investment focus for CE differs, as shown below. While some funds use internal frameworks, some use Ellen MacArthur Foundation’s CE definition and Accenture’s circular business models framework.
3. Large corporations and SMEs
As of 2017, institutional investors owned 70–86% of the ten largest US companies such as Apple, Alphabet, Microsoft, and Amazon . As consumer preferences shift from ownership towards sharing, the business models of these companies face a risk of becoming obsolete . With the sustainability movement gaining impetus, many large corporations have rebranded themselves as ‘sustainability leaders’ and are making strides to move towards a CE. Through its take-back programme ‘Trade In’, Apple has refurbished more than 7.8 million devices and recycled more than 48,000 metric tons of e-waste this year, at the same time cutting down its input costs .
The figure below lists some of the corporations and financial institutions which have pledged to rethink their supply chains as a part of the Renewable Energy 100 and the New Plastics Economy initiatives.
To reinvent their business models, large enterprises such as Apple rely on industry experts and invest massively in research and development of circular technologies . On the other hand, SMEs with intrinsically circular business models offer creative solutions to make the circular value chain more efficient and effective. Some examples of SMEs mobilising change through innovations include:
TerraCycle aims to eliminate the idea of waste and has partnered with FMCG corporations such as Unilever, Procter & Gamble, Clorox, Nestlé, Mars, Colgate, Coca-Cola, and PepsiCo to offer these companies’ products in reusable and recyclable packaging via its platform ‘Loop’ .
Winnow Solutions uses AI technology to monitor and reduce food waste. The company has worked with big players in the hospitality and food services industry such as Hilton, Sofitel, Marriot, Novotel to save more than 23 million meals. The company’s investors include Ingka Group (parent company of IKEA), European Investment Bank, and Circularity Capital .
HYLA Mobiles owns a series of patents in logistics and lifecycle management of mobile phones and consumer electronics. HYLA offers mobile trade-in programs in collaboration with leading wireless operators, retailers, OEMs, insurers, and online brands such as Verizon, AT&T, Samsung, Vodafone, KPN, and Best Buy. HYLA is backed by venture capital firms such as SJF Ventures and NGEN Partners .
SMEs play a critical role in fulfilling the circularity gap. However, they are often unable to scale their business due to lack of funding. The situation aggravates in emerging markets, where waste collection is informal, and infrastructure is hard to procure.
SMEs with circular business models lack access to funding
The figure below provides a summary of some challenges faced by various stakeholders in contributing to the CE.
How can institutional investors accelerate the transition to a circular economy?
With access to trillions of capital that can scale innovative solutions, institutional investors have an essential role to play in accelerating the transition to a circular economy. Institutional investors can contribute in the following ways:
Organisation-level: Gain familiarity and build expertise on the concept by engaging with important stakeholders; Incorporate CE principles into the company strategy and investment decision-making; Set ambitious targets on an organisational level
Portfolio-level: Take active ownership by engaging with the holding companies on circular strategies; Integrate CE into the investment mandate, either as a theme or as a lens; Increase allocation to private equity funds, venture capital funds, and project finance funds with a circular approach
Industry-level: Shape the market demand for funds which take CE principles into account; Join forces with key stakeholders and establish a common framework to build, manage, and measure the impact of a circular portfolio.
Connection and collaboration lie at the core of a circular economy. The transition to a circular economy also requires fund managers, large enterprises, SMEs, consumers, enabling organisations, and governments to collectively move forward and show participation.
‘A circular economy cannot be achieved by a single company or sector. It requires courageous collaboration among partners who understand the dual mission of financial value and societal change’ – Dow