Investing in a ‘Circular Economy’

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In a new report from the Putnam Investments sustainable investing team, researchers discuss the concept of a “circular economy,” which is an economy consciously designed to maximize the efficient use of resources and minimize waste.

The report, “Toward a Circular Economy,” says the global economy, as it currently operates, demands more of the world’s resources than the Earth can sustain. As such, the concept of a circular economy has emerged as an important framework to inform business leaders and investors. A more circular economy, the report argues, offers the potential to improve planetary health and dramatically decrease the natural resource intensity of the global economy.

Moving Away From ‘Take, Make, Waste’

The Earth’s capacity to provide and replenish natural resources in key areas has been diminished by human production and consumption, due in large part to linear “take, make, waste,” approaches to production, consumption and disposal, the report says. This approach has been linked to high levels of emissions and waste and other environmental challenges, increasing business risks and uncertainties.

In contrast, the report says, a circular economy focuses on effective design; extended product lifespans through reuse, repair and recycling; and more strategic decomposition. This approach has a direct link to new products, practices and business models, offering the possibility for enhanced growth, reduced risk and improved financial returns.

Putnam’s analysis suggests that, at the current rate of resource use, approximately 1.75 Earths would be required to maintain healthy ecosystem functions and regenerate needed resources, the report says. For context, more than 100 billion tons of raw resources enter the economy every year, including metals, minerals and fossil fuels and organic materials from plants and animals. Of this, just 8.6% gets recycled and used again.

Resource use has tripled since 1970 and could double again by 2050 if “business as usual” continues, the report says. Adapting business models to be less resource-intensive creates opportunity for tremendous environmental and economic benefit.

Around and Around

As the report explains, in a circular economy, products are specifically designed with the goals of efficient resource use, extended product life and improved ability to repair, recycle and reuse materials. Pollution and waste are minimized, products and materials are used longer and natural systems are more able to maintain health and regenerate.

Business innovations regarding circular economy principles are accelerating, Putnam says. This owes to the fact that businesses are feeling the finite supply of raw materials more directly and because the long-term costs of waste and toxicity have become much more apparent. Increasingly, business leaders are recognizing the systemic risks that impact their operations, such as potential inflation, materials scarcity, elevated operating costs and higher long-term liability.

As a result, the report finds companies are using less raw materials, designing better for repair and reuse and creating business models that allow them to benefit from extended product lives.

Specific Solutions

The report identifies three major types of production models, with each lending itself to a particular form of solution. Products derived from raw materials can benefit from recycling. More complicated products, involving high energy and materials intensity, can benefit from an extended product life. Products that are highly engineered and technical can benefit from a focus on modular design and repair and reuse.

From the investment perspective, business approaches that focus on circular economy principals have the opportunity to reduce risks, improve environmental outcomes, align with customer demand and enhance long-term prospects for growth and financial returns, the report concludes.

Today and in the future, investors should seek to understand the current resource intensity of products and processes coming out of the companies in which they invest. By recognizing potential solutions and analyzing individual company efforts to contribute to a circular economy, investors and business leaders can realign company goals with the needs of the world.