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A New Frontier for Green Investment

Kerry Chen, CEO of ATRenew, says investors should look at the circular economy as a long-term investment.

More institutional investors are incorporating ESG into their stewardship criteria and capital allocation decisions. Green finance – typically global bond, loans, and other long-term markets – has reached almost US$2 trillion in volume. Annual green bond issuance broke through the half trillion mark for the first time, ending 2021 at US$522.7 billion, a 75% increase on prior year volumes, according to the Climate Bonds Initiative.

This is having a profound impact on companies and investors. Even in these early days we are seeing huge growth in a number of sectors within what might be regarded as the ESG sphere, from renewables to gender equity to electric vehicles. Additionally, more products are being created that offer choice to investors, from thematic ETFs, low carbon indices and green bonds, to ESG ratings and scores.

Poised for growth

According to Deloitte Insights, the lion’s share of ESG investments has gone into renewables of ‘general ESG’. However, one area that has received less attention from investors is the circular economy, despite the fact that it is poised to play a decisive role in creating a more sustainable planet in the years to come.

According to the US Environmental Protection Agency (EPA), a circular economy keeps materials, products, and services in circulation for as long as possible. Per MarketStudyReport, the global circular economy is set to grow by 7.8% CAGR between 2021-2027, to be worth US$657 billion by the end of 2027. Per the European Investment Bank Group, the circular economy, thanks to technological innovation, would increase global resource productivity by 3%.

It will also create jobs. By 2030 an extra two million new jobs related to the circular economy are estimated to be created in Europe. Additionally, a mature circular economy would reduce dependence on imported raw materials.

Governments understand this and many have made the circular economy a key priority. Last year, China released the Development Plan for the Circular Economy which covers the period of 2021-25. The plan aims to further develop the country’s circular economy to be fully established by 2025, to increase resource productivity by 20%, and to reduce energy consumption and water consumption per unit of GDP by 13.5% and 16%, respectively, compared to 2020 levels, among other ambitious targets.

The European Union (EU) introduced its Circular Economy Action Plan (CEAP) in 2015 which aimed to transform the European economy from a linear to a circular model. According to Eurostat, circular economy activities increased by 6% between 2012 and 2016 within the EU.

Technology innovation

Many companies operating in the modern circular economy are deep technology firms, leveraging artificial intelligence (AI), machine learning and robotics and other technology in a way that would not be out of place in Silicon Valley or MIT. These include start-ups that are able to measure waste in kitchens using smart metres, helping to cut food waste. Among many examples of innovation, a Dutch company has developed a process of dyeing cloth that uses no water or chemicals (apart from the dye itself). There is real, bottom-up consumer demand for products that come from the circular economy both for moral reasons and raw economic necessity. For instance, economic turbulence has driven demand for pre-owned mobile phones or trade-ins.

Importantly, there are real economic and investment opportunities here. According to the latest research by WEEE, 5.3 billion mobile phones will be thrown away in 2022. Many of these devices will disappear into drawers, closets, cupboards or garages or be tossed into waste bins at great environmental and human cost. These devices also contain valuable gold, copper, silver, palladium and other recyclable components that can be used in other devices or equipment such as solar panels, car batteries etc.

New electronics is big business yet requires massive resources and logistics. In China, the shipment volume for new consumer electronics exceeded 530 million in 2020, according to CIC. Given these numbers and opportunities for growth, businesses are responding. In China alone it is estimated that the pre-owned consumer electronics transaction and service market is expected to grow to 987.5 billion yuan by 2026, at a compound annual growth rate of 26.1% from 2021 to 2026. This is due to demand among Chinese consumers for lower cost but high-quality mobile phones, and a growing acceptance that pre-used electronics can be reliable and of a high quality.

Identifying investments

The good news is more companies are adopting circular principles to reduce costs. The challenge is in identifying opportunities for investments; however, this is beginning to change. Over the past few years we have seen some of the world’s largest asset managers, including Credit Suisse, Goldman Sachs and BlackRock, launch funds aimed at the circular economy.

We are also seeing more corporations tap debt markets to finance efforts to reduce, reuse and recycle. For instance, earlier this year French beauty brand L’Oréal launched a €3 billion bond with sustainability-linked tranche. Published under L’Oréal’s new Sustainability-Linked Financing Framework, the bond aims to push 50% of the group’s plastics used in packaging to be from recycled or bio-based source by 2025, among other sustainability-related goals.

There are also tracker funds available for investors, such as the BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF launched in 2019. The fund provides investors with exposure to large caps “selected for their active participation in a business model based on the circularity of goods, materials and raw materials”. Tracker funds focused on companies in the circular economy space will no doubt grow and become more diverse as investors see the returns and growth.

The circular economy is still in its infancy and its growth will be uneven across the globe. However, this is the perfect opportunity for investors to lock in real long-term returns on their investments by turning their attention to companies that are looking to make consumption more sustainable and circular.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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