Increasingly mainstream model presents opportunities for mitigating climate change and ensuring financial returns, says IGCC report.
The circular economy is become a key method for addressing climate change, and investors can play an important role in its wider adoption if they build their capabilities, according to the Investor Group on Climate Change.
The IGCC, a group of Australian and New Zealand institutional investors with about A$33 trillion of funds under management, released its report ahead of its climate finance summit in Sydney.
The circular economy aims to move away from current linear modes of production and consumption, which rely on vast quantities of energy, materials, labour and capital – causing climate-related and other environmental risks which can’t be solved by transitioning to cleaner energy.
The three key principles behind the model are eliminating waste and pollution, keeping products and materials in use for as long as possible, and regenerating nature.
The global economy uses 74% more biological resources than the planet’s ecosystems can regenerate on an annual basis. Yet in what has been called the decisive decade for climate-change mitigation, less than 9% of the resources in the global economy are managed along circular principles.
The report said circular practices can bring “significant opportunities” to mitigate climate risk from industry and agriculture, forestry and other land use. Adoption of circular principles in the global food system could achieve emissions reductions of 49% below the baseline sector-wide 2050 scenario, the report said, while greater circularity and recycling of cement, steel, plastic and aluminium could cut emissions by 40%.
“By implementing an overarching circular economy framework and system thinking, investors, businesses and communities can tackle their climate goals, while also addressing biodiversity, land use objectives and more,” said IGCC Chief Executive Rebecca Mikula-Wright.
Institutional investors could begin by building an understanding of circular economics internally before moving on to integrating circular-economy analysis into their assessments, the report said.
Monitoring exposure to companies delivering circular-economy solutions, and engaging with companies, policy makers and regulators are also seen as key.
Business at heart of circular transition
According to the Ellen MacArthur Foundation, a charity that works to accelerate the transition to a circular economy, business sits at the heart of the change.
“The circular economy is increasingly seen by businesses, thought-leaders, and policymakers as a way of delivering long-term growth to investors while helping address climate change and other global challenges,” said the charity.
The IGCC report notes the alignment of the circular economy model with systems theory and thinking. Rather than competing with other priorities, this means circular-economy approaches can provide investors with a way to meet a range of objectives by following a consistent principle, covering not just emissions reduction targets but also UN Sustainable Development Goals.
Investors can support the transition to greater circularity by investing in firms adopting aligned business processes, the report added. These practices and models include circular supplies, where traditional inputs are replaced by renewable or recovered materials, resource recovery, which uses technology innovation to re-use resource outputs, and product-to-service approaches, in which suppliers offer products on a pay-per-use rather than ownership basis.
Regulation can help to encourage good practice, said the report, singling out the European Union for its support, which includes targeting a material footprint reduction of 50% by 2030 and 75% by 2050 across the region, and an increase in the material re-use rate to at least 25% by 2030.
Among companies embracing the circular economy, Netherlands-based electronics provider Phillips aims to send zero waste to landfill and has committed to generating 25% of its revenue from circular products, services and solutions.
In practice, this means the company offers a trade-in on all professional medical equipment, and takes responsibility for its repurposing, refurbishment and repair.
Steel maker ArcelorMittal is trialling circular business models, including offering short-to-medium term leases of piling sheets, which are used to retain earth on construction sites. This enables building contractors to access only the amount of sheets needed for each project, reducing steel consumption.
And in the food industry, initiatives such as Ethical Partners in Australia have been engaging with suppliers to find ways to tackle waste.
Some 40% of all food grown and manufactured in Australia is wasted, Ethical Partners is aiming to reduce this through partnerships with food retailers such as Coles and Woolworths focused on redirecting products that won’t be sold to other uses, including turning broccoli into rice and sweet potatoes into chips for instance.
Applying circular principles could reduce the annual volume of plastics entering the oceans by 80%, according to research by the Pew charitable trust and Systemiq. This would reduce greenhouse-gas emissions by 25%, generate savings of US$200 billion a year and create 700,000 jobs by 2040.
“A circular economy may present a considerable opportunity for institutional investors, in financial returns, climate solutions, emissions reductions, and other important parts of their ESG considerations,” said the IGCC’s report. “The opportunity appears to cross portfolios, asset classes and economic sectors.”