On June 9, 2022, the Investor Group on Climate Change released a new discussion paper on the circular economy; the systemic approach that has risen to prominence as a key method to address climate change.
The paper was launched at their IGCC Climate Finance Summit in Sydney, NSW, Australia before more than 300 institutional investors, corporate leaders, and policy makers.
In true restoration economy style, Regenerate and Restore: A Circular Economy Discussion Paper for Investors includes a briefing on circular economy fundamentals, indications of the investment opportunity, and the link between circular economy approaches and climate mitigation, resilience and adaptation. In this way, it’s very reminiscent of the lessons documented in the 2020 book RECONOMICS: The Path To Resilient Prosperity.
It recommends that investors adopt their “four P’s” approach, which is also used in climate-aligned investing: Plan, Pledge, Progress and Publish.
It also recommends investors prepare to build circular economy capability in four stages:
- Governance – build an understanding of circular economics across internal teams and key decision-makers;
- Integration – consider adding new circular economy analysis within company and portfolio risk and emissions assessments;
- Allocation – monitor existing exposures to companies delivering circular economy solutions and consider new mandates targeting emerging circular economy solutions, especially in private markets; and
- Engagement – consider integrating circular economy questions in existing engagement activities, particularly where companies have exposure to diversified mining, steel, cement, food and beverage, aviation and construction. Also, consider engagement with policymakers and regulators.
IGCC collaborated with authors Jillian Reid, a Partner in Mercer‘s Sustainable Investment team, and Ashleigh Morris, the CEO of circular economy strategic advisory, Coreo.
IGCC CEO Rebecca Mikula-Wright said, “Leading investors are looking at systemic approaches to the climate challenge. 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. We are thrilled to collaborate with innovators like Mercer and Coreo in sharing their deep knowledge on circular economy thinking.”
Reid said, “Adopting a circular economy lens enables multiple, interconnected issues and their cumulative effects to be assessed and addressed. That is an exciting opportunity for investment teams facing a growing list of systemic issues in their efforts to meet the long-term financial goals of beneficiaries.”
Morris said “An intimate relationship exists between capital flow and materials flow in the circular economy. Far beyond a waste management strategy or recycling at scale, the circular economy aims to redesign the system so there is no waste. Shifting from extractive to regenerative, from ownership to access, from monopolies to networks, scale to scope, and from products to services, capital circulation will either block or support the ability of a circular economy to thrive.”
Background on Circular Economy thinking
In what has been called the decisive decade for climate action, investors are increasingly exploring systemic approaches that have the potential to reduce emissions while simultaneously addressing other important environmental and social goals.
One such approach is to adopt a circular economy model, which aims to decouple economic activity from the consumption of finite resources. It is based on three key principles:
- designing waste and pollution out of the system;
- keeping products and materials in use and at the highest value for as long as possible; and
- regenerating natural and social systems.
While transitioning the energy system to renewable generation is intrinsic to circular economic activity and can address around 55 per cent of global emissions, addressing the remaining 45 per cent requires us to reduce the emissions profile of industry, agriculture, forestry and other land use; essentially our economies’ current modes of production and consumption.
The Investment Opportunity
A circular economy may present a considerable opportunity for institutional investors in financial returns, climate solutions and emissions reductions, and other parts of their environmental, social and governance (ESG) considerations.
In 2021, PWC valued the circular economy’s potential in Australia at A$2 trillion over the next 20 years. A circular economy could abate 165 million tons of carbon pollution each year in Australia.
In Europe, circular initiatives throughout the construction, food and transport sectors are predicted to yield annual benefits of up to €1.8 trillion (US$2.1 trillion) by 2030.
Less than 9 per cent of the resources in the global economy are managed along circular principles, which suggests approximately 90 per cent of resources may be underutilized.
Australia may have a particular economic opportunity. The country extracts and uses primary resources at double the OECD benchmark but generates only half the value of the OECD benchmark per kilogram of natural resources.
There are five readily identifiable circular business models that investors might watch for:
- Circular supplies – replacing traditional material inputs with bio-based, renewable, or recovered materials;
- Resource recovery – leveraging technology to recover and re-use resource outputs;
- Product life extension – extending the life cycle of products and assets;
- Sharing platforms – sharing under-utilised products and materials; and
- Product to service – offering products through a lease or pay-for-use arrangement instead of ownership.
Photo of Pyrmont Bridge in Sydney by Storm Cunningham.