Combating climate change with circularity
A circular economy can help the world meet key sustainability targets.
A circular economy designs out waste by re-using raw materials, and devising products or systems that can be repaired, recycled or refurbished. The concept is not new, but it is gathering momentum because it addresses some of the key challenges that the world is currently grappling with – growing demand but finite resources, waste pile-ups, pollution and social pressures.
As a result, investors and policymakers are acting. The European Union’s Circular Economy Action Plan now forms a crucial part of the bloc’s Green Deal strategy. Many other nations have circularity plans too, and investors are increasingly engaged.
Previous analysis has centred on the environmental benefits of circularity (mostly pollution), but now other advantages are being highlighted – not least the potential for a circular economy to cut emissions in line with the Paris Agreement climate targets by by-passing emissions hotspots and minimising material extraction and handling along supply chains.
A third-party report says the world is currently 8.9% circular, but if that could be increased to 17%, greenhouse-gas emissions could be cut by 39% and resource-use reduced by 28% below current trajectories by 2030. This would allow countries to meet the Paris Agreement target of a maximum 2˚C of warming and open the door for net-zero emissions by 2050.
Even if all countries fulfil their Paris Agreement pledges, it is suggested that temperatures may still rise by about 3.2˚C by 2100.
A circular economy has other benefits too, including allowing the world to better meet societal needs, something we believe will increasingly feature as a result of the coronavirus pandemic.
There are already signs of steps being taken to facilitate the transition to a circular economy, including increased R&D into waste-management for hard-to-reuse materials and nudge policies for consumer behaviours, plus subsidies or investment opportunities that reward business collaborations across the value chain, from encouraging more modular product design, to the re-use and recycling of textiles, metals, chemicals and other materials.
Technology uptake will also play a vital role – something the pandemic may well have accelerated – but we believe some investment will be catalysed only alongside government support.
However, a transition towards a circular economic model could present social risks unless it is underpinned with support for communities and businesses. A more digital economy that is focussed on product redesign, repair and re-use services will require skills-retraining for some. Companies may be forced to invest in new means of operating and potentially hire or retrain staff.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report, Lucy Acton, CFA
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