World renowned economist, Kate Raworth has described the 20th century economy as one focused on profit and financial value – companies took materials and made products, which we used and then threw away. This was all driven by a number of factors. Firstly, convenience – it is much easier to use disposable nappies than scrub terry towelling ones, for example. Secondly, cost – technology and improved transportation made goods cheaper. Thirdly, complexity – technology means it is nott easy to fix fridges, washing machines and tumble dryers; once they are broken, they go straight to landfill.
So what is changing? Raworth argued that business leaders, designers, technologists and architects are now thinking about all the benefits a product or a solution can provide – the societal, economic and cultural uplifts – not just the money. She believes we are moving towards an era that is about mending, reusing and recycling. And it cannot come quickly enough – our planetary resource constraints, combined with rising consumption in emerging countries, means there has never been a better time for the circular economy.
Sustainable business models
Is she right? We think so. Companies are starting to develop more sustainable business models and think about how they can re-use and recycle existing materials. They are thinking about how they can design products that can be taken apart easily, or whose materials can be readily recycled, or where the waste from one process becomes the input for another. And they think about how to minimise ‘wastage’ or ‘leakage’ from a process to make it as efficient as possible. This is all good news for the conscientious investor – companies thinking about the bigger picture could be the ones that will do well in the future. And there are lots of examples.
Take Royal DSM, a scientific company focused on nutrition, health and sustainable living – it uses agricultural residue to produce fuel from bio-ethanol. Brambles, an Australian business, is another well-known example. The company, which provides pallets for distribution, was the first to move from replacing pallets to restoring them – a pooled pallet system is incredibly efficient and significantly reduces waste. The same goes for consumer goods – Fairphone has designed a smartphone where any component can be replaced, lengthening device life and preventing faults.
There are examples in the retail sector too. H&M has its garment collecting programme, a global initiative that aims to prevent customers disposing of unwanted clothes – all the clothes collected by the Swedish mega retailer are either re-used, re-worn or recycled, with nothing going to landfill. And the move towards ‘hiring not buying’ is interesting. Kingfisher, the owner of B&Q, is trialling tool hiring, where customers hire professional grade equipment – drills for example – rather than buying them and using them only a handful of times. The idea is that this provides a better user experience and lowers the environmental impact and cost. These types of business models and the associated mindset become a huge competitive advantage in an age of resource constraints.
However, it is important this is an easy process for companies and consumers to engage with – if it is too difficult or too costly to re-use, upcycle or recycle parts and materials, they won’t do it.
A great example of a company exploring this is a Norwegian company called Tomra, which makes reverse vending machines and materials sorting machines. The reverse vending machine allows consumers to recycle packaging materials and send products back – payments are used to incentivise consumers. Materials sorting machines allow valuable materials to be separated and not disposed of. Tomra recovers 715,000 tons of metal each year from metal recycling machines.
The investor angle
So how can investors track this theme? Checking the companies within your portfolio is a good place to start. The ones that are demonstrating a forward-thinking strategy and signs of moving into this ‘circular’ way of operating could be the businesses of the future. And funds that can access this space? Baillie Gifford Positive Change and Montanaro Better World are funds that look to the future, think big and are putting companies that deliver societal and environmental benefits, as well as bringing good returns, at the heart of their investment strategies.
The advantages of the circular economy are undisputed, but as Raworth said: “It is not about the business world and individual companies doing this in isolation; it is about creating an ecosystem of business, governments and communities that work together towards the goal of the circular economy and the fundamental drivers of reusing, repairing and recycling.” It will be the responsibility of everyone, investors included, to make this a reality.
Further reading: Why ESG ETFs are not for me