The Circular Economy, an Opportunity for Investors

In the search for opportunities that can provide additional financial returns, investors often incorporate considerations beyond traditional financial metrics into their investment decision-making process. This concept is known as return additionality. The circular economy, where materials and resources are reused and waste is avoided, can potentially offer economic benefits and may be an avenue for return additionality.

A study by Oxford University revealed that companies with robust Environmental, Social and Governance (ESG) practices often experience lower risk and greater long-term financial performance. This same study stated that companies which have specific and effective ESG strategies achieve better operational performance, and their stock price performance is positively influenced by good sustainability practices .

This may provide an opportunity for investors to identify companies that might have unrealized opportunities for revenue growth or expense savings and to encourage them to adopt circular economy practices across their operations. This shift is not just theoretical; it is already happening. Between January and September 2020, public equity fund assets focused on the circular economy increased sixfold, from US $0.3 billion to US $2 billion, according to the Ellen MacArthur Foundation.

Benefits to companies and investors

1. Saving on packaging costs

In our economy, we can see wasted resources in countless industries and situations. Packaging, for instance, can constitute a good portion of the overall cost of goods sold. Most of this value is lost once the consumer discards the package. To recuperate this value, the market is currently concentrating on recycling materials like plastic to create new products, such as outdoor furniture, construction materials and yoga mats. However, only a small portion of these recyclable material inputs are being reused (less than 12% in the EU, for example).

Reusing packaging at a larger scale may represent a potentially significant opportunity. The beauty industry, for example, tries to reduce packaging costs by using bigger bottles. Certain restaurants and grocery stores in the U.S. offer discounts to consumers who bring reusable containers: the Just Salad restaurant chain offers free toppings for customers with reusable containers . Several major hotel chains (Mariott International, Hyatt Hotels and InterContinental Hotels) are replacing single-use shampoo bottles with re-fillable ones.

2. Meeting environmentally conscious consumer preferences

Consumers are increasingly prioritizing sustainability. According to a study from Nasdaq, Gen Z shoppers worldwide are willing to pay up to 10% more for a sustainable product . They are more interested in sustainability-related concerns than the brand names themselves and they place value on sustainability over cost saving measures. As consumer preferences shift towards sustainable products and services, companies that consider sustainability are better able to build customer loyalty, capture market share and drive revenue growth. Also, innovative waste reduction programs and sustainable product designs can boost a company’s brand and public profile, better positioning it in the green economy.

3. Boosting supply chain resilience

The current linear economic model can lead to resources scarcity and eventually depletion, but a circular model can help to mitigate supply chain risks. By using fewer raw materials, companies are less exposed to the price volatility of these materials. This stability can assist with the decrease of the cost of goods sold while helping with long-term planning as it reduces the dependance on new raw material integration.

4. Managing emissions

Reducing greenhouse gas (GHG) emissions is a core pillar of the circular economy. To achieve net-zero by 2050, our economy would benefit from the redesign of products, such that they are made with reusable resources. By reducing waste at multiple stages (from production to disposal), companies can reduce the need for production, thereby cutting emissions. Waste reduction also brings down the amount of material in landfills, which decreases methane emissions. With net-zero commitments for 2030 and 2050 becoming the norm, companies have an opportunity to innovate and implement best practices to reduce cost while meeting net-zero commitments (as opposed to buying carbon offsetting credits, for example).

5. Anticipating future regulations

Regulations related to the circular economy are expected to expand rapidly worldwide. For example, the European Commission adopted an action plan for a circular economy in 2019. In 2022, heads of state and global government representatives committed to developing by the end of 2024 an international legally binding agreement to end plastic pollution. The circular economy is also a key pillar of the European Green Deal, a set of policies approved in 2020 which aim to make the bloc carbon-neutral by 2050. Countries outside of the E.U., such as Chile and China, have already adopted ESG-related regulations aimed at promoting a circular economy. By cultivating an innovative and forward-thinking mindset, companies can start to implement circular economy policies and procedures. This can help them avoid potential future fines, reduce cost and risk, and leverage first-to-market brand opportunities.

6. Diversifying operations

Participating in the circular economy can help to diversify a company’s operations when it comes to the design and production of products. This is because in the circular eco-system, companies use old materials to create new things and design products with longer lifespans. This value recovery can be further developed and implemented at scale for greater economic gain.

Conclusion

The circular economy is often seen from a GHG emission reduction perspective, but it can also offer economic benefits. Shareholders can leverage these benefits when looking for growth investment opportunities or opportunities for existing investee companies to reduce expenses. Implementing a circular economy model can help companies achieve financial savings by recapturing wasted value. As investors continue to look for return additionality, they can encourage companies to implement circular economy practices, which could improve financial returns while contributing to positive environmental changes.

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Author

Simon Cholette-Cousineau

Manager, Graduate Leadership Program, ESG Research and Engagement

TD Asset Management Inc.

Simon is a Manager on the ESG Research and Engagement team as part of the Graduate Leadership Program (GLP). The GLP is an enterprise-wide rotational program that provides a diverse range of banking experiences. Simon's experiences include business banking, risk management, credit cards and asset management rotations. As a part of his role, Simon represents the firm on the Global Real Estate Sustainability Benchmark pilot initiative. He also provides proxy voting recommendations and supports the ESG team with client and colleague inquiries. Simon has nine years of large-scale people management experience and has effectively led front-line colleagues and leadership teams across various business units within TD. Simon has been working for TD for 15 years and brings experience from retail banking, insurance, wealth and credit card operations. He holds an MBA from the Telfer School of Management at the University of Ottawa.