Fund Solutions

Circular Support for Asset Owners’ Climate and Biodiversity Goals

Flows and regulation are facilitating shift to companies adopting circular models.

Circular economy-related investments are expected to support asset owners and managers to meet net zero targets, according to a recent report by ISS ESG, the responsible investment arm of Institutional Shareholder Services (ISS).

Greater use of circular economy principles has the potential drive emissions reductions across waste-heavy sectors like industrial materials and the food system through product reuse and elimination of food waste, the report said.

Currently the world’s food system accounts for around a third of global greenhouse gas (GHG) emissions, which an Ellen MacArthur Foundation (EMF) analysis found could be reduced by 49% by 2050 if a circular scenario was implemented in the sector.

According to ISS, the circular economy circulates products and materials through both a technical cycle (through shared product use) and through a biological cycle (return of nutrients to nature). But the report emphasises that product circularity requires a holistic approach, covering product design and planning, as well as recycling and efficient material use.

ISS ESG flagged Danish bioscience company Chr. Hansen as an example of a business contributing to the circular economy and to the UN Sustainable Development Goals (SDGs) through its natural solutions across food, beverage, nutritional, pharmaceutical, and agricultural industries, including a biological yield enhancer offering which supports sustainable agriculture.

The company’s data suggests potential avoided emissions from its bio protection products could total more than 66% of its total GHG emissions across Scope 1, 2, and 3 in the year 2019/20.

By tackling waste and pollution and extending the life of products and materials and natural systems, the circular economy could also make a significant contribution to protection of biodiversity, a topic of particular concern for investors and policymakers ahead of COP27 and the finalisation of the Global Biodiversity Framework at COP15 in December.

According to Circle Economy data, just 8.6% of all materials extracted from nature are cycled back into the economy while 90% of biodiversity loss and water stress can be traced to resource extraction and processing.

The ISS ESG report also highlights the role of the circular economy in improving the financial performance of companies and addressing aspects of the cost-of-living crisis. It argues that adopting circular economy principles can alleviate rising raw material prices by reducing waste, and cites analysis suggesting that circular approaches are consistent with a lower risk of defaulting on debt and higher risk-adjusted returns on its stock.

A recent report by the Investor Group on Climate Change emphasised the role of investors in the wider adoption of circular economy principles.

Noting the contribution of the circular economy to investors’ net zero targets, the report said institutional investors should build their understanding of circular economics, integrate circular-economy analysis into their assessments, monitor their exposure to companies delivering circular-economy solutions, and engage with companies, policy makers and regulators. 

Flows and regulations

Investments are already flowing into sectors and businesses adopting circular economy models, while regulatory change is also extending use of circular principles.

While fashion is the second biggest polluting industry in the world, its rental, repair, and remake offerings are worth over US$73 billion, according to ISS ESG. Valuations of resale and rental platforms like Depop, Rent the Runway and The Real Real, have now surpassed the billion-dollar mark.

The opportunity is also being realised in the finance sector, with growth witnessed across asset classes over the last three years alone. Flows into public equity funds with a circular economy focus climbed to US$9.5 billion in the three years to December 2021, up from US$0.3 billion.

Annual issuance of corporate and government bonds with a circular economy tilt also increased five-fold over the same period.

Financial flows into the circular economy are being stimulated by regulatory change. The circular economy is one of the six environmental objectives of the EU Taxonomy and a delegated act outlining technical screening criteria is expected to be introduced this year.

Europe’s Corporate Sustainability Reporting Directive is set to require 50,000 companies in the EU to disclose circular economy performance data by 2024.

The European Commission recently unveiled a raft of new measures aimed at increasing the use of circular economy principles across a range of sectors, emphasising their contribution to efforts to reduce climate change and biodiversity loss.

The measures, part of Europe’s Circular Economy Action Plan, include rules that provide consumers with more information on the sustainability of their product choices, but also industry-specific initiatives, including for textiles.

Other major economies are also undertaking similar reforms including the US, China and UK.

New legislation on Extended Producer Responsibility (EPR) is set to come into force in the UK next year.

 

 

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