ESG Feature – The circular economy
hold and commercial waste to be thrown away in 2050, up from 2 billion tonnes in 2016. This is all the more alarming when you consider that this forecast exceeds the World Bank’s population-growth projections over the same period. Yet the main issue is not how much waste is being created but how it is disposed of. Our rubbish typically finds its way into open dumps and landfills or waste treatment plants, which do not have systems to collect escaping gases. This is important because the World Bank estimates that dis- posing of rubbish generated 1.6 billion tonnes of carbon diox- ide equivalent greenhouse gases in 2016, or 5% of global emissions.
The situation is worse than the headline figure. It does not include the waste generated by industry, which can send scrap metals to be disposed of by private contractors. So, the harm to the climate is certainly a lot graver than reported. The world has a rubbish problem, and investors need to solve it if they are serious about decarbonising their portfolios.
Take me round again Burger King may have found the answer to this problem. It is trialling a circular model. This is where everything is re-used in one form or another.
This could mean sharing, leasing, re-pairing, refurbishing and recycling materials and products for as long as they possibly can instead of throwing them away. Reducing the waste companies produce, and the resources they take from our planet, is a core investment driver. “It is in a company’s interest to manage its waste, because it is about efficiency,” says Rebecca White, a responsible investment ana- lyst at Newton Investment Management.
“There are opportunities for companies to think outside the box by not just reducing waste but thinking about what the circular economy could mean for their business model,” she adds. An alternative model for luxury goods companies could be to copy the second-hand car market, for example.
There is another reason why investors should be raising the issue in meetings with corporate boards. Investors are trying to encourage companies to keep ahead of two evolutions: regula- tion and consumer demand. “Investors want companies to be positioned to meet future consumer expectations,” White says. This may not be easy. Especially for an industry obsessed with measuring output and change. White points to a big chal- lenge with waste, recycling and the circular economy: there is no single way to measure the problem. When it comes to cli- mate change, for example, the focal point is greenhouse gas emissions. There is no similar standard when it comes to waste.
A closed-loop mindset We cannot recycle our way
out of the waste problem. Rebecca White, Newton Investment Management
Another issue is there is no one-size-fits all solution to this problem. “Recycling is not the only option,” White says. “It is a big part of the circular economy but is no silver bullet. It is not the only element. We have to think about other solutions to get around these challenges; we cannot recycle our way out of the waste problem.” There are significant challenges around recycling. One of the issues is that there is a limited number of times you can recy- cle a plastic bottle. In response to this problem, using different materials, the sharing economy and circular design processes are options to consider. “We have to think more broadly about the solutions when we think about the challenges within the recycling space,” White says. Companies may not be able to reduce their waste, but per- haps they could find alternative markets for it. “Some are try- ing to find a use for their by-products,” White says. As an example, she points to a small beer company in the US, which sends its spent yeast and grain to dairy farms to use as animal feed or fertiliser. Hideki Suzuki, a director of ESG research and integration at Manulife Investment Management, offers a different example of a furniture company that build its products from dismantled materials. The products are then placed in the smallest flattest packaging possible so the user can decide whether to recycle or refurbish. “Such innovative ideas are coming from a closed- loop mindset,” he says.
External forces Awareness of the issue and the need to tackle it has been grow- ing, which could be good news for investors. “Recognition of the importance of a circular business model has been heightened in the past few years,” Suzuki says. This has opened up opportunities in the two main areas of the capital markets.
26 | portfolio institutional | May 2022 | issue 113
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